What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2026-03-27 compared with 2025-03-19 · 446 added, 313 removed, 895 unchanged (46% of the section changed)

8 unchanged sentences

(the “Company”) as of December 31, 2025 and 2024, the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2025 and 2024, and the results of its operations and its cash flows for the years then ended , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

12 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Estimation of Future Production Volumes Used to Estimate Proved Oil and Natural Gas Reserves and the Associated Effect on Depreciation, Depletion and Amortization (“DD&A”) Expense Related to Proved Oil and Natural Gas Properties

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oil and natural gas properties of $233.3 million and accumulated depletion, amortization and impairment of $131.6 million.

DD&A expense was $10.2 million for the year ended December 31, 2024.

Depletion, depreciation, amortization, and accretion expense was $12.2 million for the year ended December 31, 2025.

We have identified the estimation of future production volumes used to estimate proved oil and natural gas reserves and the associated effect on DD&A expense related to proved oil and natural gas properties as a critical audit matter.

Estimating future production volumes involves a high degree of subjectivity from management and their independent petroleum engineer.

Estimating future production volumes involves a high degree of subjectivity from management and their independent petroleum engineers.

Changes in this estimate could have a significant effect on the measurement of DD&A expense.

1 unchanged sentence

The primary procedures we performed to address this critical audit matter included:

Evaluating the professional qualifications and objectivity of the independent petroleum engineer, including their relationship to the Company.

● Evaluating the professional qualifications and objectivity of the independent petroleum engineers, including their relationship to the Company.

● Assessing the reasonableness of the future production volumes by comparing estimates of future production volumes against historical results of production volumes on a summary basis for all wells.

● Performing a retrospective review over management estimates of future production volumes made in prior periods as compared to actual results.

Estimation of Future Production Volumes Used to Estimate Fair Value of the Acquired Proved Oil and Gas Properties in the Peak Acquisition

As described in Note 4 to the consolidated financial statements, on November 14, 2025, the Company completed an acquisition of Peak E&P, LLC and Peak BLM, LLC (“Peak Acquisition”) for a total consideration of $88.5 million.

In connection with the Peak Acquisition, the Company recognized proved oil and gas properties of $47.9 million.

To determine the acquisition date fair value of the oil and gas properties, management used internal engineers to make significant estimates, including estimating the future production volumes of the acquired oil and gas reserves.

We have identified the estimation of future production volumes used to estimate the fair value of the acquired proved oil and gas properties in the Peak Acquisition as a critical audit matter.

Estimating future production volumes involves a high degree of subjectivity from management and their internal petroleum engineers.

Changes in this estimate could have a significant effect on the fair value of the acquired oil and natural gas properties.

Auditing the estimation of future production volumes requires subjective and complex auditor judgement.

The primary procedures we performed to address this critical audit matter included:

● Performing a retrospective review over management estimates of future production volumes made in the acquisition date fair value forecast as compared to actual results.

/s/ BDO USA, P.C.

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Accounts receivable

Short term investments

Fair value of derivatives

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Restricted cash

Fair value of derivatives, long term

Deferred financing costs

Prepaid drilling costs

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Non-current liabilities

Credit facility payable

Ad valorem taxes, long term

Asset retirement obligations

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Preferred shares, no par value, unlimited shares authorized, none issued or outstanding

Common shares, no par value, unlimited shares authorized and 22,008,766 shares issued and outstanding at December 31, 2024 and 22,222,722 issued and 22,151,848 shares outstanding at December 31, 2023

Treasury shares, at cost, 0 at December 31, 2024 and 70,874 at December 31, 2023

Common shares, no par value, unlimited shares authorized and 30,239,980 shares issued and outstanding at December 31, 2025 and 22,008,766 issued and outstanding at December 31, 2024

Additional paid-in capital

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Loss on sale of oil and gas properties

Transaction costs

General and administrative expenses:

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Total operating costs and expenses

Operating income

Operating (loss) income

( 10,517,383 )

Other income (expense):

1 unchanged sentence

Interest expense

(Loss) gain on derivative contracts

Gain (loss) on derivative contracts, net

Other income, net

Net income before income tax expense

Income tax expense

Other income, net

Net (loss) income before income tax expense

( 5,436,132 )

Income tax (benefit) expense

NET (LOSS) INCOME

( 5,798,863 )

Currency translation adjustments

Unrealized (loss) gain on securities

NET COMPREHENSIVE INCOME

Net income per share, basic

Net income per share, diluted

Unrealized loss on securities

NET COMPREHENSIVE (LOSS) INCOME

( 5,935,563 )

Net (loss) income per share, basic

Net (loss) income per share, diluted

Weighted average number of shares outstanding, basic

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( 1,831,208 )

( 6,055,601 )

Retirement of treasury shares

( 2,191,534 )

( 5,695,275 )

Exercise of stock options

Vesting of shares of restricted stock

Other comprehensive loss

Other comprehensive income

Balance at December 31, 2024

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( 5,798,863 )

Stock-based compensation expense

Buyback of common shares

( 5,998,223 )

Retirement of treasury shares

( 2,191,534 )

Dividend equivalent rights

Stock-based compensation expense

Shares issued in business combination

Vesting of shares of restricted stock

7 unchanged sentences

Cash flows from operating activities:

( 5,798,863 )

Adjustments to reconcile net income to net cash provided by operating activities:

2 unchanged sentences

Accretion of discount on available for sale securities

Amortization on deferred financing costs

Loss on sale of oil and gas properties

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Stock-based compensation expense

Deferred income tax expense

Changes in assets and liabilities:

Deferred income tax (benefit) expense

Changes in assets and liabilities, net of assets and liabilities acquired in business combination:

Accounts receivable

( 1,588,383 )

Prepaid income taxes

( 1,973,348 )

Other assets and liabilities

Accounts payable, royalties payable and other accrued liabilities

Accounts payable, royalties payable, gathering fees payable, and other accrued liabilities

( 2,940,888 )

Net cash provided by operating activities

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Additions to land, buildings and property and equipment

Purchases of short term investments - held to maturity

( 32,812,974 )

Purchases of short term investments - available for sale

( 4,045,785 )

( 11,988,982 )

Proceeds from short term investments - held to maturity

Proceeds from short term investments - available for sale

Net asset acquired in business combination

( 49,754,846 )

Proceeds from sale of oil and gas properties

Prepaid drilling costs

( 1,813,808 )

Net cash used in investing activities

4 unchanged sentences

( 1,831,208 )

( 6,055,601 )

Exercise of stock options

Borrowings on credit facility

Dividends paid

1 unchanged sentence

( 5,486,834 )

Debt issuance costs

Net cash used in financing activities

( 7,318,042 )

Deferred financing costs

Net cash provided by (used in) financing activities

( 7,318,042 )

Effect of currency rates on cash, cash equivalents, and restricted cash

Decrease in cash, cash equivalents, and restricted cash

( 6,883,835 )

Increase (decrease) in cash, cash equivalents, and restricted cash

( 6,883,835 )

4 unchanged sentences

Income tax paid - state (PA)

Income tax (refund) paid - state (other)

Income tax paid - state (other)

Interest paid

Non-cash investing activities:

Change in proved properties accrued in accounts payable and accrued liabilities

Change in gathering system accrued in accounts payable and accrued liabilities

Change in proved properties accrued in accounts payable

Change in gathering system accrued in accounts payable

Asset retirement obligation asset additions and adjustments

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The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc.

and its wholly owned subsidiaries, Epsilon Midstream, LLC, Epsilon Operating, LLC, Dewey Energy GP, LLC, Dewey Energy Holdings, LLC and Altolisa Holdings, LLC.

and its wholly owned subsidiaries, Epsilon Midstream, LLC, Epsilon Operating, LLC, Dewey Energy GP, LLC, Peak Exploration & Production LLC, Peak BLM Lease LLC, Peak Powder River Resources, LLC, Peak Energy Operating #2, LLC, Willow Springs Development, LLC, Peak Powder River Acquisition, LLC and Altolisa Holdings, LLC.

With regard to the gathering system, in which Epsilon owns an undivided interest in the asset, proportionate consolidation accounting is used.

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Fair value is generally calculated using the Income Approach which considers estimated discounted future cash flows.

Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable.

Gas Gathering System Properties

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Revenue Recognition

Revenues are comprised primarily of sales of natural gas, crude oil and NGLs, along with the revenue generated from the Company’s ownership interest in the gas gathering system in the Auburn field in Northeastern Pennsylvania.

Revenue recognition is evaluated through the following five steps:

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(ii) identification of the performance obligations in the contract;

(iii) determination of the transaction price;

(iv) allocation of the transaction price to the performance obligations in the contract;

and (v) recognition of revenue when or as a performance obligation is satisfied.

(iii) determination of the transaction

EPSILON ENERGY LTD.

1 unchanged sentence

For the years ended December 31, 2025 and 2024

(iv) allocation of the transaction price to the performance obligations in the contract;

and (v) recognition of revenue when or as a performance obligation is satisfied.

Accounting Policies

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The Company recognizes upstream revenue at the point in time when control has been transferred to the customer, generally at the time natural gas reaches an agreed-upon delivery point and collectability is reasonably assured.

Upstream revenue is based upon a fixed price, based on market pricing, and is measured as the amount of consideration the Company expects to receive in exchange for the transferring of the natural gas.

The services provided by the gas gathering system take place continuously and as a practical expedient, the revenues are recognized monthly for the volumes that are processed and transported for the upstream producers during that period of time.

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Typically, the Company sells its natural gas directly to customers, under agreements with payment terms less than 30 days after delivery and 60 days on the revenue generated by the gas gathering system.

For operated assets in Wyoming, payment is received within 30 days after the end of a month for oil and 60 days after the end of the month for natural gas and NGLs.

Natural Gas Revenues

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The Company recognizes revenue proportionate to its entitled share of volumes sold.

Currently, the vast majority of Epsilon’s natural gas production comes from the Marcellus in Northeastern Pennsylvania.

Currently, the vast majority of Epsilon’s natural gas production comes from the Appalachian Basin in Pennsylvania.

Epsilon uses a third-party service for its natural gas marketing.

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Commissions payable to the third-party broker for these services are treated as lease operating expenses in the financial statements.

For the Company’s operated assets in Wyoming, revenues from the sale of natural gas and NGLs are recognized, as the product is delivered to the customers’ custody transfer points and collectability is reasonably assured.

The Company fulfills the performance obligations under the customer contracts through daily delivery of natural gas and NGLs to the customers’ custody transfer points.

Revenues are recorded on a monthly basis using the prices received under the Company’s contracts.

These contracts are generally derived from stated market prices which are adjusted to reflect deductions, including transportation, fractionation and processing.

As a result, the revenues from the sale of natural gas and NGLs are subject to change with the increase or decrease in market prices.

As a result, the sale of natural gas and NGLs, as presented on the consolidated statements of operations, represent the Company’s share of revenues, net of gathering and processing costs, net of royalties and excluding revenue interests owned by others.

When selling natural gas and NGLs on behalf of royalty owners or working interest owners, the Company acts as an agent and therefore reports the revenue on a net share basis.

To the extent actual volumes and prices of natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded.

Historically, differences between revenue estimates and actual revenue received have not been significant.

The majority of product sale commitments of the Company are short term in nature with a contractual term of one year or less.

For these contracts, the Company applies the practical expedient in Accounting Standards Codification (“ASC”) 606-10-50-14, which exempts entities from disclosing the transaction price allocated to remaining performance obligations, if any, if the performance obligation is part of a contract that has an original expected duration of one year or less.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

which applies to variable consideration that is recognized as control of the product is transferred to the customer.

Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.

Gas Gathering System Revenue

The Company has a 35 % ownership interest in the Auburn Gas Gathering System (“Auburn GGS”).

This system aggregates the natural gas from the various pads in the field and transports the natural gas to the inlet of the Auburn compression facility where it is dehydrated, compressed and injected into the Tennessee Gas Pipeline.

The Company has a 35 % ownership interest in the Auburn GGS.

This system aggregates the natural gas from the various pads in the field and transports the natural gas to the inlet of the Auburn CF where it is dehydrated, compressed and injected into the Tennessee Gas Pipeline.

The gathering and compression services operate under fee-based contracts.

1 unchanged sentence

Revenue is recognized over time as the services are provided.

Oil and Other Liquids Revenue

The source of the Company’s oil and other liquids revenue is its ownership in wells in the Permian Basin, Oklahoma, and Alberta, Canada.

The Company does not operate the wells and has elected not to receive its proportionate share of the production.

Oil and Natural Gas Liquids Revenue

The source of the Company’s oil and natural gas liquids revenue is its ownership in wells in Wyoming, the Permian Basin, and Alberta, Canada.

With the exception of Wyoming, the Company does not operate the wells and has elected not to receive its proportionate share of the production.

As such, under the Joint Operating Agreement, the operators have control of the marketing of this production at current market prices and remits our net revenue interest less taxes and fees on a monthly basis.

The Company recognizes revenue with a monthly accrual of its proportionate share of volumes produced at an estimated market price.

Accounts Receivable and Other

Oil, natural gas liquid and natural gas receivables consist of amounts due from purchasers or operators for commodity sales from our revenue interest in the leases in Northeastern Pennsylvania, the Permian Basin, Oklahoma, and Alberta, Canada.

For the Company’s operated assets in Wyoming, revenue from the sale of oil and natural gas liquids are recognized, as the product is delivered to the customers’ custody transfer points and collectability is reasonably assured.

The Company fulfills the performance obligations under the customer contracts through daily delivery of oil and natural gas liquids to the customers’ custody transfer points.

Revenues are recorded on a monthly basis using the prices received under the Company’s contracts.

These contracts are generally derived from stated market prices which are adjusted to reflect deductions, including transportation, fractionation and processing.

As a result, the revenues from the sale of oil and natural gas liquids are subject to change with the increase or decrease in market prices.

As a result, the sales of oil and natural gas liquids, as presented on the consolidated statements of operations, represent the Company’s share of revenues, net of gathering and processing costs, net of royalties and excluding revenue interests owned by others.

When selling oil and natural gas liquids on behalf of royalty owners or working interest owners, the Company acts as an agent and therefore reports the revenue on a net share basis.

To the extent actual volumes and prices of oil and natural gas liquids sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded.

Historically, differences between revenue estimates and actual revenue received have not been significant.

The majority of product sale commitments of the Company are short term in nature with a contractual term of one year or less.

For contracts with terms greater than one-year, the Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical expedient in ASC 606-10-50-14A, which applies to variable consideration that is recognized as control of the product is transferred to the customer.

Accounts Receivable

Oil, natural gas liquid and natural gas receivables consist of amounts due from purchasers or operators for commodity sales from our revenue interest in the leases in Pennsylvania, Wyoming, the Permian Basin, and Alberta, Canada.

Payments from purchasers are typically due by the last day of the month following the month of delivery.

Gathering fee revenue consists of fees due from the operator of the Auburn GGS, as an agent for the Company fulfilling the operations of the gathering system.

Payments from the operator are typically due 60 days from the last day of the month of transmission.

The Company’s operations do not result in any contract assets or liabilities on the accompanying consolidated balance sheets.

Payments from the operator are typically due 60 days from the last day of the month

EPSILON ENERGY LTD.

1 unchanged sentence

For the years ended December 31, 2025 and 2024

of transmission.

The Company’s operations do not result in any contract assets or liabilities on the accompanying consolidated balance sheets.

For its operated assets in Wyoming, the Company accrues for oil, natural gas and natural gas liquids sales based on actual production dates.

These are due within 45 days of production for oil and 60 days for natural gas and other liquids.

To the extent the Company has joint interest owners in properties, joint interest billings represent monthly billings to working interest owners in the properties the Company operates.

Joint interest billings are due within 30 days , with a right of offset against revenues due to working interest owners in the respective properties.

The Company monitors the creditworthiness of its counterparties by reviewing credit ratings, financial statements, and payment history.

Buildings and Other Property and Equipment

Buildings are depreciated on a straight-line basis over the estimated useful life of the property, 30 years .

The Company’s office building in Durango is stated at cost and depreciated over the estimated useful life of 25 years using straight-line method.

Other property and equipment consists of computer hardware and software, and furniture and fixtures.

1 unchanged sentence

Financial Instruments and Fair Value

Epsilon’s financial instruments consist of cash and cash equivalents, short term investments, restricted cash, commodity derivative contracts, accounts receivable, accounts payable, and long-term debt.

Epsilon’s financial instruments consist of cash and cash equivalents, restricted cash, commodity derivative contracts, accounts receivable, accounts payable, and long term debt.

The Company classifies the fair value of financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instrument.

10 unchanged sentences

The revolving line of credit is classified within Level 2 of the fair value hierarchy.

The Company had investments in U.S.

Treasury Bills, which mature over a period between 3 and 12 months and are classified as short term investments.

Treasury Bills are carried at fair value.

Treasury Bills are classified within Level 1 of the fair value hierarchy.

Commodity derivative instruments consist of NYMEX HH swap and basis swap contracts for natural gas.

Commodity derivative instruments consist of NYMEX HH and NYMEX WTI CMA swaps and options as well as basis swap contracts for natural gas.

The Company’s derivative contracts are valued based on a marked to market approach.

1 unchanged sentence

The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

Derivative Instruments

4 unchanged sentences

● Fixed-price swaps—where a fixed price is received for production and a variable market price is paid to the contract counterparty.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2024 and 2023

● Basis swap contracts—which guarantee a specified price differential between the price at Henry Hub and our physical pricing points.

1 unchanged sentence

If the settled price differential is less than the swapped basis, then we make a payment to the counterparty for the difference between the two.

● Two-way collar contracts—which guarantee a specified price range for NYMEX by using the proceeds of selling a call option at a specified strike price (the “Ceiling”) to finance the purchase of a put option at a specified strike price (the “Floor”).

● Two-way costless collar contracts—which guarantee a specified price range for NYMEX by using the proceeds of selling a call option at a specified strike price (the “Ceiling”) to finance the purchase of a put option at a specified strike price (the “Floor”).

Derivative instruments are recorded on the consolidated balance sheets at fair value as either current or non-current assets or liabilities based on their anticipated settlement date.

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Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short term investments, accounts receivable and derivative contracts.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and derivative contracts.

Exposure to credit risk associated with these instruments is controlled by (i) placing assets and other financial interests with credit-worthy financial institutions, (ii) maintaining policies over credit extension that include the evaluation of customers’ financial condition and monitoring paying history, although the Company does not have collateral requirements and (iii) netting derivative assets and liabilities for counterparties with a legal right of offset.

At December 31, 2024, cash and cash equivalents was primarily concentrated in one financial institution the U.S.

At December 31, 2023, cash and cash equivalents and short term investments were primarily concentrated in one financial institution the U.S.

At December 31, 2025 and 2024, cash and cash equivalents were primarily concentrated in one financial institution the U.S.

We currently have $ 8.5 million in excess of the federally insured limits.

The Company periodically assesses the financial condition of these institutions and believe that any possible credit risk is minimal.

The Company periodically assesses the financial condition of these institutions and believes that any possible credit risk is minimal.

For the year ended December 31, 2025, the Company had five customers that accounted for more than 90 % of the total trade accounts receivable.

For the year ended December 31, 2024, the Company had three customers that accounted for 89.1 % of the total trade accounts receivable.

For the year ended December 31, 2023, the Company had four customers that accounted for 90.7 % of the total trade accounts receivable.

Geographic Locations of Operations

Approximately 50 % and 77 % of our revenue during fiscal years 2024 and 2023, respectively, was derived from natural gas production and gathering system revenues in the state of Pennsylvania.

Approximately 40 % and 6 % of our revenue during fiscal year 2024 and 2023, respectively, was derived from oil, natural gas, and natural gas liquids revenues in the state of Texas.

Epsilon’s management expects to continue to seek opportunities in other North American basins to provide the Company the flexibility to respond to market conditions by allocating capital across multiple basins and commodities.

EPSILON ENERGY LTD.

1 unchanged sentence

For the years ended December 31, 2025 and 2024

Geographic Locations of Operations

Approximately 67 % and 50 % of our revenue during fiscal years 2025 and 2024, respectively, was derived from natural gas production and gathering system revenues in the state of Pennsylvania.

Approximately 19 % and 40 % of our revenue during fiscal year 2025 and 2024, respectively, was derived from oil, natural gas, and natural gas liquids revenues in the state of Texas.

As a result of this geographic concentration, we may be disproportionately exposed to the effect of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, weather events or interruption of the processing or transportation of crude oil or natural gas.

Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis.

Epsilon assesses the realizability of deferred tax assets and recognizes valuation allowances as appropriate (see Note 10).

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities, and for operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the periods in which those temporary differences are expected to reverse.

Significant judgment is required in evaluating the realizability of deferred tax assets, including the need for and amount of any valuation allowance.

(see Note 10).

Foreign Currency Transactions

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Any gains or losses on transactions or monetary assets or liabilities in currencies other than the functional currency are included in net income in the current period.

Gains and losses on translation of balances denominated in Canadian dollars are included in accumulated other comprehensive income.

Gains and losses on translation of balances denominated in Canadian dollars, calculated using the end of the period exchange rate, are included in accumulated other comprehensive income.

Stock Based Compensation

The Company has issued time-based restricted stock and performance share units (“PSU”) to employees and directors of the Company.

The fair value of the time-based restricted stock is determined using the fair value of the Company’s common shares on the date of grant.

The Company has issued time-based restricted stock units (“RSU”), performance share units (“PSU”), and dividend equivalent rights shares (“DER”) to employees and directors of the Company.

The fair value of the time-based RSU and the DER shares is determined using the fair value of the Company’s common shares on the date of grant.

The fair value of the PSUs is determined by the performance requirements.

These awards vest ratably over a three-year period.

The RSU and PSU awards vest ratably over a three-year period .

The DER awards vest immediately.

Compensation expense and a corresponding increase to additional paid in capital are recorded over the vesting period.

8 unchanged sentences

Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate based on prevailing financial market conditions at the later of date of adoption or lease commencement, credit analysis of comparable companies and management judgments to determine the present values of its lease payments (see Note 12).

Joint Interests

The majority of the Company’s oil and natural gas exploration, development and production activities, and the gathering system, are conducted jointly with others and, accordingly, these financial statements reflect only the Company’s proportionate interest in such jointly controlled assets.

Recently Issued Accounting Standards

In October 2023, the FASB issued ASU No.

2023-06, Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, to amend certain disclosure and presentation requirements.

For entities subject to the SEC’s existing disclosure requirements, the effective date for each amendment

EPSILON ENERGY LTD.

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For the years ended December 31, 2025 and 2024

will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the codification and will not become effective for any entity.

The Company is currently evaluating the impact of this ASU.

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.

This ASU required disclosure of incremental segment information, primarily through enhanced disclosures about significant segment expenses and amounts for each reportable segment on an annual and interim basis.

This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods with fiscal years beginning after December 15, 2024.

The Company has adopted ASU No.

2023-07 as of December 31, 2024.

See Note 14 “Operating Segments” in the Notes to Consolidated Financial Statements.

Joint Interests

Deferred Financing Costs

The Company has deferred financing costs - upfront fees and expenses that include origination, underwriting, legal and other fees – that were incurred to secure our revolving credit facility.

The fees are amortized using the straight-line method, which approximates the effective interest method, over the life of the credit facility and are recognized in our consolidated statements of operations as interest expense.

The unamortized deferred financing costs related to the credit facility are reported in the consolidated balance sheets as Deferred financing costs in non-current assets.

Business Combinations

The Company accounts for business combinations in accordance with FASB ASC Topic 805, Business Combinations.

The Company accounts for our acquisitions that qualify as a business using the acquisition method in which the Company recognizes and measures identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquired entity at their fair values as of the acquisition date.

If the set of assets and activities acquired is not considered a business, it is accounted for as an asset acquisition using a cost accumulation model.

In the cost accumulation model, the cost of the acquisition, including certain transaction costs, is allocated to the assets acquired on the basis of relative fair values.

The Company includes the results of operations of acquired businesses beginning on the respective acquisition dates.

In accordance with the acquisition method, the Company allocates the purchase price of an acquired business to its identifiable assets and liabilities based on the estimated fair values.

The fair values of identifiable assets acquired and liabilities assumed are determined based on various valuation techniques, including market prices, discounted cash flow analysis, and independent appraisals.

This fair value measurement is based on unobservable (Level 3) inputs.

The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill.

The excess value of the net identifiable assets and liabilities acquired over the purchase price of an acquired business, if any, is recorded as a bargain purchase gain.

Transaction costs related to the business combination are expensed as incurred.

Recently Issued Accounting Standards

In December 2023, the FASB issued ASU No.

1 unchanged sentence

Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to disclose disaggregated information about a reporting entity’s effective tax rate reconciliation, using both percentages and reporting currency amounts for specific standardized categories, as well as disclosure of income taxes paid disaggregated by jurisdiction.

The amendments will be effective for fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is evaluating the impact of this new standard and believes that the adoption will result in additional disclosures, but will not have any other impact on its consolidated financial statements.

Effective January 1, 2025, the Company adopted ASU 2023‑09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

The amendments enhance income tax disclosures, primarily related to the effective tax rate reconciliation and income taxes paid.

The Company adopted the amendments on a prospective basis.

The adoption did not have a material impact on the Company’s consolidated financial statements, as the amendments relate primarily to expanded disclosures and do not change the recognition or measurement of income taxes.

Because the amendments were adopted prospectively, the enhanced disclosures required by ASU 2023‑09 are provided for the year ended December 31, 2025.

Prior‑year disclosures continue to be presented in accordance with the Company’s previously applied accounting guidance.

See Note 9 “Income Taxes” in the Notes to Consolidated Financial Statements.

In March 2024, the FASB issued ASU No.

2 unchanged sentences

The amendments in ASU 2024-01 improves its overall clarity and operability without changing the guidance and adding illustrative examples to determine whether profits interest award should be accounted for in accordance with Topic 718.

The amendments will be effective for fiscal years beginning after December 15, 2024, and interim periods within those annual periods.

The Company does not anticipate that these updates, once adopted, will have a material effect.

The guidance is effective for fiscal years beginning after December 15, 2024, and interim periods within those annual periods.

The Company has adopted ASU No.

2024-01 as of December 31, 2025 with no material impact.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

In November 2024, the FASB issued ASU 2024-3 "Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures." The ASU will improve the decision usefulness for investors by requiring public business entities to disclose more detailed information about their expenses such as (a) inventory and manufacturing expense, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, etc.

2 unchanged sentences

Short Term Investments

Short term investments are highly liquid investments with original maturities between three and twelve months.

The Company’s short term investments consist of US Treasury Bills.

These investments are classified as available-for-sale.

Available-for-sale short term investments are reported at fair value in the Consolidated Balance Sheets.

Unrealized gains and losses are excluded from earnings and are reported in accumulated other comprehensive income in the Consolidated Statements of Operations and Comprehensive Income.

The following table summarizes the available-for-sale short term investments as of December 31, 2024 and 2023.

December 31, 2024

December 31, 2023

Treasury Bills

During the year ended December 31, 2024, the Company sold securities with a carrying amount of $ 14,989,595 for total proceeds of $ 15,336,930 .

The realized gains on these sales were $ 347,335 .

An additional $ 7,780,000 of securities

In July 2025, the FASB issued ASU 2025-05, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit losses for Accounts Receivable and Contract Assets.

The amendments in this update provide (1) all entities with a practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets and (2) entities other than public business entities with an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606.

The amendments will be effective for fiscal years beginning after December 15, 2025, with early adoption permitted.

The Company is evaluating the impact of this new standard and believes that the adoption may result in additional disclosures, but will not have any material impact on its consolidated financial statements.

Business Combination

During the year ended December 31, 2025, Epsilon acquired 100 % of the ownership interest in Peak Exploration & Production LLC and Peak BLM Lease LLC and their subsidiaries (together, “Peak”) for total consideration of $ 88.5 million consisting of 1) issuance of 5,681,489 common shares valued at $ 27.6 million, 2) contingent consideration of up to 2,500,000 common shares valued at $ 10.6 million, and the settlement of $ 50.3 million of debt.

The contingent consideration was settled on November 19, 2025, through the issuance of 2,234,847 common shares for $ 10.6 million.

The acquired assets primarily include operated and non-operated production and leasehold interests in the core of the Powder River Basin in Wyoming.

EPSILON ENERGY LTD.

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For the years ended December 31, 2025 and 2024

reached maturity with total realized gains of $ 234,248 .

The realized gains are included in interest income in the consolidated Statements of Operations and Comprehensive Income.

During the year ended December 31, 2023, the Company sold securities with a carrying amount of $ 10,394,482 for total proceeds of $ 10,454,976 .

The realized gains on these sales were $ 60,494 .

These securities were sold to raise cash to fund capital expenditures.

An additional $ 16,410,000 of securities reached maturity with total realized gains of $ 395,767 .

The realized gains are included in interest income in the consolidated statements of operations and comprehensive income.

The following table summarizes the allocation of the total purchase price to the assets acquired and liabilities assumed based on the estimated fair value as of the closing date of the acquisition.

Purchase price allocation as of November 14, 2025:

Consideration:

Share consideration issued to sellers November 14, 2025 - 5,681,489 common shares

Fair value of contingent share consideration (1)

Debt repayment

Total consideration transferred

Fair value of assets acquired:

Oil and gas receivable

Joint interest billing receivable

Prepaid and other assets

Proved oil and gas properties

Unproved oil and gas properties

Land and buildings

Other non-current assets

Amount attributable to assets acquired

Fair value of liabilities assumed:

Account payable

Revenue and production taxes payable

Accrued liabilities

Ad valorem taxes payable - current

ROU liability - current

Asset retirement obligations

Ad valorem taxes payable - long term

ROU liability - long term

Amount attributable to liabilities assumed

Net assets acquired

(1) The contingent consideration was settled on November 19, 2025.

The Company issued 2,234,847 common shares with a fair value of $ 10.6 million.

The Company funded the acquisition through the issuance of shares and borrowings under our credit facility.

The results of operations attributable to Peak since the closing date of the acquisition have been included in the consolidated statements of operations and comprehensive income and include $ 4 million of total revenues and a $ 5,747 net loss for the year ended December 31, 2025.

Pro Forma Operating Results (Unaudited)

The following supplemental, unaudited pro forma combined financial information for the year ended December 31, 2025 reflects the consolidated results of operations of the Company as if the Peak acquisition had occurred on January 1, 2024.

The information below reflects pro forma adjustments based on available information and certain assumptions that the Company believes are factual and supportable.

The unaudited pro forma information includes adjustments for (i) leasehold expense (ii) depreciation, depletion, amortization, and accretion, (iii) loss on impairment of long term assets, (iv) interest expense related to long term debt, and (v) loss on sale of assets.

In addition, for the year ended December 31, 2025 and 2024, the pro forma information has been effected for income taxes with an effective tax rate of 6.31 % and 45.79 %, respectively.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

Total revenues

Basic net income per common share

Diluted net income per common share

The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the Peak acquisition been completed as of January 1, 2024, and should not be taken as indicative of the Company's future combined results of operations.

The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results.

Property and Equipment

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Asset Acquisitions

During the year ended December 31, 2025, Epsilon had no asset acquisitions.

During the year ended December 31, 2024, Epsilon made the following four acquisitions.

Management determined that substantially all of the fair value of the gross assets acquired were concentrated in oil and gas properties and therefore accounted for these transactions as asset acquisitions and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed.

● a 25 % working interest in three producing wells in Ector County, Texas for $ 12.1 million.

● a 25 % working interest in 3,620 gross undeveloped acres in Ector County, Texas for $ 2.6 million.

● a 50 % working interest in 14,243 gross undeveloped acres in Alberta, Canada for $ 1.0 million.

● a joint venture covering approximately 130,000 gross undeveloped acres in Alberta, Canada with a commitment to provide an approximately $ 7.0 million drilling carry to earn a 25 % working interest

During the year ended December 31, 2023, Epsilon made the following three acquisitions.

● a 10 % interest in two wellbores located in Eddy County, New Mexico for total consideration of $ 2.1 million paid in cash.

● a 25 % working interest in 1,297 gross acres in Ector County, Texas for total consideration of $ 1.3 million paid in cash.

● a 25 % working interest in producing wells in Ector County, Texas for $ 12.1 million.

● a 25 % working interest in undeveloped acreage in Ector County, Texas for $ 2.6 million.

● a 50 % working interest in undeveloped acreage in Alberta, Canada for $ 1.0 million.

● a joint venture covering undeveloped acreage in Alberta, Canada with a commitment to provide an approximately $ 7.0 million drilling carry to earn a 25 % working interest

EPSILON ENERGY LTD.

1 unchanged sentence

For the years ended December 31, 2025 and 2024

● a 25 % working interest in 11,067 gross acres in Ector County, Texas for total consideration of $ 6.3 million paid in cash.

Property Sale

During the year ended December 31, 2024, Epsilon had no asset sales.

During the year ended December 31, 2023, Epsilon sold two wellbore-only Oklahoma assets for $ 12,498 .

During the year ended December 31, 2025, Epsilon sold all of its interest in Dewey Energy Holding, LLC for $ 2.5 million.

This sale resulted in a loss of $ 19.3 million.

During the year ended December 31, 2024, Epsilon had no asset sales.

Property Impairment

6 unchanged sentences

For unproved properties, such as leasehold costs, expected current and future market prices for similar assets are considered relative to carrying values in evaluating impairment.

During the year ended December 31, 2024, Epsilon recorded an impairment of $ 1.45 million on the Killam project (interest acquired in April 2024) in Alberta, Canada.

One well was impaired as a result of a decrease in reserves ($ 0.53 million) and one well drilled during the year was deemed non-commercial ($ 0.92 million).

For the year ended December 31, 2023, there was no impairment.

For the year ended December 31, 2025, the Company recorded an impairment of $ 3.2 million on the Canadian wells ( 2 gross, 0.5 net) and $ 0.7 million on the New Mexico wells ( 2 gross, 0.2 net) due to low forward oil prices on December 31, 2025 (which are required to be used in impairment testing) and an offset frac hit impacting production and reserves in New Mexico.

During the year ended December 31, 2024, Epsilon recorded an impairment of $ 1.45 million on the Killam project (interest acquired in April 2024) in Alberta, Canada as a result of a decrease in forecasted reserves.

Refer to Note 16 – Fair Value Measurements.

Revolving Line of Credit

The Company closed a senior secured reserve based revolving credit facility on June 28, 2023 with Frost Bank as issuing bank and sole lender.

The current borrowing base is $ 45 million (redetermined as of February 10, 2025), supported by the Company’s upstream assets in Pennsylvania and subject to semi-annual redeterminations with a maturity date of June 28, 2027.

Interest will be charged at the Daily Simple SOFR rate plus a margin of 3.25 %.

The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower).

There are currently no borrowings under the facility.

The Company closed a new senior secured reserve based revolving credit facility on October 10, 2025 with Frost Bank as administrative agent and Frost Bank and Texas Capital Bank as lenders.

As of December 31, 2025, the borrowing base was $ 80 million, supported by the Company’s producing reserves and is subject to semi-annual redeterminations with a maturity date of October 10, 2029.

Interest will be charged at the 3-month Term SOFR rate plus a margin of 3 - 4 % (depending on facility utilization), payable quarterly.

The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary.

During March 2026, the Company made a $ 5 million repayment on the outstanding credit facility.

Under the terms of the facility, the Company must adhere to the following financial covenants:

● Current ratio of 1.0 to 1.0 (current assets / current liabilities)

● Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts)

Additionally, if the leverage ratio is greater than 1.0 to 1.0, or the borrowing base utilization is greater than 50 %, the Company is required to hedge 50 % of the anticipated production from PDP reserves for a rolling 24 month period.

● Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and noncash amounts)

Additionally, the Company is required to hedge 50 % of its forecasted Proved Developed Producing production over a rolling 18-month period.

If the facility utilization drops below 50 %, then the required hedging drops to 25 % of Proved Developed Producing production for the last 6 months of the 18-month period.

We were in compliance with the financial covenants of the agreement as of December 31, 2025.

1 unchanged sentence

Interest Rate

Revolving line of credit

Credit facility payable

SOFR + 3.25 %

3 unchanged sentences

Shareholders’ Equity

(a) Authorized shares

Authorized shares

The Company is authorized to issue an unlimited number of common shares with no par value and an unlimited number of Preferred Shares with no par value.

(b) Purchases of Equity Securities

Purchases of Equity Securities

On February 18, 2026, the Board authorized a new share repurchase program of up to 3,014,986 common shares, representing 10 % of the outstanding common shares of the Company at such time, for an aggregate purchase price of not more than US $ 15.0 million.

The program commenced on February 19, 2026 and is set to expire February 18, 2027, unless the maximum amount of common shares is purchased before then or the Board approves earlier termination.

On February 12, 2025, the Board authorized a new share repurchase program of up to 2,200,876 common shares, representing 10 % of the current outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $ 13.0 million.

The program commenced on February 12, 2025 and expired on February 11, 2026.

On March 19, 2024, the Board of Directors authorized a new share repurchase program of up to 2,191,320 common shares, representing 10 % of the outstanding common shares of Epsilon at such time, for an aggregate purchase price of not more than US $ 12.0 million.

The program was pursuant to a normal course issuer bid and was conducted in accordance with Rule 10b-18 under the Exchange Act.

The program commenced on March 27, 2024 and was set to expire on March 26, 2025, unless the maximum amount of common shares is purchased before then or the Board approves earlier termination.

The program commenced on March 27, 2024 and expired on February 12, 2025, when the Board terminated and revoked authority under the program.

During the year ended December 31, 2024, we repurchased 125,000 common shares and spent $ 627,500 at an average price of $ 5.00 per share (excluding commissions) under the plan.

On February 12, 2025, the Board terminated and revoked authority under the program.

The previous share repurchase program commenced on March 9, 2023.

During the year ended December 31, 2023, we repurchased 968,149 common shares of the maximum of 2,292,644 authorized for repurchase and spent $ 4,940,295 under the plan.

The repurchased stock had an average price of $ 5.08 per share (excluding commissions) and 897,275 common shares were retired during the year ended December 31, 2023.

In 2024, we repurchased 248,700 common shares and spent $ 1,203,708 at an average price of $ 4.82 per share (excluding commissions) and retired 319,574 common shares before the plan terminated on March 26, 2024.

In 2024, the Company repurchased 373,700 shares and spent $ 1,831,208 at an average price of $ 4.88 per share (excluding commissions) under the two consecutive repurchase programs.

The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act.

The program will commence on February 12, 2025 and end on February 11, 2026, unless the maximum amount of common shares is purchased before then or the Board approves earlier termination.

In 2024, the Company also repurchased 248,700 common shares and spent $ 1,203,708 at an average price of $ 4.82 per share (excluding commissions) and retired 319,574 common shares under the 2023-2024 repurchase program before the plan terminated on March 26, 2024.

During the year ended December 31, 2024, the Company repurchased a total of 373,700 shares and spent $ 1,831,208 at an average price of $ 4.88 per share (excluding commissions) under the two previous repurchase programs.

Equity Incentive Plan

The Board adopted the 2020 Equity Incentive Plan (the “2020 Plan”) on July 22, 2020 subject to approval by Epsilon’s shareholders at Epsilon’s 2020 Annual General and Special Meeting of shareholders, which occurred on September 1, 2020 (the “Meeting”).

Shareholders approved the 2020 Plan at the Meeting.

The 2020 Plan provides for incentive compensation in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards.

The 2020 Plan provides for incentive compensation in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, dividend equivalent rights, other stock-based awards and cash-based awards.

Under the 2020 Plan, Epsilon is authorized to issue up to 2,000,000 common shares.

18 unchanged sentences

The total fair value of vested shares during the year ended December 31, 2025 was $ 1,763,433 (during the year ended December 31, 2024:

$ 1,303,187 ).

At December 31, 2025, the Company had unrecognized stock-based compensation related to these shares of $ 4,146,227 to be recognized over a weighted-average period of 1.37 years.

Performance Share Unit (“PSU”)

The Company historically granted PSUs, which are paid in stock to certain key employees.

The number of shares ultimately issued under these awards can range from zero to 200 % of target awarded amounts at the discretion of the Compensation committee of the Board of Directors.

During the years ended December 31, 2024 and 2023, the Company awarded no PSUs.

During the year ended December 31, 2023, a total of 15,833 common shares vested.

Stock compensation expense recognized during the year ended December 31, 2024 related to PSUs was $ 0 (during the year ended December 31, 2023, $ 58,737 ).

At December 31, 2024, the Company had no unrecognized stock-based compensation related to these shares.

Stock Options

As of December 31, 2024, the Company had no outstanding stock options.

The following table summarizes stock option activity for the years ended December 31, 2024 and 2023:

December 31, 2024

December 31, 2023

Exercise price in US$

Balance at beginning of period

Balance at period-end

Exercisable at period-end

At December 31, 2024 and 2023, the Company had unrecognized stock-based compensation related to these options of nil .

The total intrinsic value of the outstanding options at December 31, 2024 was nil (at December 31, 2023:

The total intrinsic value of options exercised during the year ended December 31, 2024 was nil (during the year ended December 31, 2023:

During the years ended December 31, 2024 and 2023, the Company awarded no stock options.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2024 and 2023

Dividend Equivalent Rights

Per the 2020 Plan, all employees and directors are entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Common Shares during the period beginning on the grant date of this award and ending, with respect to each share subject to the award, on the earlier of the date the Award is settled or the date on which it is terminated.

Dividend Equivalent Rights shall be paid by crediting the holder with a cash amount or with additional whole RSUs within 30 days of the date of payment of such cash dividends on Common Shares, as determined by the Committee, subject to the holder’s continued service with the Company.

Such cash amount or additional RSUs shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time as the RSUs originally subject to this Award.

For the year ended December 31, 2025, 47,417 common shares were issued as dividend equivalent rights.

Stock compensation expense recognized during the year ended December 31, 2025 was $ 200,015 .

Revenue Recognition

Revenues are comprised primarily of sales of natural gas, oil and NGLs, along with the revenue generated from the Company’s ownership interest in the Auburn gas gathering system in Northeastern Pennsylvania.

Revenues are comprised primarily of sales of natural gas, oil and NGLs, along with the revenue generated from the Company’s ownership interest in the Auburn GGS in Pennsylvania.

Overall, product sales revenue generally is recorded in the month when contractual delivery obligations are satisfied, which occurs when control is transferred to the Company’s customers at delivery points based on contractual terms and conditions.

1 unchanged sentence

Gathering System revenues derived from Epsilon’s production, which have been eliminated from total gathering system revenues (“elimination entry”), amounted to $ 1.9 million and $ 1.1 million, respectively, for the years ended December 31, 2025 and 2024.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

The following table details revenue for the years ended December 31, 2025 and 2024:

Year Ended December 31,

Operating revenue

Natural gas liquids

1 unchanged sentence

Gathering and compression fees (1)

Total operating revenue

Total revenue

(1) Net of elimination

5 unchanged sentences

Settlement statements for product sales, and the related cash consideration, are generally received from the purchaser within 30 days .

For operated production in Wyoming, cash consideration is typically received within 30 days after the end of a production month for oil, while natural gas and NGLs cash consideration is typically received within 60 days after the end of a production month.

As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the natural gas, oil, NGLs, or condensate.

1 unchanged sentence

Gas Gathering and Compression Revenue

The Company also provides natural gas gathering and compression services through its ownership interest in the Auburn gas gathering system in Pennsylvania.

The Company also provides natural gas gathering and compression services through its ownership interest in the Auburn GGS in Pennsylvania.

For the provision of gas gathering and compression services, the Company collects its share of the gathering and compression fees per unit of gas serviced and recognizes gathering revenue over time using an output method based on units of gas gathered.

2 unchanged sentences

Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2024 and 2023

Current Expected Credit Losses

5 unchanged sentences

As of December 31, 2025 and 2024, we determined that our allowance for credit loss was nil .

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

The following table details accounts receivable as of December 31, 2025, 2024 and 2023:

4 unchanged sentences

Commodity contract

Other receivables

Total accounts receivable

4 unchanged sentences

Balance at beginning of period

Translation gain/(loss)

Unrealized (loss)/gain on securities

Translation (loss)/gain

Unrealized gain/(loss) on securities

Balance at end of period

3 unchanged sentences

( 2,769,534 )

We file a federal income tax return in the United States, Canada, and various state and local jurisdictions.

We believe that we have appropriate support for the income tax positions taken and to be taken on the Company's tax returns and that the accruals for tax liabilities are adequate for all open years based on our assessment of many factors

( 5,436,132 )

We file income tax returns in the United States, Canada, and various state and local jurisdictions.

The Company's tax returns are open to audit under the statute of limitations for the years ending December 31, 2021 through December 31, 2025.

EPSILON ENERGY LTD.

1 unchanged sentence

For the years ended December 31, 2025 and 2024

including past experience and interpretations of tax law applied to the facts of each matter.

The Company's tax returns are open to audit under the statute of limitations for the years ending December 31, 2021 through December 31, 2024.

The following tables present the Company’s current and deferred tax expense (benefit) for the periods indicated:

The following tables present the Company’s current and deferred tax (benefit) expense for the periods indicated:

Year ended December 31,

3 unchanged sentences

The following table presents the reconciliation of our income taxes calculated at the statutory federal tax rate to the income tax provision in our financial statements.

Our effective tax rate for 2024 and 2023 differs from the statutory rate primarily due to states taxes, foreign withholding taxes, and the recognition of a valuation allowance on our Canadian and Oklahoma state deferred tax assets.

Our effective tax rate for 2025 differs from the statutory rate primarily due to states taxes, foreign withholding taxes, and the recognition of a valuation allowance on our Canadian and Oklahoma state deferred tax assets.

US Federal Statutory Tax Rate

( 1,141,588 )

State and Local Income Taxes, Net of Federal Income Tax Effect*

Foreign Tax Effects

Statutory tax rate difference between Canada and United States

US withholding tax on dividends from United States to Canada

Changes in valuation allowance

Statutory tax rate difference between Alberta and United States

Changes in valuation allowance

Nontaxable or Nondeductible Items

Income tax expense

*State taxes in Pennsylvania made up the majority (greater than 50 percent) of the tax effect in this category.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

Our effective tax rate for 2024 differs from the statutory rate primarily due to states taxes, foreign withholding taxes, & the recognition of a valuation allowance on our Canadian and Oklahoma state deferred tax assets.

Our effective tax rate for 2024, excluding the impact of Canadian loss net valuation allowance, is 25.48 %.

Income tax provision computed at the statutory federal tax rate

7 unchanged sentences

Income tax expense

Our effective tax rate for 2024 and 2023, excluding the impact of Canadian loss net valuation allowance, is 25.48 % and 28.29 %, respectively.

Deferred income taxes primarily represent the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2024 and 2023

Net deferred tax liabilities consisted of the following at December 31, 2025 and 2024:

1 unchanged sentence

Deferred tax assets:

State net operating loss carryforwards

US Federal and state net operating loss carryforwards

Canadian net operating loss carryforwards

5 unchanged sentences

( 11,213,899 )

Total deferred tax assets

Total net deferred tax assets

Deferred tax liabilities:

11 unchanged sentences

( 12,738,577 )

As of December 31, 2024, we have no federal net operating loss carry-forwards and approximately $ 11.3 million of state net operating loss carry-forwards, of which $ 0.2 million expires in 2037 and the remaining can be carried forward indefinitely.

These loss carryforwards may reduce future taxable income, however, the extent of which may be limited due to any IRC Section 382 limitation.

As of December 31, 2025, we have $ 1.4 million of U.S.

federal net operating loss carry-forwards, all of which has an indefinite carryforward period but is limited to offset 80% of taxable income in any future year.

We also have approximately $ 30.8 million of state net operating loss carry-forwards (tax-effected $ 0.6 million), of which $ 0.2 million expires in 2037 and the remaining can be carried forward indefinitely.

These loss carryforwards may reduce future taxable income, however, the extent of which may be limited in the circumstances that an IRC Section 382 limitation would apply due to an ownership change.

A state valuation allowance of $ 0.4 million is applicable to the net state deferred tax assets attributable to Oklahoma because of objective negative evidence on the cumulative loss incurred in the state over the three-year period ended December 31, 2025.

As of December 31, 2024, we have $ 40.9 million of Canadian net operating loss carry-forwards.

As of December 31, 2025, we have $ 48.2 million (tax-effected 11.1 million) of Canadian net operating loss carry-forwards.

A separate valuation allowance of $ 12.8 million attributable to Canadian net operating losses and other tax carryovers is recorded because it is more likely than not to be utilized.

The net change in the total valuation allowance for each of the years ended December 31, 2024 and 2023 was a decrease of $ 0.5 million and an increase of $ 0.50 million, respectively.

The Company does not have any material uncertain tax positions.

The Company recognizes interest expense and penalties related to the uncertain tax position in the income tax expense line in the accompanying consolidated statements of operations and comprehensive loss.

Accrued interest and penalties are included in other non-current liabilities in the consolidated balance sheets and were $ 0 as of December 31, 2024 and 2023.

The Company recognizes interest expense and penalties related to the uncertain tax position in the income tax expense line in the accompanying consolidated statements

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

of operations and comprehensive loss.

Accrued interest and penalties are included in other non-current liabilities in the consolidated balance sheet and were $ 0 as of December 31, 2025 and 2024.

Total net income tax payments were $ 2.2 million for the year ended December 31, 2025.

The following table lists the components of the payments for income taxes:

Total net payments

Commitments and Contingencies

The Company also enters into commitments for capital expenditures in advance of the expenditures being made.

As of December 31, 2024, our commitments for capital expenditures were $ 7.8 million.

All of the capital commitments are related to the first two wells of the joint venture in Alberta entered into in October 2024.

Of the total commitment, $ 3.4 million is drilling carry in favor of the operator, and the remaining amount is our working interest share of outstanding authorizations for future expenditures.

As of December 31, 2025, our commitments for capital expenditures were $ 3.8 million related to drilling costs.

In 2025, the Company filed a lawsuit against a contractor regarding alleged non-performance while running casing in a well.

The Company is seeking damages due to its inability to complete the Leavitt Fed 2-9-4MH well.

The Company is in the process of scheduling arbitration

The Company has intervened as a defendant-intervenor in litigation challenging BLM’s issuance of federal oil and gas leases acquired by the Company in 2017, 2018, and 2020.

Plaintiffs allege deficiencies in BLM’s environmental review under NEPA.

The Company intervened to protect its leasehold interests.

Management does not believe the outcome will have a material adverse effect on the Company’s financial position.

Between September 30, 2025 and October 28, 2025, we received multiple demand letters on behalf of purported Epsilon stockholders (the “Demands”).

The Demands primarily alleged that the Preliminary Proxy Statement filed on September 19, 2025 or the Definitive Proxy Statement filed on October 10, 2025, as applicable, failed to disclose certain material information with respect to the acquisition of Peak Exploration and Production, LLC, and Peak BLM Lease LLC.

On October 16, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Anthony Morgan (the “Morgan Complaint”).

On October 17, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Richard Lawrence (the “Lawrence Complaint,” and together with the Morgan Complaint, the “Complaints”).

The Complaints allege, among other things, that Epsilon and the other named defendants (the “Epsilon Defendants”) violated New York common law based on claims of negligence, negligent misrepresentation and concealment.

Specifically, the Complaints allege that the Preliminary Proxy Statement or the Definitive Proxy Statement, as applicable, failed to disclose, among other things, certain details regarding the background of the Transactions.

Among other remedies, the Complaints sought an injunction against consummating the Transactions, rescission or actual and punitive damages if the Transactions are consummated, costs and attorneys’ fees.

To date, we have not been served with the Complaints, and the Plaintiffs have not taken any additional steps in furtherance of prosecuting the Complaints.

While we believe that the disclosures set forth in the Preliminary Proxy Statement and the Definitive Proxy Statement comply fully with applicable law, to moot certain of the claims made in the Demands and Complaints, to avoid nuisance and potential expense and delay, we voluntarily supplemented the Definitive Proxy Statement with certain disclosures in our Supplemental Disclosures to Definitive Proxy Statement filed on October 31, 2025.

Nothing in our

EPSILON ENERGY LTD.

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For the years ended December 31, 2025 and 2024

Supplemental Disclosures was an admission of the legal necessity or materiality under applicable law of any of the disclosures set forth in the Preliminary Proxy Statement or the Definitive Proxy Statement.

To the contrary, we deny all allegations in the Demands and Complaints that any additional disclosure was required.

Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of December 31, 2025 summarized in the following table:

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Operating cash flows from operating leases

Right-of-use assets obtained in exchange for new operating lease liabilities

Weighted average remaining lease term (years) - operating lease

1 unchanged sentence

On March 1, 2023, the Company commenced a new office lease with a 70 month lease term and future lease payments estimated to be approximately $ 0.85 million.

There are no other pending leases, and no lease arrangements in which the Company is the lessor.

Through its subsidiaries, the Company also leases office space in both Englewood, CO and Wright, WY.

Lease expense for operating leases was $ 0.27 million and $ 0.24 for the years ended December 31, 2025 and 2024, respectively.

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Year ended December 31,

Net (loss) income

( 5,798,863 )

In calculating the net income per share, basic and diluted, the following weighted-average shares were used:

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Basic weighted-average number of shares outstanding

Dilutive stock options

Unvested performance-based restricted shares

Unvested time-based restricted shares

Diluted weighted-average shares outstanding

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Year ended December 31,

Anti-dilutive options

Anti-dilutive unvested time-based restricted shares

Anti-dilutive unvested performance-based restricted units

Total Anti-dilutive shares

Operating Segments

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Other lease operating expense

Gathering system operating expenses

Intersegment other lease operating expense

Loss on sale of oil and gas properties

Depletion, depreciation, amortization and accretion

Segment operating income

Reconciliation of segment operating income

Segment operating (loss) income

( 3,812,219 )

Reconciliation of segment operating loss

Salary expense

( 3,876,611 )

Stock based compensation

( 1,744,917 )

Transaction costs

( 2,947,907 )

Other general and administrative

Elimination of intersegment other lease operating expenses

( 3,291,624 )

Total consolidated operating income

Other income (expense)

Elimination of intersegment other lease operating expenses

Interest income

Interest expense

Loss on derivative contracts

Other income, net

Net income before income tax expense

Gain on derivative contracts

Net loss before income tax expense

( 5,436,132 )

Capital expenditures (2)

3 unchanged sentences

Current assets, net

Fair value of derivatives, long term

Other property and equipment

Operating lease right-of-use asset

Credit facility fees

Restricted Cash

16 unchanged sentences

Other lease operating expense

Gathering system operating expenses

Intersegment other lease operating expense

Loss on sale of oil and gas properties

Depletion, depreciation, amortization and accretion

2 unchanged sentences

Salary expense

( 2,815,428 )

Stock based compensation

( 1,244,416 )

Other general and administrative

Elimination of intersegment other lease operating expenses

( 2,873,286 )

Total consolidated operating income

Other income (expense)

Elimination of intersegment other lease operating expenses

Interest income

Interest expense

Gain on derivative contracts

Other income, net

Loss on derivative contracts

Net income before income tax expense

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Inter-segment sales during the years ended December 31, 2025 and 2024 have been eliminated upon consolidation.

For the year ended December 31, 2024, we sold natural gas to 34 unique customers.

SWN Energy Services Company, LLC accounted for 10 % or more of our total revenue.

For the year ended December 31, 2023, we sold natural gas to 33 unique customers.

Direct Energy Business Marketing, LLC and EQT Energy, LLC each accounted for 10 % or more of our total revenue.

For the year ended December 31, 2025, three purchasers each accounted for 10 % or more of our total revenue:

ARM Energy ( 55 %) and Ares Energy ( 20 %) from the upstream segment and Williams ( 17 %) from the gas gathering segment.

For the year ended December 31, 2024, three purchasers each accounted for 10 % or more of our total revenue:

ARM Energy ( 30 %) and Ares Energy ( 38 %) from the upstream segment and Williams ( 20 %) from the gas gathering segment.

(2) Capital expenditures for the Upstream segment consist primarily of the acquisition of properties, and the drilling and completing of wells while Gas Gathering consists of expenditures relating to the expansion, completion, and maintenance of the gathering and compression facility.

Commodity Risk Management Activities

Commodity Price Risks

Epsilon engages in price risk management activities from time to time.

These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas by securing fixed price contracts for a portion of expected sales volumes.

(3) Our upstream segment includes Canadian revenue and assets for the year ended December 31, 2025 of $ 1.0 million and $ 6.6 million, respectively.

Our upstream segment includes Canadian revenue and assets for the year ended December 31, 2024 of $ 0.1 million and $ 3.7 million, respectively.

EPSILON ENERGY LTD.

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For the years ended December 31, 2025 and 2024

Commodity Risk Management Activities

Commodity Price Risks

Epsilon engages in price risk management activities from time to time.

These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas and oil by securing fixed price contracts for a portion of expected sales volumes.

Inherent in the Company’s fixed price contracts, are certain business risks, including market risk and credit risk.

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The natural gas and oil revenues and cash flows are affected by changes in commodity product prices, which are volatile and cannot be accurately predicted.

The objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future natural gas sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget.

The objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future natural gas and oil sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget.

Epsilon has historically elected not to designate any of its financial commodity derivative contracts as accounting hedges and, accordingly, accounts for these financial commodity derivative contracts using the mark-to-market accounting method.

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The related cash flow impact is reflected in cash flows from operating activities.

During 2025, Epsilon recognized gains on financial commodity derivative contracts of $ 5,500,486 .

This amount included cash received on the settlement of these contracts of $ 1,163,662 .

During 2024, Epsilon recognized losses on financial commodity derivative contracts of $ 391,147 .

This amount included cash received on the settlement of these contracts of $ 1,196,656 .

During 2023, Epsilon recognized gains on financial commodity derivative contracts of $ 3,130,055 .

This amount included cash paid on the settlement of these contracts of $ 3,251,890 .

Commodity Derivative Contracts

At December 31, 2024, the Company had outstanding NYMEX HH swaps totaling 2.2615 Bcf with a weighted average strike price of $ 3.26 and Tennessee Z4 basis swaps totaling 2.2615 Bcf with a weighted average strike price of ($ 0.91 ) covering January 2025 to October 2025, and NYMEX WTI CMA swaps totaling 20,662 Bbls with a weighted average strike price of $ 73.49 to hedge a portion of expected volumes for the contract period of January 2025 to June 2025.

At December 31, 2023, the Company had outstanding NYMEX HH swaps totaling 1.905 Bcf with a weighted average strike price of $ 3.25 and Tennessee Z4 basis swaps totaling 1.905 Bcf with a weighted average strike price of ($ 1.10 ) to hedge a portion of expected volumes for the contract period of January 2024 to October 2024.

Fair Value of Derivative

NYMEX Henry Hub swap

Tennessee Z4 basis swap

Crude Oil NYMEX WTI CMA

Fair Value of Derivative

NYMEX Henry Hub swap

Tennessee Z4 Basis swap

Net Fair Value of Derivatives

At December 31, 2025, the Company had outstanding NYMEX HH swaps totaling 1.68 Bcf, NYMEX HH options totaling 4.51 Bcf, NYMEX WTI CMA swaps totaling 340,916 Bbls, and NYMEX WTI CMA options totaling 181,634 Bbls for the contract period of January 2026 to January 2028.

At December 31, 2024, the Company had outstanding NYMEX HH swaps totaling 2.2615 Bcf and Tennessee Z4 basis swaps totaling 2.2615 Bcf for the contract period of January 2025 to October 2025, and NYMEX WTI CMA swaps totaling 20,662 Bbls for the contract period of January 2026 to June 2025.

EPSILON ENERGY LTD.

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For the years ended December 31, 2025 and 2024

Fair Value of Derivative

NYMEX Henry Hub (LD) Options Call

NYMEX Henry Hub (LD) Options Put

NYMEX Henry Hub (LD) Swaps

NYMEX WTI CMA Options Put

NYMEX WTI CMA Swaps

NYMEX Henry Hub (LD) Options Put

NYMEX Henry Hub (LD) Swaps

NYMEX WTI CMA Options Put

NYMEX WTI CMA Swaps

Fair Value of Derivative

NYMEX Henry Hub (LD) Options Call

NYMEX Henry Hub (LD) Swaps

NYMEX WTI CMA Options Call

NYMEX Henry Hub (LD) Options Call

NYMEX Henry Hub (LD) Swaps

NYMEX WTI CMA Options Call

( 1,552,027 )

Net Fair Value of Derivatives

Net Long-Term

The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated:

Year ended December 31,

Fair value of asset, beginning of the period

(Loss) gain on derivative contracts included in earnings

Fair value of asset (liability), beginning of the period

Gain on derivative contracts included in earnings

Settlement of commodity derivative contracts

1 unchanged sentence

( 1,196,656 )

Fair value of (liability) asset, end of the period

Fair value of asset, end of the period

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

The following table presents the fair value of derivatives, as presented in the Consolidated Balance Sheets, on a net basis as they are subject to master netting arrangements:

3 unchanged sentences

Fair value of derivatives

( 1,552,027 )

Derivative Liabilities

Fair value of derivatives

( 1,552,027 )

Asset Retirement Obligations

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Epsilon has estimated the net present value of its total asset retirement obligations to be $ 7.4 million as of December 31, 2025 ($ 3.7 million at December 31, 2024).

We acquired $ 3.8 million of additional asset retirement obligation with the Peak acquisition.

Each year we review, and to the extent necessary, revise our asset retirement obligations estimates in accordance with recent activity and current service costs.

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Balance end of period

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2024 and 2023

Fair Value Measurements

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Cash, restricted cash, accounts receivable, and accounts payable are carried at cost, which approximates fair value because of the short term maturity of these instruments.

Cash equivalents are carried at fair value.

Cash equivalents from the Company’s money market accounts are carried at fair value.

The Company’s revolving line of credit has a recorded value that approximates its fair value since its variable interest rate is tied to current market rates and the applicable margins represent market rates.

The revolving line of credit is classified within Level 2 of the fair value hierarchy.

The Company had investments in U.S.

Treasury bills, all of which mature over a period of 3 and 12 months and are classified as short term investments.

Treasury bills are carried at fair value.

Treasury bills are classified within Level 1 of the fair value hierarchy.

Commodity derivative instruments consist of NYMEX HH swap and basis swap contracts for natural gas and NYMEX WTI CMA swap contracts for crude oil.

Commodity derivative instruments consist of NYMEX HH swap and option contracts and basis swap contracts for natural gas and NYMEX WTI CMA swap and option contracts for crude oil.

The Company’s derivative contracts are valued based on a marked to market approach.

1 unchanged sentence

The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

December 31, 2025

2 unchanged sentences

Derivative contracts

( 1,552,027 )

Cash equivalents

Derivative contracts

( 1,552,027 )

December 31, 2024

3 unchanged sentences

Cash equivalents

Short term investments

Derivative contracts

Non-Recurring Fair Value Measurements

The Company performed an impairment test on our oil and gas properties and it was determined that the carrying amount of the Killam project in Alberta, Canada exceeded the estimated undiscounted future cash flows resulting in a reduction of the carrying amount of the oil properties to their estimated fair values by $ 1.45 million.

For the year ended December 31, 2025, the Company performed an impairment test on our oil and gas properties and it was determined that the carrying amount in New Mexico and Canada each exceeded the estimated undiscounted future cash flows resulting in a reduction of the carrying amount of the oil properties to their estimated fair values by $ 3.9 million.

Fair value is determined using management’s best estimate of proved reserves and net cash flows by area, using forward commodity prices from the last day of the year.

The undiscounted future net cash flows are compared to the carrying value of each area.

This nonrecurring fair value measurement is classified within Level 3 of the fair value hierarchy.

For the year ended December 31, 2023, there was no impairment.

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2024 and 2023

The table below summarizes the fair value of the impaired assets at December 31, 2024.

The table below summarizes the fair value of the impaired assets as of the fair value measurement date, December 31, 2025.

Quoted Prices

3 unchanged sentences

Total Nonrecurring fair value measurement

For the year ended December 31, 2024, the Company performed an impairment test on our oil and gas properties and it was determined that the carrying amount of the Killam project in Alberta, Canada exceeded the estimated undiscounted future cash flows resulting in a reduction of the carrying amount of the oil properties to their estimated fair values by $ 1.45 million.

Fair value is determined using management’s best estimate of proved reserves and net cash flows by area, using forward commodity prices from the last day of the year.

The undiscounted future net cash flows are compared to the carrying value of each area.

This nonrecurring fair value measurement is classified within Level 3 of the fair value hierarchy.

The table below summarizes the fair value of the impaired assets as of the fair value measurement date, December 31, 2024.

Quoted Prices

Identical Assets

Nonrecurring fair value measurement

Long-lived assets held and used

Total Nonrecurring fair value measurement

EPSILON ENERGY LTD.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2025 and 2024

EPSILON ENERGY LTD.

Supplemental Information to Consolidated Financial Statements

18 unchanged sentences

The following tables set forth Epsilon’s net proved reserves at December 31, 2025 and 2024 and changes for each of the two years in the year ended December 31, 2025.

Net proved reserves at December 31 are estimated by the Company’s independent petroleum engineers, DeGolyer and MacNaughton.

Net proved reserves at December 31 are estimated by the Company’s independent petroleum engineers, DeGolyer and MacNaughton for Pennsylvania, Texas, New Mexico, and Canada.

Net proved reserves at December 31 are estimated by the Company’s independent petroleum engineers, Cawley, Gillespie & Associates for Wyoming.

EPSILON ENERGY LTD.

25 unchanged sentences

Net proved reserves at December 31, 2025

(1) Revisions of previous estimates for Pennsylvania for 2023 include reductions of 9,626 MMcf related to well performance, reductions of 21,830 MMcf related to commodity pricing, and additions of 16,625 MMcf related to changes in previously adopted development plans.

(2) Revisions of previous estimates for Oklahoma for 2023 include reductions of 454 MMcfe related to commodity pricing, 1,760 MMcfe related to changes in previously adopted development plans, and 777 MMcfe related to well performance.

(3) Revisions of previous estimates for Pennsylvania for 2024 include additions of 10,244 MMcf related to changes in previously adopted development plans, reductions of 2,849 MMcf related to commodity pricing, and additions of 939 MMcf related to well performance.

(4) Revisions of previous estimates for the Permian Basin for 2024 include additions of 2,317 MMcfe related to well performance and reductions of 23 MMcfe related to commodity pricing.

(5) Revisions of previous estimates for Oklahoma for 2024 include reductions of 196 MMcfe related to commodity pricing and 410 MMcfe related to well performance.

(1) Revisions of previous estimates for Pennsylvania for 2024 include additions of 10,244 MMcf related to changes in previously adopted development plans, reductions of 2,849 MMcf related to commodity pricing, and additions of 939 MMcf related to technical revisions.

(2) Revisions of previous estimates for the Permian Basin for 2024 include additions of 2,317 MMcfe related to technical revisions and reductions of 23 MMcfe related to commodity pricing.

(3) Revisions of previous estimates for Oklahoma for 2024 include reductions of 196 MMcfe related to commodity pricing and 410 MMcfe related to technical revisions.

(4) Revisions of previous estimates for Pennsylvania for 2025 include reductions of 5,015 MMcf related to changes in previously adopted development plans, additions of 9,617 MMcf related to commodity pricing, and additions of 8,498 MMcf related to technical revisions.

(5) Revisions of previous estimates for the Permian Basin for 2025 include reductions of 1,326 MMcfe related to changes in previously adopted development plans, reductions of 429 MMcfe related to commodity pricing, and reductions of 836 MMcf related to technical revisions.

EPSILON ENERGY LTD.

76 unchanged sentences

Unproved acquisition costs

Proved acquisition costs

Proved development costs

10 unchanged sentences

Results of operations from oil and gas producing activities

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Natural gas and oil Reserves

The following information has been developed utilizing procedures prescribed by the Extractive Activities—Natural Oil and Gas (Topic 932) of the ASC and based on natural gas reserves and production volumes estimated by our

EPSILON ENERGY LTD.

Supplemental Information to Consolidated Financial Statements

independent petroleum consultants, DeGolyer and MacNaughton.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Natural Gas and Oil Reserves

The commodity prices estimated below were based on a 12-month average of first-day-of-the-month commodity prices for the years 2025 and 2024.

8 unchanged sentences

The following table sets forth the standardized measure of discounted future net cash flows from projected production of Epsilon’s gas reserves as of December 31, 2025 and 2024.

Standard measure of discounted net cash flows as of December 31, 2024

Year ended December 31,

Standard measure of discounted net cash flows

Future cash inflows

1 unchanged sentence

(403,654,558)

Future development costs (1)

Future income taxes (2)

Future net cash flows (undiscounted)

10% annual discount for estimated timing of cash flows

Standardized measure of discounted future net cash flows

Standard measure of discounted net cash flows as of December 31, 2023

Future cash inflows

Future production costs

(109,070,217)

Future development costs (1)

(119,751,295)

Future income taxes (2)

1 unchanged sentence

10% annual discount for estimated timing of cash flows

(137,392,539)

Standardized measure of discounted future net cash flows

5 unchanged sentences

The following table sets forth the changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2025 and 2024:

Future net cash flows as of December 31, 2022

Revenue less production and other costs

Changes in price, net of production costs

(144,425,073)

(156,373,808)

Development costs incurred

Year ended December 31,

Future net cash flows

Changes in price and production costs

Net changes in future development costs

Revisions of previous quantity estimates

Accretion of discount

Net change in income taxes

Timing differences and other technical revisions

Future net cash flows as of December 31, 2023

Revenue less production and other costs

Changes in price, net of production costs

Development costs incurred

Net changes in future development costs

Acquisition of reserves

Divestitures of reserves

Revisions of previous quantity estimates

Accretion of discount

Development costs incurred

Net change in income taxes

Purchases of reserves in place

Accretion of discount

Timing differences and other technical revisions

Future net cash flows as of December 31, 2024

Future net cash flows

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data