What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-25 compared with 2020-03-18 · 409 added, 295 removed, 612 unchanged (53% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated balance sheets as of December 31, 2019 and 2018, and the consolidated statements of operations and comprehensive income, changes in shareholders’

equity and cash flows for years ended December 31, 2019 and 2018 included in this annual report have been prepared in accordance with U.S.

Our consolidated balance sheets as of December 31, 2020 and 2019, and the consolidated statements of operations and comprehensive income, changes in shareholders’ equity and cash flows for years ended December 31, 2020 and 2019 included in this annual report have been prepared in accordance with U.S.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

5 unchanged sentences

We have audited the accompanying consolidated balance sheets of Epsilon Energy Ltd.

(the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive income, changes in shareholders’

equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

(the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

2 unchanged sentences

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

4 unchanged sentences

/s/ BDO USA LLP

We have served as the Company’s auditor since 2017.

Houston, Texas

14 unchanged sentences

Unproved properties

Accumulated depletion, depreciation, and amortization

Accumulated depletion, depreciation, amortization and impairment

Total oil and gas properties, net

Gathering system

Accumulated depletion, depreciation, and amortization

Accumulated depletion, depreciation, amortization and impairment

Total gathering system, net

12 unchanged sentences

Other accrued liabilities

Fair value of derivatives

Asset retirement obligation

Asset retirement obligations

Total current liabilities

Non-current liabilities

Asset retirement obligation

Asset retirement obligations

Deferred income taxes

3 unchanged sentences

Shareholders' equity

Common shares, no par value, unlimited shares authorized and 26,790,985 issued and outstanding at December 31, 2019 and 27,385,133 shares issued and 27,358,180 shares outstanding at December 31, 2018.

Treasury shares, 26,953 shares issued at December 31, 2018

Common shares, no par value, unlimited shares authorized and 23,985,799 issued and outstanding at December 31, 2020 and 26,790,985 shares issued and outstanding at December 31, 2019.

Additional paid-in capital

16 unchanged sentences

Depletion, depreciation, amortization, and accretion

(Gain) loss on sale/disposal of property

Impairment of proved properties

Gain on sale of property

General and administrative expenses:

2 unchanged sentences

Total operating costs and expenses

Operating income

Operating income (loss)

Other income (expense):

1 unchanged sentence

Interest expense

Gain (loss) on derivative contracts

Gain on derivative contracts

Other income (expense)

Other income (expense), net

Income before income tax expense

Other income, net

Net income before income tax expense

Income tax expense

7 unchanged sentences

EPSILON ENERGY LTD.

Consolidated Statements of Changes in Shareholders’

Consolidated Statements of Changes in Shareholders’ Equity

Common Shares Issued

5 unchanged sentences

Stock-based compensation expenses

Buyback and retirement of common shares

Buyback of common shares not yet retired

Exercise stock options

Purchase of treasury shares

Retirement of treasury shares

Vesting of shares of restricted stock

Other comprehensive income

1 unchanged sentence

Stock-based compensation expenses

Retirement of common shares

Exercise of stock options

Buyback and retirement of common shares

Restricted stock shares vested

Purchase of treasury shares

Retirement of treasury shares

Shares retired through tender offer

Vesting of shares of restricted stock

Other comprehensive income

7 unchanged sentences

Depletion, depreciation, amortization, and accretion

(Gain) loss on sale/disposal of properties

(Gain) loss on derivative contracts

Cash received from (paid for) settlements of derivative contracts

Impairment of proved properties

Gain on sale of properties

Gain on derivative contracts

Cash received from settlements of derivative contracts

Settlement of asset retirement obligation

Stock-based compensation expense

4 unchanged sentences

Accounts payable, royalties payable and other accrued liabilities

Other long-term liabilities

Net cash provided by operating activities

1 unchanged sentence

Acquisition of unproved oil and gas properties

Acquisition of proved oil and gas properties

Additions to unproved oil and gas properties

(Additions to) refunds of proved oil and gas properties

Additions to proved oil and gas properties

Additions to gathering system properties

Additions to land, buildings and other fixed assets

Additions to land, buildings and property and equipment

Prepaid drilling costs

Proceeds from sale of properties

Proceeds from sale of leases

Net cash used in investing activities

2 unchanged sentences

Exercise of stock options

Repayment of revolving line of credit

Net cash used in financing activities

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

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

Cash, cash equivalents and restricted cash, beginning of year

Cash, cash equivalents and restricted cash, end of year

(Decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of period

Cash, cash equivalents and restricted cash, end of period

Supplemental cash flow disclosures:

11 unchanged sentences

Epsilon Energy Ltd.

(the “Company”

or “Epsilon”

or “we”) was incorporated under the laws of the Province of Alberta, Canada on March 14, 2005.

On October 24, 2007, the Company became a publicly traded entity trading on the Toronto Stock Exchange (“TSX”) in Canada.

On February 14, 2019, Epsilon’s registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission and on February 19, 2019, we began trading in the United States on the NASDAQ Global Market under the trading symbol “EPSN.”

Effective as of the close of trading on March 15, 2019, Epsilon voluntarily delisted its common shares from the TSX.

(the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada on March 14, 2005.

On October 24, 2007, the Company became a publicly traded entity trading on the Toronto Stock Exchange (“TSX”) in Canada.

The Company is engaged in the acquisition, development, gathering and production of primarily natural gas reserves in the United States.

Recent Developments

The significant demand declines caused by the global response to the coronavirus 2019 pandemic (“COVID-19”) as well as the actions taken by a number of global oil producers has contributed to steep declines in the demand and pricing for oil, natural gas and NGLs, negatively impacting U.S.

While Epsilon did not incur significant disruptions to operations during the year ended December 31, 2020 as a result of the COVID-19 pandemic, the Company did need to recognize an impairment on its legacy Oklahoma producing assets due to the historically low commodity prices.

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report.

As such, the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations is uncertain.

Management is actively monitoring the impact of the COVID-19 pandemic on the Company's financial condition, liquidity, operations, suppliers, industry and ability to obtain financing in future reporting periods.

Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is currently not able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the future.

The federal government has passed a series of relief and stimulus packages, including the CARES Act, for the country, but Epsilon has not and does not anticipate that it will apply for assistance under such programs.

Accordingly, these programs have no effect on Epsilon’s financial statements.

On June 28, 2020, Chesapeake Energy Corporation (“CHK”) filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code (“Petition”).

Chesapeake Energy Marketing, Inc., a subsidiary of CHK, is one of the Anchor Shippers under the Anchor Ship Gas Gathering Agreement (“ASGGA”) for the Auburn GGS with a 43.8750% voting percentage.

The Williams Companies Inc.

(“Williams”), including its subsidiary Appalachia Midstream Services, L.L.C.

(“AMS”), is listed in the petition as a top 30 creditor of CHK, with an amount due by CHK under the ASGGA.

On June 28, 2020 unpaid fees attributable to CHK for the ASGGA for May and June 2020 gathering fees were $1.1 million and $1.3 million respectively.

On December 15, 2020, a global resolution between Williams and CHK was approved by the United States Bankruptcy Court.

As a part of the agreement, CHK affirmed the ASGGA for the Auburn GGS and agreed to pay all pre-petition and past due receivables related to midstream expenses, per the existing contracts.

We have received our share of the pre-petition amounts and as such, reversed our $0.8 million previously established allowance for doubtful accounts related to the Company’s share of those payments as of December 31, 2020.

On March 10, 2021, Epsilon filed a complaint against Chesapeake Appalachia, LLC (“Chesapeake”) in the United States District Court for the Middle District of Pennsylvania, Scranton, Pennsylvania.

Epsilon claims that Chesapeake has breached a settlement agreement and several operating agreements (“JOAs”) to which Epsilon and Chesapeake are parties.

Epsilon asserts that Chesapeake has failed to cooperate with Epsilon’s efforts to develop resources in the Auburn Development, located in North-Central Pennsylvania, as required under both the settlement agreement and JOAs.

Epsilon has requested a preliminary injunction, among other requests for relief.

Accordingly, a hearing on that request is expected to be heard in Spring 2021.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

Basis of Preparation

The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”).

All amounts presented are in US$ unless otherwise indicated.

Principles of Consolidation

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, Dewey Energy GP, LLC, and Dewey Energy Holdings, LLC.

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, Dewey Energy GP, LLC, Dewey Energy Holdings, 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.

5 unchanged sentences

Actual results could differ from those estimates.

Reclassifications

Certain amounts reported in prior year’s consolidated financial statements have been reclassified to conform to the current presentation with no effect on shareholders’

equity or net income.

Summary of Significant Accounting Policies

3 unchanged sentences

The Company presents restricted cash with cash and cash equivalents in the Consolidated Statements of Cash Flows.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of December 31, 2019 and December 31, 2018:

Year ended December 31,

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of December 31, 2020 and 2019:

Cash and cash equivalents

8 unchanged sentences

Our allowance for doubtful accounts was nil as of December 31, 2020 and 2019.

There was no bad debt expense recognized for the years ended December 31, 2019 and 2018.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

For the year ended December 31, 2020, we recognized an $819,000 bad debt expense, but then reversed it at December 31, 2020.

There was no bad debt expense recognized for the year ended December 31, 2019.

Oil and Natural Gas Properties

13 unchanged sentences

With respect to lease and well equipment costs, which include development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves.

When circumstances indicate that proved oil and natural gas properties may be impaired, Epsilon compares expected undiscounted future cash flows at a depreciation, depletion and amortization group level to the unamortized capitalized cost of the asset.

If the expected undiscounted future cash flows, based on Epsilon’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value.

If the expected undiscounted future cash flows, based on Epsilon’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the carrying value of the asset, the capitalized cost is reduced to fair value.

Fair value is generally calculated using the Income Approach described in the Fair Value Measurement Topic ASC 820, which considers estimated discounted future cash flows.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

Gas Gathering System Properties

Epsilon accounts for its gas gathering system asset using the proportionate consolidation method of accounting.

Epsilon’s 35% portion of asset development costs are capitalized when incurred.

All other costs are expensed.

4 unchanged sentences

Fair value is generally calculated using the Income Approach described in Fair Value Measurement Topic ASC 820, which considers estimated discounted future cash flows.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

Revenue Recognition

Revenues are comprised primarily of sales of natural gas and to a much lesser degree 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.

We adopted Accounting Standards Codification (“ASC”) topic 606 on January 1, 2019.

The standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

The ASU replaced most existing revenue recognition guidance in GAAP when it became effective and was incorporated into GAAP as Accounting Standards Codification (“ASC”) Topic 606.

Revenue recognition is evaluated through the following five steps:

16 unchanged sentences

Natural Gas Revenues

The Company’s natural gas purchase contracts are generally structured such that Epsilon commits and dedicates for sale its proportionate share of natural gas production per day to a purchaser.

Natural gas is sold at a percentage of index prices of each component, less any stated deductions.

Control transfers at the delivery point specified in the contract, which typically is stated as the inlet of the 3rd party sales transportation pipeline.

The Company recognizes revenue proportionate

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

to its entitled share of volumes sold.

Currently, almost all of Epsilon’s natural gas production comes from the Marcellus Field in Northeastern Pennsylvania.

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

Currently, almost all of Epsilon’s natural gas production comes from the Marcellus Field in Northeastern Pennsylvania.

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

2 unchanged sentences

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 Tennessee Gas Pipeline.

2 unchanged sentences

Revenue is recognized over time as the services are provided.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

Accounts Receivable and Other

Accounts receivable –

Oil, natural gas liquid and natural gas receivables consist of amounts due from purchasers for commodity sales primarily from our revenue interest in the leases in Northwestern Pennsylvania.

Accounts receivable – Oil, natural gas liquid and natural gas receivables consist of amounts due from purchasers for commodity sales primarily from our revenue interest in the leases in Northwestern Pennsylvania.

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

1 unchanged sentence

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.

Allowance for Doubtful Accounts

Estimated losses on accounts receivable are provided through an allowance for doubtful accounts.

We estimate the allowance for doubtful accounts through various procedures, including review of our trade receivable balances by counterparty, assessing economic events and conditions, our historical experience with counterparties, the counterparty’s financial condition and the amount and age of past due accounts.

Buildings and Other Property and Equipment

3 unchanged sentences

Financial Instruments and Fair Value

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

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

Our financial instruments that are accounted for at fair value measurement consist of commodity derivatives.

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.

Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2—Pricing inputs are other than quoted prices in active markets included in Level 1.

Prices in Level 2 are either directly or indirectly observable as of the reporting date.

Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

Level 3—Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.

The Company makes its own assumptions about how market participants would price the assets and liabilities.

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

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.

Commodity derivative instruments consist of fixed-price swaps, and basis swap contracts for natural gas.

The Company’s derivative contracts are valued based on an income approach.

The model considers various assumptions, such as quoted forward prices for commodities, time value and volatility factors.

The Company’s derivative contracts are valued based on an income approach.

The model considers various assumptions, such

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

as quoted forward prices for commodities, time value and volatility factors.

These assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy.

The Company utilizes its counterparties’

valuations to assess the reasonableness of its own valuations.

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

Derivative Instruments

The Company enters into derivative contracts to hedge price risk associated with a portion of natural gas production.

While it is never management’s intention to hold or issue derivative instruments for speculative trading purposes, conditions sometimes arise where actual production is less than estimated, which has, and could, result in over‑hedged volumes.

Natural gas production is primarily sold under market sensitive contracts which are typically priced at a differential to the NYMEX or the published natural gas index prices for the producing area due to the natural gas quality and the proximity to major consuming markets.

Our derivative transactions have included the following:

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

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

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

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

If the settled price differential is greater than the swapped basis, then we receive a payment from the counterparty in the amount of the difference between the two.

7 unchanged sentences

The associated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset.

Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method of the asset’s useful life.

Recognized asset retirement obligation relates to the plugging and abandonment of oil and natural gas wells and decommissioning of the gas gathering system.

Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method of the asset’s useful life.

Recognized asset retirement obligations relate to the plugging and abandonment of oil and natural gas wells and decommissioning of the gas gathering system.

Management reviews the estimates of the timing of well abandonments as well as the estimated plugging and abandonment costs, which are discounted at the credit adjusted risk free rate.

These adjustments are recorded to the asset retirement obligation with an offsetting change to oil and gas properties.

These adjustments are recorded to the asset retirement obligations with an offsetting change to oil and gas properties.

An ongoing accretion expense is recognized for changes in the value of the liability as a result of the forecast inflation due to the passage of time, which is recorded in depreciation, depletion, amortization, and accretion expense in the consolidated statements of operations and comprehensive income.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

Concentrations of Credit Risk

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.

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, 2020 and 2019, the cash and cash equivalents were primarily concentrated in two financial institutions, one in Canada and one in the US.

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

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

Geographic Locations of Operations

Through December 31, 2019, our primary source of revenue originated from natural gas production and gathering system revenues in the state of Pennsylvania.

Approximately 97% and 96% of our production during fiscal 2020 and 2019, respectively was derived from natural gas production and gathering system revenues in the state of Pennsylvania.

Our asset in Pennsylvania has not yet reached the mature stage, but at some point we may need to acquire and develop other producing assets to maintain our current level or to grow.

To this end, we have begun to acquire leases in the Anadarko basin and to expand our holdings in Pennsylvania.

To this end, we have begun to acquire leases and to expand our holdings in Pennsylvania.

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.

Income taxes are accounted for using the asset and liability approach.

2 unchanged sentences

Foreign Currency Transactions

The United States dollar is the functional currency for all of Epsilon’s consolidated subsidiaries.

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.

6 unchanged sentences

The Company estimates a forfeiture rate and adjusts the corresponding expense each period based on an updated forfeiture estimate (see Note 6).

The Company has issued restricted stock to employees and directors of the Company.

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

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 stock on the date of grant.

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

Based on the performance requirements, either the fair value of the Company’s common stock on the date of grant, or a Monte Carlo valuation is used to determine fair value of the shares at the date of the grant.

These awards vest ratably over a three-year period.

8 unchanged sentences

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

The Company, an emerging growth company (“EGC”), has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply to private companies.

In December 2019, the Financial Accounting Standards Board ( FASB ) issued ASU 2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes,”

which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes.

In March 2020, the FASB issued ASU No.

2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”).

The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates (“IBORs”) to alternative reference rates.

ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform.

The guidance may be applied upon issuance of ASC 848 through December 31, 2022.

We do not expect a material impact from the adoption of this ASU.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes.

The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted.

In June 2016 the FASB issued ASU 2016-13, Financial Instruments –

Credit Losses (Topic 326):

The Company is currently assessing the impact of adopting this new guidance.

In June 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities.

1 unchanged sentence

GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred.

The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and must be applied retrospectively.

Early adoption is permitted.

Epsilon is evaluating the impact of the adoption of ASU 2016-13 on January 1, 2023.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”

(ASU 2016-02), which significantly changes accounting for leases by requiring that lessees recognize a right of use asset and a related lease liability representing the obligation to make lease payments, for all lease transactions with terms greater than one year.

Additional disclosures about an entity’s lease transactions will also be required.

ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

Epsilon is currently assessing the expected impact, and will adopt ASU 2016-13 as of January 1, 2023.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (ASU 2016-02), which significantly changes accounting for leases by requiring that lessees recognize a right of use asset and a related lease liability representing the obligation to make lease payments, for all lease transactions with terms greater than one year.

Additional disclosures about an entity’s lease transactions will also be required.

ASU 2016-02 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

In July, the FASB voted to extend the adoption date by one year for private and non-profit companies, and thus emerging growth companies as well.

As an emerging growth company, Epsilon plans to defer adoption of ASU 2016-02 until the fiscal year beginning after December 15, 2021.

Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach.

Epsilon is reviewing the provisions of ASU 2016-02 to determine the impact on its consolidated financial statements and related disclosures.

Epsilon is evaluating the impact of the adoption of ASU 2016-02 on the financial statements.

Epsilon is currently assessing the expected impact on our financial statements and will adopt for the year beginning in January 2022.

Epsilon Energy Ltd.

2 unchanged sentences

Property and Equipment

The following table summarizes the Company’s property and equipment at December 31, 2019 and 2018:

The following table summarizes the Company’s property and equipment at December 31, 2020 and 2019:

Property and equipment:

2 unchanged sentences

Unproved properties

Accumulated depletion, depreciation, and amortization

Accumulated depletion, depreciation, amortization and impairment

Total oil and gas properties, net

Gathering system

Accumulated depletion, depreciation, and amortization

Accumulated depletion, depreciation, amortization and impairment

Total gathering system, net

2 unchanged sentences

Property Acquisitions

During the years ended December 31, 2019 and 2018 the Company acquired additional acreage in the Anadarko Basin for $596,500 and $260,000, respectively.

Included in additions to proved natural gas and oil properties for the year ended December 31, 2018 was an approximate $0.5 million cash call refund for wells previously drilled.

During the years ended December 31, 2019 the Company acquired additional acreage in the Anadarko Basin for $596,500.

No acquisitions occurred in 2020.

Property Sale

2 unchanged sentences

The sale was completed in July 2019 with a final payment of $0.4 million for a total of $1.4 million received for the stranded leases.

No property sales occurred in 2020.

Property Impairment

At December 31, 2019 and 2018, the Company evaluated its proved and unproved natural gas and oil properties, and its gathering system assets for indicators of any potential impairment.

As a result of these assessments, no impairment was required for the years ended December 31, 2019 and 2018.

Epsilon performs a quantitative impairment test quarterly or whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the published NYMEX forward prices, timing, methods and other assumptions consistent with historical periods.

When indicators of impairment are present, tests require that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values.

If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the natural gas properties to their estimated fair values is required.

This is determined based on discounted cash flow techniques using significant assumptions including projected revenues, future commodity prices, and a market-specific weighted average cost of capital which are affected by expectations about future market and economic conditions.

During the three months ended March 31, 2020, Epsilon recognized certain indicators of impairments specific to our Oklahoma assets related to historically low oil and NGL prices and determined that the carrying value of those assets was not recoverable.

As a result of this assessment, a $1.76 million impairment was assessed on the Company’s Oklahoma assets at March 31, 2020.

No further impairment was required for the year ended December 31, 2020.

No impairment was required for the year ended December 31, 2019.

Revolving Line of Credit

Effective July 30, 2013, Epsilon Energy USA Inc., a wholly owned subsidiary of the Company, executed a three-year senior secured revolving credit facility with a bank (‘‘Credit Facility’’) for a total commitment of up to $100 million.

Upon each advance, interest is charged at the rate of LIBOR plus an ‘‘applicable margin’’.

The applicable margin ranges from 2.75 - 3.75% and is based on the percent of the line of credit utilized.

The terms “Borrowing Base”

and “Mortgaged Properties”

include the Company’s gathering system assets in addition to the natural gas and oil properties.

The “Required Reserve Value”

is the lesser of 90% of the recognized value of all proved natural gas and oil properties or 150% of the then current borrowing base.

On January 7, 2019, the maturity date of the Credit Facility was extended to March 1, 2022 and the borrowing base was increased from $13.5 million to $23 million.

The borrowing base is subject to redetermination by the lenders based on, among other things, their evaluation of the Company’s natural gas reserves.

Additionally, the Company is

Epsilon Energy Ltd.

1 unchanged sentence

For the years ended December 31, 2020 and 2019

required to maintain acceptable commodity hedging agreements covering at least 25% of projected production of natural gas for the succeeding calendar year, along with the 50% for the current calendar year.

Upon each advance, interest is charged at the rate of LIBOR plus an ‘‘applicable margin’’.

The applicable margin ranges from 2.75 - 3.75% and is based on the percent of the line of credit utilized.

The terms “Borrowing Base” and “Mortgaged Properties” include the Company’s gathering system assets in addition to the natural gas and oil properties.

The “Required Reserve Value” is the lesser of 90% of the recognized value of all proved natural gas and oil properties or 150% of the then current borrowing base.

On January 7, 2019, the maturity date of the Credit Facility was extended to March 1, 2022 and the borrowing base was increased from $13.5 million to $23 million.

The borrowing base is subject to redetermination by the lenders based on, among other things, their evaluation of the Company’s natural gas reserves.

Additionally, the Company is required to maintain acceptable commodity hedging agreements covering at least 25% of projected production of natural gas for the succeeding calendar year, along with the 50% for the current calendar year.

On August 14, 2019 the borrowing base was reaffirmed at $23 million.

Additionally, the commodity hedging requirements were updated.

Currently, when the Company’s utilization exceeds 25%, the Company must have in place acceptable commodity hedging agreements covering at least 75% of projected production for the first full twelve months after such occurrence and 50% of projected production of natural gas for the succeeding six months.

On February 11, 2020 the borrowing base was reaffirmed at $23 million and hedging requirements remained unchanged.

If we have a need to access the line of credit in the future, we will be sure that all hedging requirements are met.

The lender under the Credit Facility has a first priority security interest in the tangible and intangible assets, including the gathering system, of Epsilon Energy USA, Inc.

4 unchanged sentences

● Leverage ratio less than 3.5 based on income adjusted for interest, taxes and non-cash amounts.

The Company was in compliance with the financial covenants of the Credit Facility as of December 31, 2019 and 2018 and we expect to be in compliance with the financial covenants for the next 12 months.

The Company was in compliance with the financial covenants of the Credit Facility as of December 31, 2020 and we expect to be in compliance with the financial covenants for the next 12 months.

A commitment fee of 0.50% is assessed quarterly on the daily average unused borrowing base on the Credit Facility

4 unchanged sentences

(1) At December 31, 2020, the interest rate was 2.99%.

Shareholders’

Authorized shares

Shareholders’ Equity

(a) 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.

Purchases of Equity Shares

Prior to moving the Company listing from the TSX to the NASDAQ, and prior to the purchase of the equity shares on the NASDAQ shown below, the Company purchased shares through a normal-course issuer bid (“NCIB”) program with the TSX, which expired February 28, 2019.

On the TSX, the Company repurchased and retired 57,100 shares of common stock through the year ended December 31, 2019.

The repurchased stock had an average price of $4.26 per share.

The average share price (converted to US$ using a rate of Cdn$1.33 to US$1) on the TSX from January 1, 2019 through the last day of trading on the TSX, March 15, 2019, was $4.22 (for the year ended December 31, 2018, $3.98).

Commencing on May 20, 2019, the Company entered into a share repurchase program on the NASDAQ conducted in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934.

The Company is

Epsilon Energy Ltd.

1 unchanged sentence

For the years ended December 31, 2020 and 2019

authorized to repurchase up to 1,367,762 of its outstanding common shares, representing 5% of the outstanding common shares of Epsilon as of May 20, 2019, for an aggregate purchase price of not more than $2.5 million.

The program will end on May 19, 2020 unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination.

Repurchases may be made at management’s discretion from time to time through the facilities of the NASDAQ Global Market.

The price paid for the common shares will be, subject to applicable securities laws, the prevailing market price of such common shares on the NASDAQ Global Market at the time of such purchase.

The Company intends to fund the purchase out of available cash and does not expect to incur debt to fund the share repurchase program.

(b) Purchases of Equity Shares

On the TSX, the Company repurchased and retired 57,100 shares of common stock through the year ended December 31, 2019.

The repurchased stock had an average price of $4.26 per share.

Commencing on May 20, 2019, the Company entered into a share repurchase program on the NASDAQ conducted in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934.

The Company was authorized to repurchase up to 1,367,762 of its outstanding common shares, representing 5% of the outstanding common shares of Epsilon as of May 20, 2019, for an aggregate purchase price of not more than $5.0 million.

The program ended on May 19, 2020, but Epsilon’s final repurchase under this program occurred on May 8, 2020.

Repurchases were made at management’s discretion from time to time through the facilities of the NASDAQ Global Market.

The price paid for the common shares was, subject to applicable securities laws, the prevailing market price of such common shares on the NASDAQ Global Market at the time of such purchase.

The Company funded the purchases out of available cash and did not incur debt to fund the share repurchase program.

Substantial Issuer Bid/Issuer Tender Offer

On May 14, 2020, the Company’s Board of Directors announced its intention to commence a substantial issuer bid/issuer tender offer to purchase for cash up to an aggregate of approximately $6.2 million of its common shares.

In May 2020, upon the terms and subject to the conditions described in the Offer to Purchase dated May 19, 2020, as amended, the Company offered to repurchase up to 2,000,000 of its common shares for $3.06 per share, excluding taxes and interest, for a total cost of approximately $6.1 million, excluding expenses of the tender offer.

As permitted under Rule 13e-4(f) and Rule 14e-1(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as stated in its Offer to Purchase, Epsilon was permitted to take up and pay for 2,000,000 Common Shares plus 2% of its issued and outstanding Common Shares, or an aggregate total of up to 2,522,673 Common Shares.

The tender offer expired on June 30, 2020, and on July 6, 2020 the Company announced that it accepted 2,337,034 shares for repurchase under the terms of the Offer to Purchase for an aggregate consideration of $7,151,324, or $3.06 per share, excluding fees and expenses.

The Company canceled all common shares taken up and paid for under the tender offer.

The Company funded the repurchases under the tender offer with cash on hand.

The following table contains information about our repurchase of equity securities during the year ended December 31, 2020:

5 unchanged sentences

announced plans

Beginning balance at May 20, 2019

September 2019

November 2019

Total for the year ended December 31, 2019

or programs (4)

Beginning of normal-course issuer bid, May 20, 2019

Shares purchased through December 31, 2019 (1) (2)

January 2020 (2)

February 2020 (2)

March 2020 (2)

April 2020 (2)

July 2020 (3)

Total as of December 31, 2020

(1) Shares purchased through December 31, 2019 were cancelled prior to the year ended December 31, 2019.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

(2) Epsilon repurchased these shares under its share repurchase program that commenced on May 20, 2019, as described above.

(3) Epsilon repurchased these shares under its substantial issuer bid/issuer tender offer dated May 19, 2020, as described above.

(4) The Company announced its intention to commence a substantial issuer bid/issuer tender offer on May 14, 2020, and the substantial issuer bid/issuer tender offer commenced May 19, 2020, as described above.

(5) The normal-course issuer bid expired on May 19, 2020, and the substantial issuer bid/issuer tender offer expired on June 30, 2020.

Epsilon’s board of directors (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.

Following Epsilon’s listing on the NASDAQ Global Market, the Board determined that it is in the best interest of the shareholders to approve a new incentive plan that is compliant with U.S.

public company equity plan rules and practices that would replace Epsilon’s Amended and Restated 2017 Stock Option Plan (including its predecessors) and the Share Compensation Plan (collectively referred to as the “Predecessor Plans”).

No further awards will be granted under the Predecessor Plans.

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.

Under the 2020 Plan, Epsilon will be authorized to issue up to 2,000,000 Common Shares.

As of December 31, 2020, the Company granted, after the Compensation Committee approved the terms, target formulas, and peer group applicable to the performance incentive awards, 214,000 performance stock units (“PSUs”), and 111,900 time-based restricted shares to employees, leaving 1,674,100 shares available to be granted under the 2020 Plan.

No shares subject to awards currently outstanding under the Predecessor Plans that expire or are forfeited will become available for issuance under the 2020 Plan.

Restricted Stock Awards

For the year ended December 31, 2020, 111,900 common shares of Restricted Stock with a weighted average market price at the grant date of $3.71 were awarded to the Company’s officers, employees, and board of directors.

These shares vest over a three-year period, with one-third of the shares being issued per period on the anniversary of the award resolution.

The vesting of the shares is contingent on the individuals’ continued employment or service.

The Company determined the fair value of the granted Restricted Stock-based on the market price of the common shares of the Company on the date of grant.

The following table summarizes restricted stock for the years ended December 31, 2020 and 2019:

December 31, 2020

December 31, 2019

Remaining Life

Balance non-vested Restricted Stock at beginning of period

Balance non-vested Restricted Stock at end of period

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

Stock compensation expense for the granted Restricted Stock is recognized over the vesting period.

Stock compensation expense recognized during the year ended December 31, 2020 was $655,924 (for the year ended December 31, 2019, $485,257).

At December 31, 2020, the Company had unrecognized stock-based compensation related to these shares of $1,068,819 to be recognized over a weighted average period of 1.20 years (at December 31, 2019:

$1,641,295 over 1.12 years).

Performance Share Unit Awards (“PSU”)

The company grants PSUs, which are paid in stock to certain key employees.

For the year ended December 31, 2020, 214,000 PSUs with a weighted average market price at the grant date of $3.42 were awarded.

PSUs are based on a three-year performance period with performance being measured each year at December 31.

The PSUs will vest on the last day of the performance period.

The number of PSUs that will ultimately vest is based on two performance targets as follows:

● The targets for the PSUs are based on (i) the relative total stockholder return (“TSR”) percentile ranking and (ii) the relative cash flow per debt adjusted share – growth (“CFDAS Growth”) percentile ranking of the Corporation, each as compared to the Corporation’s Performance Peer Group during the applicable one-year performance period ending on December 31.

● Cash Flow per Debt Adjusted Share (“CFDAS”) is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) divided by the sum of the 1) the total debt plus the value of preferred stock minus cash and the amount of dividends paid for the year divided by the share price at the end of the year;

and 2) the actual share count at year end.

● The vesting of each PSU Award will be based 50% on TSR performance and 50% based on CFDAS Growth performance.

● The recipient of the award must be employed with the Corporation at the time of vesting.

The number of shares ultimately issued under these awards can range from zero to 200% of target award amounts.

The PSUs are accounted for as equity awards.

The fair value of the 50% for performance based on CFDAS was determined as the market price of the common shares of the Company on the date of grant.

Weighted average fair value of CFDAS PSUs granted during the year ended December 31, 2020 was $3.41 per unit.

The fair value of the 50% for performance based on TSR was determined on the grant date by the application of a Monte Carlo simulation model.

Weighted average fair value of TSR PSUs granted during the year ended December 31, 2020 was $4.10 per share.

The Monte Carlo simulation model calculated grant date fair value using the following assumptions:

Expected life (in years)

Expected volatility

42.1% - 53.6%

Risk-free rate of return

0.10% - 0.17%

Weighted average grant-date fair value per PSU

The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the performance stock awards, to calculate the fair value of the awards.

Expected volatilities in the model were estimated using a historical period consistent with the expected term for each annual performance period of the awards.

The risk-free interest rate was based on the United States Treasury rate measured over a term commensurate with the expected term for each annual performance period of the awards.

The expected term is

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

based on the time between the valuation date and the end of each annual performance period of the awards.

The valuation model assumes dividends are immediately reinvested.

The following table summarizes PSUs for the years ended December 31, 2020 and 2019:

December 31, 2020

December 31, 2019

Remaining Life

Balance non-vested PSUs at beginning of period

Balance non-vested PSUs at end of period

Stock compensation expense for the granted PSUs is recognized over the vesting period.

Stock compensation expense recognized during the year ended December 31, 2020 related to PSUs was $191,840 (for the year ended December 31, 2019, nil).

At December 31, 2020, the Company had unrecognized stock-based compensation related to these shares of $568,585 to be recognized over a weighted average period of 1.37 years (at December 31, 2019:

nil over nil years).

Stock Options

The Company maintains a stock option plan for directors, officers, employees and consultants of the Company and its subsidiaries.

Through December 31, 2019, the Company had issued stock options covering 245,000 Common Shares at an overall average price of $5.27 per Common Share to directors, officers and employees of the Company and its subsidiaries.

A maximum amount of 755,000 Common Shares are available for future option issuances.

Through December 31, 2020, the Company had outstanding stock options covering 245,000 Common Shares at an overall average exercise price of $5.27 per Common Share to directors, officers, and employees of the Company and its subsidiaries.

These 245,000 options have a weighted average expected remaining term of approximately 2.2 years.

The following table summarizes stock option activity for the years ended December 31, 2020 and 2019:

6 unchanged sentences

Exercisable at period-end

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

At December 31, 2019, the Company had unrecognized stock based compensation related to these options of $1,867 to be recognized over a weighted average period of 0.08 years (for the year ended December 31, 2018:

(1) Exercise price has been converted to US$ using the rate of Cdn$1.33 to US$1, the rate on March 15, 2019, the date Epsilon Energy, Ltd was delisted from the TSX

At December 31, 2020, the Company had unrecognized stock-based compensation related to these options of nil (for the year ended December 31, 2019:

$1,867 over 0.8 years).

2 unchanged sentences

no stock options).

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

The following table summarizes information for stock options outstanding at December 31, 2020:

4 unchanged sentences

Stock-based compensation for the options, for the years ended December 31, 2020 and 2019, was $1,867 and $25,203, respectively.

Share Compensation Plan

A Share Compensation Plan (the “Plan”) was adopted by the Board on April 13, 2017 and approved by the shareholders at the Annual General Meeting in April 2017.

The Plan provides that designated participants may, as determined by the Board, be issued Common Shares in an amount up to 100% of the participant’s compensation paid by the Company in consideration of the participant’s service for the current year divided by the market price of the Common Shares on the NASDAQ at the date of issuance of the Common Shares in the current year.

In December 2019, 184,500 common shares of Restricted Stock were awarded to the Company’s officers, employees, and board of directors (in December 2018, 174,500 shares).

These shares vest over a three year period, with one-third of the shares being issued per period on the anniversary of the award resolution.

The vesting of the shares is contingent on the individuals continued employment or service.

The Company determined the fair value of the granted Restricted Stock based on the market price of the common shares of the Company on the date of grant.

Stock compensation expense for the granted Restricted Stock is recognized over the vesting period.

Stock compensation expense recognized during the years ended December 31, 2019 and 2018 was $485,257 and $246,904, respectively.

At December 31, 2019, the Company had unrecognized stock based compensation related to these shares of $1,641,295 to be recognized over a weighted average period of 1.12 years (for the year ended December 31, 2018:

$1,767,975 over 1.42 years).

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

The following table summarizes Restricted Stock activity for the years ended December 31, 2019 and 2018:

December 31, 2019

December 31, 2018

Remaining Life

Balance non-vested Restricted Stock at beginning of period

Balance non-vested Restricted Stock at end of period

Revenue Recognition

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

Also included to a much lesser degree is natural gas, crude oil and NGLs from Oklahoma.

Upon adoption, we did not make any changes to our revenue reporting based on ASC 606 (Note 3).

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 based on contractual terms and conditions.

In addition, gathering and compression revenue generally is recorded in the month when contractual service obligations are satisfied, which occurs as control of those services is transferred to the Company’s customers.

The following table details revenue for the years ended December 31, 2020 and 2019:

5 unchanged sentences

Total operating revenue

Revenue is recorded in the month when contractual performance obligations are satisfied.

However, settlement statements from the purchasers, and the related cash consideration are received within 30 days for natural gas, NGLs, oil, or condensate sold, and 60 days for gas gathering revenues.

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, NGLs, oil, or condensate.

Product Sales Revenue

The Company enters into contracts with third party purchasers to sell its natural gas, oil, NGLs and condensate production.

Under these product sales arrangements, the sale of each unit of product represents a distinct performance obligation.

Product sales revenue is recognized at the point in time that control of the product transfers to the purchaser based on contractual terms which reflect prevailing commodity market prices.

To the extent that marketing costs are incurred by the Company prior to the transfer of control of the product, those costs are included in lease operating expenses on the Company’s consolidated statements of operations.

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

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.

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

The accounts receivable balances from contracts with customers within the accompanying balance sheets as of December 31, 2019 and 2018 were $2.4 million and $3.0 million, respectively.

The settlement statement from the operator of the Auburn GGS is received two months after transmission and compression has occurred.

As a result, the Company must estimate the amount of production that was transmitted and compressed within the system.

The accounts receivable balances from the operator of the Auburn GGS within the accompanying balance sheets as of December 31, 2019 and 2018 were $1.9 million and nil, respectively.

The receivable balance was nil at December 31, 2018 as the Company had previously been overpaid by the operator.

Epsilon Energy Ltd.

1 unchanged sentence

For the years ended December 31, 2020 and 2019

Gas Gathering and Compression Revenue

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

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.

The settlement statement from the operator of the Auburn Gas Gathering System is received two months after transmission and compression has occurred.

As a result, the Company must estimate the amount of production that was transmitted and compressed within the system.

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

Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts on a case-by-case basis once there is evidence that collection is not probable.

Due to the bankruptcy filed by Chesapeake Energy Corporation (“CHK”) on June 28, 2020, the Company recorded an allowance for possible uncollectable fees.

Unpaid fees attributable to CHK for May and June 2020 gathering system services were $1.1 million and $1.3 million respectively.

On December 15, 2020, a global resolution between Williams and CHK was approved by the United States Bankruptcy Court.

As a part of the agreement, CHK affirmed the ASGGA for the Auburn GGS and agreed to pay all pre-petition and past due receivables related to midstream expenses, per the existing contracts.

We received our share of the pre-petition amounts and as such, reversed our $0.8 million previously established allowance for doubtful accounts related to the Company’s share of those payments.

As of December 31, 2020, all cash has been received and revenue is included in the financial statements.

The following table details accounts receivable as of December 31, 2020 and 2019:

Accounts receivable

Natural gas and oil sales

Joint interest billing

Gathering and compression fees

Total accounts receivable

Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes certain transactions that have generally been reported in the consolidated statements of changes in shareholders’

Accumulated other comprehensive income includes certain transactions that have generally been reported in the consolidated statements of changes in shareholders’ equity.

The activity in of Accumulated Other Comprehensive Income during the years ended December 31, 2020 and 2019 consisted of the following:

1 unchanged sentence

Balance at beginning of period

Translation gain (loss) other

Translation gain other

Balance at end of period

Substantially all of the accumulated other comprehensive income is related to the translation adjustment for the Canadian convertible debentures settled in 2017.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

Income (loss) before income taxes is as follows for the periods indicated:

1 unchanged sentence

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 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 ended December 31, 2016 through December 31, 2019.

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

The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2017 through December 31, 2020.

The following tables present the Company’s current and deferred tax expense (benefit) 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 2019 differs from the statutory rate primarily

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

due to state taxes.

In addition to state taxes, our effective tax rate for 2018 differs from the statutory rate primarily due to lapsed uncertain tax positions.

Our effective tax rate for 2020 differs from the statutory rate primarily due to the valuation allowance on our deferred tax assets relating to Canadian and Oklahoma operations.

Our effective tax rate for 2019 differs from the statutory rate primarily due to state taxes.

Income tax provision computed at the statutory federal tax rate

2 unchanged sentences

Return to provision adjustment

State Valuation Allowance

Miscellaneous other items

Change in uncertain tax position

Income tax expense

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.

As of December 31, 2019, we have no U.S.

federal net operating loss carry-forwards and approximately $8.5 million of state net operating loss carry-forwards, which begin to expire after 2025.

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

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

Net deferred tax liabilities consisted of the following at December 31, 2020 and 2019:

As at December 31,

As of December 31,

Deferred tax assets:

1 unchanged sentence

Canadian net operating loss carryforwards

Unrealized Hedge/Other

Unrealized derivatives/other

Gross deferred tax assets

3 unchanged sentences

Oil and gas property

Unrealized Hedge/Other

Total deferred tax liabilities

Unrealized derivatives/other

Gross deferred tax liabilities

Net deferred tax liability

As of December 31, 2020, we have no federal net operating loss carry-forwards and approximately $7.4 million of state net operating loss carry-forwards, which 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.

We evaluate all available evidence in determining the carrying value of our deferred tax assets based upon the more-likely-than-not standard of the accounting literature.

We have recorded a valuation allowance against the Canadian net operating losses as we do feel that it is more likely than not that they will not be utilized as the Company does not have any revenue producing activities in Canada.

We are subject to taxation in the United States and various state jurisdictions.

As of December 31, 2019 and 2018, the Company had no gross liability for income taxes associated with uncertain tax positions.

In addition, we determined that our deferred tax assets associated with Oklahoma operations will not be realized.

As a result of the Company's analysis, management has determined that 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, 2019 and 2018.

Accrued interest and penalties are included in other non-current liabilities in the consolidated balance sheets and were nil as of December 31, 2020 and 2019.

On March 25, 2020, the Families First Coronavirus Response Act ("FFCR Act"), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") were each enacted in response to the COVID-19 pandemic.

The FFCR Act and the CARES Act contain numerous tax provisions, such as deferring payroll tax payments, establishing a credit for the retention of certain employees, relaxing limitations on the deductibility of interest, updating the definition of qualified improvement property, modification of the utilization limitations on net operating losses, and the ability to accelerate timing of refundable AMT credits.

This legislation currently has no material impact to income tax expense on the Company’s financial statements.

The Company continues to monitor additional guidance issued by the U.S.

Treasury Department, the Internal Revenue Services and others.

Epsilon Energy Ltd.

2 unchanged sentences

Commitments and Contingencies

The Company’s future minimum lease commitments as of December 31, 2019 are summarized in the following table:

The Company’s future minimum lease commitments as of December 31, 2020 are summarized in the following table:

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

As of December 31, 2020, we had commitments of $2.3 million for capital expenditures.

The Company is not currently involved in any litigation.

Management is of the opinion that the potential for litigation is remote.

From time to time, we may be involved in disputes or litigation arising in the normal course of doing business.

At December 31, 2020, we did not have any legal proceedings to which we were a party.

However, please see Note 15, Subsequent Events, for current litigation.

Net Income Per Share

6 unchanged sentences

Year ended December 31,

Basic weighted-average number of shares outstanding

Dilutive stock options

Diluted weighted average shares outstanding

Basic and diluted weighted average shares outstanding

We excluded the following shares from the diluted EPS because their inclusion would have been anti-dilutive.

1 unchanged sentence

Anti-dilutive options

Anti-dilutive unvested restricted shares

Anti-dilutive unvested time-based restricted shares

Anti-dilutive unvested performance-based restricted shares

Total Anti-dilutive shares

7 unchanged sentences

Interest expense, interest income and income taxes are managed separately on a group basis.

The Company’s reportable segments are as follows:

The Upstream segment activities include acquisition, development and production of primarily natural gas reserves on properties within the United States;

1 unchanged sentence

The Corporate segment activities include corporate listing and governance functions of the Company.

Segment activity as at, and for the years ended December 31, 2019 and 2018 is as follows:

Segment activity as of, and for the years ended December 31, 2020 and 2019 is as follows:

Gas Gathering

As at and for the year ended December 31, 2019

As of and for the year ended December 31, 2020

Operating revenue

3 unchanged sentences

Total operating revenue

Net earnings for the period

Net earnings (loss) for the period

Operating costs

7 unchanged sentences

Other property and equipment

As at and for the year ended December 31, 2018

As of and for the year ended December 31, 2019

Operating revenue

5 unchanged sentences

Operating costs

Development geological and geophysical expenses

Depletion, deprec., amortization and accretion

Gain on sale of property

Segment assets

8 unchanged sentences

For the years ended December 31, 2020 and 2019

the year ended December 31, 2019, Epsilon sold natural gas to 29 unique customers.

The two customers over 10% comprised 47% and 27% of total revenue.

For the year ended December 31, 2018, Epsilon sold natural gas to 28 unique customers.

The two customers over 10% comprised 46% and 21% of total revenue.

year ended December 31, 2020, we sold natural gas to 29 unique customers.

Alta Energy Marketing, LLC, EQT Energy LLC, South Jersey Resources Group, LLC, and Spotlight Energy LLC each accounted for 10% or more of our total revenue.

For the year ended December 31, 2019, we sold natural gas to 29 unique customers.

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

(2) Capital expenditures for Upstream consist primarily of the drilling and completing of wells while Gas Gathering consists of expenditures relating to the installation of additional gathering facilities.

4 unchanged sentences

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.

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

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.

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

Market risk is the risk that the price of oil and natural gas will change, either favorably or unfavorably, in response to changing market conditions.

Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract.

The Company does not currently require collateral from any of its counterparties nor does its counterparties require collateral from the Company.

1 unchanged sentence

The natural gas 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.

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.

3 unchanged sentences

This amount included cash received on settlements of these contracts of $4,503,457.

For 2018, Epsilon recognized losses on financial commodity derivative contracts of $1,938,465.

This amount included cash paid on settlements of these contracts of $1,381,898.

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2019 and 2018

For 2019, Epsilon recognized gains on financial commodity derivative contracts of $4,246,057.

This amount included cash received on settlements of these contracts of $1,949,232.

Commodity Derivative Contracts

Epsilon’s outstanding natural gas price swap contracts as of December 31, 2019 consisted of:

Weighted Average Price ($/MMbtu)

Derivative Type

Fixed price swap

As of December 31, 2019 and 2018, all of the Company’s economic derivative hedge positions were with large financial institutions, which are not known to the Company to be in default on their derivative positions.

At December 31, 2020, we had no outstanding contracts.

As of December 31, 2019, all of the Company’s economic derivative hedge positions were with large financial institutions, which are not known to the Company to be in default on their derivative positions.

The Company is exposed to credit risk to the extent of non-performance by the counterparties in the derivative contracts discussed above;

however, the Company does not anticipate non-performance by such counterparties.

None of the Company’s derivative instruments contains credit‑risk related contingent features.

None of the Company’s derivative instruments

Epsilon Energy Ltd.

Notes to the Consolidated Financial Statements (Continued)

For the years ended December 31, 2020 and 2019

contains credit-risk related contingent features.

Derivatives are net on the balance sheet as they are subject to the right to offset the liabilities with the assets.

4 unchanged sentences

Net Fair Value of Derivatives

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 (liability), beginning of year

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

Gains (losses) on derivative contracts included in earnings

Settlement of commodity derivative contracts

Fair value of asset (liability), end of year

Fair value of asset, end of the period

Asset Retirement Obligations

Asset retirement obligations were estimated by management based on Epsilon’s net ownership interest in all wells and the gathering system, estimated costs to reclaim and abandon such assets and the estimated timing of the costs to be incurred in future periods, and the forecast risk free cost of capital.

Epsilon has estimated the net present value of its total asset retirement obligations to be $3.2 million as of December 31, 2020 ($2.9 million at December 31, 2019) based on a total net future undiscounted liability of approximately $8.8 million ($8.9 million at December 31, 2019).

Each year we review, and to the extent necessary, revise our asset retirement obligations estimates.

During 2020 and 2019, we reviewed the actual abandonment costs with previous estimates.

As a result, estimates of abandonment costs remained constant in 2020.

Our overall liability increased due to the addition of new wells in Pennsylvania.

Epsilon Energy Ltd.

1 unchanged sentence

For the years ended December 31, 2020 and 2019

Asset Retirement Obligations

Epsilon has estimated the net present value of its total asset retirement obligations to be $2.9 million as at December 31, 2019 ($1.6 million at December 31, 2018) based on a total net future undiscounted liability of approximately $8.9 million ($21.5 million at December 31, 2018).

Each year we review, and to the extent necessary, revise our asset retirement obligation estimates.

During 2019 and 2018, we reviewed the actual abandonment costs with previous estimates.

As a result, estimates of abandonment costs remained constant in 2019, but were updated at the end of 2018.

Our overall liability increased due to the addition of new wells in both Pennsylvania and Oklahoma.

From 2018 to 2019 our undiscounted liability decreased due to a decrease in the economic life of several of the wells in Pennsylvania.

The life of the wells decreased due to the decrease in natural gas prices which caused the wells to be economically profitable for a shorter period of time.

Due to the decrease in the life of the wells, there were fewer years of inflation affecting the plug and abandonment costs thereby lowering the estimate from December 31, 2018 to December 31, 2019.This was offset by the drilling of new wells which added to the liability.

Even though the undiscounted liability decreased, the discounted liability shown below increased due to the effect of the discounting over time.

The liability is spread over a shorter period so the ARO balance has increased at December 31, 2019 over the balance at December 31, 2018.

The following table presents the activity in Epsilon’s asset retirement obligations for the periods indicated:

Balance beginning of period

Liabilities from drilling of new wells

Wells plugged and abandoned

Change in estimates

Balance end of period

Consolidation of Common Shares

To meet NASDAQ listing standards, the shareholders of the Company on December 19, 2018 approved a Consolidation of the issued and outstanding common shares on the basis of one (1) new common share for up to every existing two (2) common shares issued and outstanding immediately prior to the Consolidation.

The common shares commenced trading on a post-Consolidation basis on the TSX on December 24, 2018.

All share amounts and per share data are presented in these statements on a post-Consolidation basis.

Subsequent Events

On March 10, 2021, Epsilon filed a complaint against Chesapeake Appalachia, LLC (“Chesapeake”) in the United States District Court for the Middle District of Pennsylvania, Scranton, Pennsylvania.

Epsilon claims that Chesapeake has breached a settlement agreement and several operating agreements (“JOAs”) to which Epsilon and Chesapeake are parties.

Epsilon has requested a preliminary injunction, among other requests for relief.

Accordingly, a hearing on that request is expected to be heard during the first half of 2021.

EPSILON ENERGY LTD.

2 unchanged sentences

The following disclosures are made in accordance with Financial Accounting Standards Board Accounting Standards Update No.

2010-03 ‘‘Natural gas and oil Reserve Estimates and Disclosures’’

and the United States Securities and Exchange Commission’s (SEC) final rule on ‘‘Modernization of Natural gas and oil Reporting.’’

2010-03 ‘‘Natural gas and oil Reserve Estimates and Disclosures’’ and the United States Securities and Exchange Commission’s (SEC) final rule on ‘‘Modernization of Natural gas and oil Reporting.’’

Natural gas and oil Reserves

Users of this information should be aware that the process of estimating quantities of ‘‘proved,’’

‘‘proved developed’’

and ‘‘proved undeveloped’’

crude oil, natural gas liquids (NGLs) and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir.

Users of this information should be aware that the process of estimating quantities of ‘‘proved,’’ ‘‘proved developed’’ and ‘‘proved undeveloped’’ crude oil, natural gas liquids (NGLs) and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir.

The data for a given reservoir may also change substantially over time as a result of numerous factors, including, but not limited to, additional development activity;

13 unchanged sentences

Estimates for PUDs are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.

The following tables set forth Epsilon’s net proved reserves at December 31, 2019 and 2018 and changes for each of the two years in the period ended December 31, 2019.

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

The following tables set forth Epsilon’s net proved reserves at December 31, 2020 and 2019 and changes for each of the two years in the period ended December 31, 2020.

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

EPSILON ENERGY LTD.

7 unchanged sentences

Revisions of previous estimates (1)(4)(5)

Improved recoveries (3)

Net proved reserves at December 31, 2020

7 unchanged sentences

At December 31, 2020

(1) Revisions of previous estimates in the proved producing category are primarily attributable to an increase in the natural gas price.

(1) Revisions of previous estimates in the proved producing category are primarily attributable to changes in the natural gas price and the reserves engineers' risking of reserves estimates.

(2) Revisions of previous estimates in the proved undeveloped category is attributable to undeveloped well locations being removed due to lease expiration and revised spacing assumptions.

(3) Improved recoveries in the proved producing category are primarily attributable to revisions to the expected production curves from the previous year.

(4) During 2019, 19 MMcf were added to proved producing from the shut-in category.

During 2018, 934 MMcf were transferred from net proved undeveloped, 306 MMcf moved to net proved developed producing and 628 MMcf moved to net proved developed non-producing.

(3) Reduced / improved recoveries in the proved producing category are primarily attributable to successful field operations changing the estimated recoveries.

(4) Revisions of previous estimates in natural gas reserves in 2020 is primarily attributable to a lower price of natural gas in Pennsylvania.

(5) Revisions of previous estimates in oil in 2020 is primarily attributable to the addition of proved, undeveloped locations.

EPSILON ENERGY LTD.

1 unchanged sentence

Capitalized Costs Relating to Natural gas and oil Producing Activities

The following table sets forth the capitalized costs relating to Epsilon’s crude oil and natural gas producing activities at December 31, 2019 and 2018:

The following table sets forth the capitalized costs relating to Epsilon’s crude oil and natural gas producing activities at December 31, 2020 and 2019:

Year ended December 31,

3 unchanged sentences

Total Oil & Gas Properties

Accumulated depreciation, depletion and amortization

Accumulated depreciation, depletion, amortization and impairment

(130,301,735)

8 unchanged sentences

Oil and Natural Gas Activities:

Proved acquisition costs

Unproved acquisition costs

3 unchanged sentences

Total costs incurred

(1) Development costs for 2018 include a $0.5 million cash call refund for wells previously drilled.

Results of Operations for Natural gas and oil Producing Activities

5 unchanged sentences

Lease operating costs

Depreciation, depletion, amortization, and accretion

Depreciation, depletion, amortization, accretion and impairment

Results of operations from oil and gas producing activities

2 unchanged sentences

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 Industries—Natural gas and oil Topic of the ASC and based on natural gas reserves and production volumes estimated by the reserve engineers of DeGolyer and MacNaughton.

The commodity prices estimated below were based on a 12-month average of first-day-of-the-month commodity prices for the years 2020 and 2019.

7 unchanged sentences

Such decisions are based upon a wide range of factors, including estimates of probable and possible reserves as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated.

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, 2019 and 2018.

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, 2020 and 2019.

Year ended December 31,

1 unchanged sentence

Future production costs

(113,557,103)

Future development costs (1)

14 unchanged sentences

Net changes in future development costs

Extensions and discoveries, less related costs

Revisions of previous quantity estimates

5 unchanged sentences

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