Epsilon Energy Ltd. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our consolidated balance sheets as of December 31, 2021 and 2020, and the consolidated statements of operations and comprehensive income, changes in shareholders’ equity and cash flows for years ended December 31, 2021 and 2020 included in this annual report have been prepared in accordance with U.S. GAAP. ​ ​ 41 ​ ​ ​ Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Epsilon Energy Ltd. Houston, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Epsilon Energy Ltd. (the “Company”) as of December 31, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, 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. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. 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. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA LLP We have served as the Company’s auditor since 2017. Houston, Texas March 23, 2022 ​ ​ 42 ​ ​ EPSILON ENERGY LTD. Consolidated Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2021 ​ 2020 ASSETS ​ ​ ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 26,497,305 ​ $ 13,270,913 Accounts receivable ​ ​ 4,596,931 ​ ​ 3,917,288 Prepaid income taxes ​ ​ — ​ ​ 89,285 Other current assets ​ ​ 569,870 ​ ​ 500,583 Total current assets ​ ​ 31,664,106 ​ ​ 17,778,069 Non-current assets ​ ​ ​ ​ ​ ​ Property and equipment: ​ ​ ​ ​ ​ ​ Oil and gas properties, successful efforts method ​ ​ ​ ​ ​ ​ Proved properties ​ ​ 138,032,413 ​ ​ 133,902,723 Unproved properties ​ ​ 21,700,926 ​ ​ 21,552,063 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 102,480,972 ) ​ ​ ( 98,200,111 ) Total oil and gas properties, net ​ ​ 57,252,367 ​ ​ 57,254,675 Gathering system ​ ​ 42,475,086 ​ ​ 42,202,644 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 33,443,949 ) ​ ​ ( 32,101,624 ) Total gathering system, net ​ ​ 9,031,137 ​ ​ 10,101,020 Land ​ ​ 637,764 ​ ​ 637,764 Buildings and other property and equipment, net ​ ​ 309,102 ​ ​ 338,419 Total property and equipment, net ​ ​ 67,230,370 ​ ​ 68,331,878 Other assets: ​ ​ ​ ​ ​ ​ Restricted cash ​ ​ 568,118 ​ ​ 565,858 Prepaid drilling costs ​ ​ — ​ ​ 379 Total non-current assets ​ ​ 67,798,488 ​ ​ 68,898,115 Total assets ​ $ 99,462,594 ​ $ 86,676,184 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS' EQUITY ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable trade ​ $ 1,189,905 ​ $ 1,592,451 Gathering fees payable ​ ​ 963,546 ​ ​ 512,796 Royalties payable ​ ​ 1,853,508 ​ ​ 1,155,698 Income taxes payable ​ ​ 1,098,425 ​ ​ — Accrued capital expenditures ​ ​ 1,016,830 ​ ​ 139,766 Other accrued liabilities ​ ​ 1,098,127 ​ ​ 1,002,935 Fair value of derivatives ​ ​ 239,824 ​ ​ — Asset retirement obligations ​ ​ 85,207 ​ ​ 106,734 Total current liabilities ​ ​ 7,545,372 ​ ​ 4,510,380 Non-current liabilities ​ ​ ​ ​ ​ ​ Asset retirement obligations ​ ​ 2,748,449 ​ ​ 3,043,509 Deferred income taxes ​ ​ 9,905,440 ​ ​ 10,102,852 Total non-current liabilities ​ ​ 12,653,889 ​ ​ 13,146,361 Total liabilities ​ ​ 20,199,261 ​ ​ 17,656,741 Commitments and contingencies (Note 10) ​ ​ ​ ​ ​ ​ Shareholders' equity ​ ​ ​ ​ ​ ​ Common shares, no par value, unlimited shares authorized and 24,202,218 issued and 23,668,203 outstanding at December 31, 2021, and 23,985,799 shares issued and outstanding at December 31, 2020. ​ ​ 131,815,739 ​ ​ 131,730,401 Treasury shares, 534,015 at December 31, 2021 ​ ​ ( 2,423,007 ) ​ ​ — Additional paid-in capital ​ ​ 8,835,203 ​ ​ 7,879,119 Accumulated deficit ​ ​ ( 68,783,207 ) ​ ​ ( 80,410,724 ) Accumulated other comprehensive income ​ ​ 9,818,605 ​ ​ 9,820,647 Total shareholders' equity ​ ​ 79,263,333 ​ ​ 69,019,443 Total liabilities and shareholders' equity ​ $ 99,462,594 ​ $ 86,676,184 ​ ​ The accompanying notes are an integral part of these consolidated financial statements ​ 43 ​ ​ ​ EPSILON ENERGY LTD. Consolidated Statements of Operations and Comprehensive Income ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Revenues from contracts with customers: ​ ​ ​ ​ ​ ​ Gas, oil, NGL, and condensate revenue ​ $ 34,538,167 ​ $ 15,545,552 Gas gathering and compression revenue ​ ​ 7,865,825 ​ ​ 8,879,728 Total revenue ​ ​ 42,403,992 ​ ​ 24,425,280 ​ ​ ​ ​ ​ ​ ​ Operating costs and expenses: ​ ​ ​ ​ ​ ​ Lease operating expenses ​ ​ 7,897,738 ​ ​ 8,052,471 Gathering system operating expenses ​ ​ 726,646 ​ ​ 429,749 Development geological and geophysical expenses ​ ​ 40,299 ​ ​ 12,910 Depletion, depreciation, amortization, and accretion ​ ​ 6,627,016 ​ ​ 9,557,891 Impairment expense ​ ​ 153,058 ​ ​ 1,760,000 Gain on sale of oil and gas properties ​ ​ ( 484,902 ) ​ ​ — General and administrative expenses: ​ ​ ​ ​ ​ ​ Stock based compensation expense ​ ​ 956,084 ​ ​ 849,631 Other general and administrative expenses ​ ​ 5,875,732 ​ ​ 4,740,332 Total operating costs and expenses ​ ​ 21,791,671 ​ ​ 25,402,984 Operating income (loss) ​ ​ 20,612,321 ​ ​ ( 977,704 ) ​ ​ ​ ​ ​ ​ ​ Other income (expense): ​ ​ ​ ​ ​ ​ Interest income ​ ​ 38,865 ​ ​ 43,540 Interest expense ​ ​ ( 101,382 ) ​ ​ ( 114,515 ) (Loss) gain on derivative contracts ​ ​ ( 4,482,909 ) ​ ​ 2,503,655 Other income (expense) ​ ​ 1,130 ​ ​ ( 4,385 ) Other (expense) income, net ​ ​ ( 4,544,296 ) ​ ​ 2,428,295 ​ ​ ​ ​ ​ ​ ​ Net income before income tax expense ​ ​ 16,068,025 ​ ​ 1,450,591 Income tax expense ​ ​ 4,440,508 ​ ​ 575,420 NET INCOME ​ $ 11,627,517 ​ $ 875,171 Currency translation adjustments ​ ​ ( 2,042 ) ​ ​ 10,169 NET COMPREHENSIVE INCOME ​ $ 11,625,475 ​ $ 885,340 ​ ​ ​ ​ ​ ​ ​ Net income per share, basic ​ $ 0.49 ​ $ 0.03 Net income per share, diluted ​ $ 0.49 ​ $ 0.03 Weighted average number of shares outstanding, basic ​ ​ 23,705,193 ​ ​ 25,122,501 Weighted average number of shares outstanding, diluted ​ ​ 23,857,102 ​ ​ 25,122,501 ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements ​ 44 ​ ​ ​ EPSILON ENERGY LTD. Consolidated Statements of Changes in Shareholders’ Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ Total ​ ​ Common Shares Issued ​ Treasury Shares ​ Additional ​ Comprehensive ​ Accumulated ​ Shareholders' ​ ​ Shares ​ Amount ​ Shares ​ Amount ​ paid-in Capital ​ Income ​ Deficit ​ Equity Balance at December 31, 2019 ​ 26,790,985 ​ $ 140,808,923 ​ — ​ $ — ​ $ 7,029,488 ​ $ 9,810,478 ​ $ ( 81,285,895 ) ​ $ 76,362,994 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 875,171 ​ ​ 875,171 Stock-based compensation expenses ​ — ​ ​ — ​ — ​ ​ — ​ ​ 849,631 ​ ​ — ​ ​ — ​ ​ 849,631 Purchase of treasury shares ​ — ​ ​ — ​ ( 657,314 ) ​ ​ ( 1,927,198 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,927,198 ) Retirement of treasury shares ​ ( 657,314 ) ​ ​ ( 1,927,198 ) ​ 657,314 ​ ​ 1,927,198 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Shares retired through tender offer ​ ( 2,337,034 ) ​ ​ ( 7,151,324 ) ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 7,151,324 ) Vesting of shares of restricted stock ​ 189,162 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 10,169 ​ ​ — ​ ​ 10,169 Balance at December 31, 2020 ​ 23,985,799 ​ $ 131,730,401 ​ — ​ $ — ​ $ 7,879,119 ​ $ 9,820,647 ​ $ ( 80,410,724 ) ​ $ 69,019,443 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 11,627,517 ​ ​ 11,627,517 Stock-based compensation expenses ​ — ​ ​ — ​ — ​ ​ — ​ ​ 956,084 ​ ​ — ​ ​ — ​ ​ 956,084 Purchase of treasury shares ​ — ​ ​ — ​ ( 534,015 ) ​ ​ ( 2,423,007 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 2,423,007 ) Exercise of stock options ​ 16,250 ​ ​ 85,338 ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 85,338 Vesting of shares of restricted stock ​ 200,169 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 2,042 ) ​ ​ — ​ ​ ( 2,042 ) Balance at December 31, 2021 ​ 24,202,218 ​ $ 131,815,739 ​ ( 534,015 ) ​ $ ( 2,423,007 ) ​ $ 8,835,203 ​ $ 9,818,605 ​ $ ( 68,783,207 ) ​ $ 79,263,333 ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements ​ 45 ​ ​ ​ EPSILON ENERGY LTD. Consolidated Statements of Cash Flows ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income ​ $ 11,627,517 ​ $ 875,171 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Depletion, depreciation, amortization, and accretion ​ ​ 6,627,016 ​ ​ 9,557,891 Impairment expense ​ ​ 153,058 ​ ​ 1,760,000 Loss (gain) on derivative contracts ​ ​ 4,482,909 ​ ​ ( 2,503,655 ) Gain on sale of oil and gas properties ​ ​ ( 484,902 ) ​ ​ — Settlement of derivative contracts ​ ​ ( 4,243,085 ) ​ ​ 4,503,457 Settlement of asset retirement obligation ​ ​ — ​ ​ ( 79 ) Stock-based compensation expense ​ ​ 956,084 ​ ​ 849,631 Deferred income tax benefit ​ ​ ( 197,412 ) ​ ​ ( 2,298,612 ) Changes in assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 679,643 ) ​ ​ 379,629 Prepaid income taxes and other current assets ​ ​ 20,000 ​ ​ 1,485,320 Accounts payable, royalties payable and other accrued liabilities ​ ​ 646,410 ​ ​ 207,613 Income taxes payable ​ ​ 1,098,425 ​ ​ — Net cash provided by operating activities ​ ​ 20,006,377 ​ ​ 14,816,366 Cash flows from investing activities: ​ ​ ​ ​ ​ ​ Additions to unproved oil and gas properties ​ ​ ( 148,862 ) ​ ​ ( 504,551 ) Additions to proved oil and gas properties ​ ​ ( 4,435,945 ) ​ ​ ( 4,870,976 ) Additions to gathering system properties ​ ​ ( 297,841 ) ​ ​ ( 731,046 ) Additions to land, buildings and property and equipment ​ ​ ( 5,745 ) ​ ​ ( 419,125 ) Proceeds from sale of oil and gas properties ​ ​ 450,000 ​ ​ — Prepaid drilling costs ​ ​ 379 ​ ​ 745 Net cash used in investing activities ​ ​ ( 4,438,014 ) ​ ​ ( 6,524,953 ) Cash flows from financing activities: ​ ​ ​ ​ ​ ​ Buyback of common shares ​ ​ ( 2,423,007 ) ​ ​ ( 9,078,522 ) Exercise of stock options ​ ​ 85,338 ​ ​ — Net cash used in financing activities ​ ​ ( 2,337,669 ) ​ ​ ( 9,078,522 ) Effect of currency rates on cash, cash equivalents and restricted cash ​ ​ ( 2,042 ) ​ ​ 10,169 Increase in cash, cash equivalents and restricted cash ​ ​ 13,228,652 ​ ​ ( 776,940 ) Cash, cash equivalents and restricted cash, beginning of period ​ ​ 13,836,771 ​ ​ 14,613,711 Cash, cash equivalents and restricted cash, end of period ​ $ 27,065,423 ​ $ 13,836,771 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow disclosures: ​ ​ ​ ​ ​ ​ Income taxes paid ​ $ 3,444,025 ​ $ 1,320,000 Interest paid ​ $ 95,942 ​ $ 114,515 ​ ​ ​ ​ ​ ​ ​ Non-cash investing activities: ​ ​ ​ ​ ​ ​ Change in unproved properties accrued in accounts payable and accrued liabilities ​ $ ( 65,000 ) ​ $ — Change in proved properties accrued in accounts payable and accrued liabilities ​ $ ( 1,097,257 ) ​ $ ( 1,825,230 ) Change in gathering system accrued in accounts payable and accrued liabilities ​ $ ( 25,399 ) ​ $ 26,373 Asset retirement obligation asset additions and adjustments ​ $ 33,234 ​ $ 37,722 ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements ​ 46 ​ ​ Epsilon Energy Ltd. Notes to the Consolidated Financial Statements For the years ended December 31, 2021 and 2020 1. Description of Business 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 is engaged in the acquisition, development, gathering and production of primarily natural gas reserves in the United States. Recent Developments 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 requested a preliminary injunction but was unsuccessful in obtaining that injunction. Epsilon filed a motion to amend its original Complaint. Chesapeake opposed. The Court ruled in Epsilon’s favor and allowed Epsilon’s amendment. Chesapeake moved to dismiss the amended Complaint. The Court granted the motion to dismiss without prejudice to Epsilon’s right to file a new lawsuit based on new proposals made after the Court’s decision. Epsilon filed a motion for reconsideration of that decision. The motion for reconsideration was fully briefed in November 2021. Epsilon filed a notice of additional evidence to the motion for reconsideration on January 4, 2022. The motion for reconsideration was denied on January 18, 2022. Epsilon filed a notice of appeal on February 15, 2022 challenging both the motion to dismiss and motion for reconsideration decisions. Chesapeake filed a cross-appeal on March 1, 2022. A briefing schedule has not yet been set but a decision on the appeal is expected in the fourth quarter of 2022. ​ On February 25, 2022, the Board of Directors approved a quarterly cash dividend of $ 0.0625 per common share, payable on March 31, 2022, to shareholders of record at the close of business on March 8, 2022. With the initiation of a cash dividend, Epsilon intends to pay regular quarterly dividends, with future dividend payments subject to quarterly review and approval by its Board of Directors. At this quarterly dividend rate, the annual dividend rate for the fiscal year 2022 is $ 0.25 per share. ​ The Board of Directors also authorized the repurchase of up to 1,183,410 of the outstanding common shares, representing 5 % of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $ 8.0 million, pursuant to a normal course issuer bid, during the one-year period commencing on March 8, 2022. The program will end on March 7, 2023 unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination. ​ ​ 2. Basis of Preparation 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, 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. All inter-company transactions have been eliminated. 47 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved natural gas reserves and related cash flow estimates used in impairment tests of oil and natural gas and gathering system properties, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates. ​ ​ ​ 3. Summary of Significant Accounting Policies Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents include cash on hand and short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Restricted cash consists of amounts deposited to back bonds or letters of credit for potential well liabilities. 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 Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of December 31, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2021 ​ 2020 Cash and cash equivalents ​ $ 26,497,305 ​ $ 13,270,913 Restricted cash included in other assets ​ ​ 568,118 ​ ​ 565,858 Cash, cash equivalents and restricted cash in the statement of cash flows ​ $ 27,065,423 ​ $ 13,836,771 ​ Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are primarily from purchasers of oil and natural gas, counterparties to our financial instruments, and revenues earned for compression and gathering services. Both oil and natural gas receivables are generally collected within 30 days after the end of the month. Compression and gathering receivables are generally collected within 60 days after the end of the month. 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. Actual balances are not applied against the reserves until substantially all collection efforts have been exhausted. Our allowance for doubtful accounts was nil as of December 31, 2021 and 2020. 48 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 Oil and Natural Gas Properties Epsilon accounts for its crude oil and natural gas exploration and production activities under the successful efforts method of accounting. Oil and natural gas lease acquisition costs are capitalized when incurred. Unproved properties with acquisition costs that are not individually significant are aggregated. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and natural gas properties. Lease delay rentals are expensed as incurred. Oil and natural gas exploration costs, other than the costs of drilling exploratory wells, are expensed as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether Epsilon has discovered proved commercial reserves. If proved commercial reserves are not discovered, such drilling costs are expensed. In some circumstances, it may be uncertain whether proved commercial reserves have been discovered when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized (see Note 4). Depreciation, depletion and amortization of the cost of proved oil and natural gas properties is calculated using the unit-of-production method. The reserve base used to calculate depreciation, depletion and amortization for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. 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 carrying value 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 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. Gas Gathering System Properties Epsilon’s 35 % portion of asset development costs are capitalized when incurred. All other costs are expensed. Depreciation, depletion and amortization of the cost of gathering system properties is calculated using the unit-of- production method. The reserve base used to calculate depreciation, depletion and amortization for the gathering system includes only proved Pennsylvania, natural gas developed reserves. When circumstances indicate that the gathering system properties may be impaired, Epsilon compares expected undiscounted future cash flows related to the gathering system to the unamortized capitalized cost of the asset. If the expected undiscounted future cash flows are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income Approach, which considers estimated discounted future cash flows. 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. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction 49 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. Accounting Policies Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The Company recognizes upstream revenue at the point in time when control has been transferred to the customer, generally at the time natural gas reaches an agreed-upon delivery point and collectability is reasonably assured. Upstream revenue is generally based upon a fixed price, based on a market index, and is measured as the amount of consideration the Company expects to receive in exchange for the transferring of the natural gas. The services provided by the gas gathering system take place continuously and as a practical expedient, the revenues are recognized monthly for the volumes that are processed and transported for the upstream producers during that period of time. Revenue for the services performed are based on the rates outlined in the cost of service agreement that governs all volumes gathered and processed by the system. The gathering rates are adjusted, and fixed annually. Typically, the Company sells its natural gas directly to customers, under agreements with payment terms less than 30 days after delivery and 60 days on the revenue generated by the gas gathering system. 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 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. In this capacity, the third-party is responsible for carrying out marketing activities such as submission of nominations, receipt of payments, submission of invoices and negotiation of contracts. Commissions payable to the third-party broker for these services are treated as lease operating expenses in the financial statements. 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. The gathering and compression services operate under fee-based contracts. The producers in the area served by the gathering system pay fees to the system owners based on the services provided to them in getting their share of the gas production to the 3rd party sales transmission point. Revenue is recognized over time as the services are provided. Oil and Other Liquids Revenue The source of the Company’s oil and other liquids revenue is its ownership interest in wells in Oklahoma. The Company does not operate the wells and has elected not to receive its proportionate share of the production. As such, under the Joint Operating Agreement, the operators have control of the marketing of this production at current market prices and remits our net revenue interest less taxes and fees on a monthly basis. The Company recognizes revenue with a monthly accrual of its proportionate share of volumes produced at an estimated market price. Accounts Receivable and Other Accounts receivable – Oil, natural gas liquid and natural gas receivables consist of amounts due from purchasers for commodity sales from our revenue interest in the leases in Northwestern Pennsylvania and Oklahoma. Payments from purchasers are typically due by the last day of the month following the month of delivery. Gathering fee revenue consists of fees due from the operator of the Auburn GGS, as an agent for the Company fulfilling the operations of the gathering 50 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 system. Payments from the operator are typically due 60 days from the last day of the month of transmission. The Company’s operations do not result in any contract assets or liabilities on the accompanying consolidated balance sheets. Buildings and Other Property and Equipment Buildings are depreciated on a straight-line basis over the estimated useful life of the property, 30 years . Other property and equipment consists of computer hardware and software, and furniture and fixtures. Other property and equipment is generally depreciated on a straight-line basis over the estimated useful lives of the property and equipment, which range from 3 years to 7 years . Financial Instruments and Fair Value Epsilon’s financial instruments consist of cash, cash equivalents, restricted cash, commodity derivative contracts, accounts receivable, accounts payable, 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. 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, and accounts payable 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. 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. 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 51 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 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. 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. If the settled price differential is less than the swapped basis, then we make a payment to the counterparty for the difference between the two. ● Two-way collar contracts—which guarantee a specified price range for NYMEX by using the proceeds of selling a call option at a specified strike price (the “Ceiling”) to finance the purchase of a put option at a specified strike price (the “Floor”). Derivative instruments are recorded on the consolidated balance sheets at fair value as either current or non-current assets or liabilities based on their anticipated settlement date. Gains or losses on derivative contracts are recorded as gain (loss) on commodity contracts in the consolidated statements of operations and comprehensive income. Hedge accounting is not used for our derivative assets and liabilities. Asset Retirement Obligations The Company records a liability for asset retirement obligations at fair value in the period in which the liability is incurred if a reasonable estimate of fair value can be made. 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 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 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. 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. At December 31, 2021 and 2020, 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. Geographic Locations of Operations Approximately 93 % and 97 % of our production during fiscal 2021 and 2020, respectively was derived from natural gas production and gathering system revenues in the state of 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. 52 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 Income Taxes Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis. Epsilon assesses the realizability of deferred tax assets and recognizes valuation allowances as appropriate (see Note 9). Foreign Currency Transactions Even though the Canadian dollar is the functional currency of Epsilon Energy Ltd. (the parent entity), the United States dollar is the reporting 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. Gains and losses on translation of balances denominated in Canadian dollars are included in accumulated other comprehensive income. Stock-Based Compensation The Company mainly estimates the fair value of all stock options awarded to employees and directors using the Black-Scholes option pricing model. Other models are used for options with more complex vesting criteria. Compensation expense and a corresponding increase to additional paid-in capital are recorded over the vesting period based on the fair value of the options granted using a graded vesting approach. When stock options are exercised for common shares, consideration paid by the stock option holders and additional paid-in capital associated with the stock options are recorded. 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 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. Compensation expense and a corresponding increase to additional paid in capital are recorded over the vesting period. Leases Agreements under which the Company makes payments to owners in return for the right to use an asset for a period are accounted for as leases. Leases that transfer substantially all the risks and rewards of ownership to third parties are recorded at inception as finance leases within property and equipment and debt. Assets acquired under capital leases are amortized over the estimated useful lives of the underlying assets. All other leases are accounted for as operating leases and the related lease payments are charged to expense as incurred on a straight-line basis over the term of the lease. 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. 53 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 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 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. Under current U.S. 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 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.” 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 currently assessing the expected impact on our financial statements and will adopt for the year beginning in January 2022. We do not expect a material effect from the adoption of this ASU. ​ ​ ​ 4. Property and Equipment The following table summarizes the Company’s property and equipment at December 31, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2021 ​ 2020 Property and equipment: ​ ​ ​ ​ ​ ​ Oil and gas properties, successful efforts method ​ ​ ​ ​ ​ ​ Proved properties ​ $ 138,032,413 ​ $ 133,902,723 Unproved properties ​ ​ 21,700,926 ​ ​ 21,552,063 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 102,480,972 ) ​ ​ ( 98,200,111 ) Total oil and gas properties, net ​ ​ 57,252,367 ​ ​ 57,254,675 Gathering system ​ ​ 42,475,086 ​ ​ 42,202,644 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 33,443,949 ) ​ ​ ( 32,101,624 ) Total gathering system, net ​ ​ 9,031,137 ​ ​ 10,101,020 Land ​ ​ 637,764 ​ ​ 637,764 Buildings and other property and equipment, net ​ ​ 309,102 ​ ​ 338,419 Total property and equipment, net ​ $ 67,230,370 ​ $ 68,331,878 ​ Property Acquisitions During the years ended December 31, 2021 and 2020, no additional acreage was acquired. 54 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 Property Sale In December 2021, the Company completed the sale of its shallow rights leases and wells in Oklahoma for $ 450,000 . No property sales occurred in 2020. Property Impairment Epsilon performs a quantitative impairment test 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. Additionally, GAAP requires that if an exploratory well is determined not to have found proved reserves, the costs incurred, net of any salvage value, should be charged to expense. 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 or for the year ended December 31, 2021. ​ ​ ​ 5. Revolving Line of Credit The Company has a senior secured revolving credit facility (“Facility”) which includes a total commitment of up to $ 100 million. The current borrowing base is $ 14 million, which is subject to semi-annual redetermination. There are currently no borrowings under the Facility. If Epsilon decided to access the Facility, depending on the level of borrowing, the Company might need to increase its hedging activity. Borrowings from the Facility may be used for the acquisition and development of oil and gas properties, investments in cash flow generating assets complimentary to the production of oil and gas, and for letters of credit and other general corporate purposes. Upon each advance, interest is charged at the highest of a) rate of LIBOR plus an applicable margin ( 2.75 %- 3.75 % based on the percent of the line of credit utilized), b) the Prime Rate, or c) the sum of the Federal Funds Rate plus 0.5 %. Effective April 6, 2021, the agreement was amended to extend the maturity date to March 1, 2024. In addition, the agreement was amended to include a Benchmark Replacement definition and transition plan to be used at such time when the LIBOR rate is discontinued. On June 28, 2021, the borrowing base was decreased from $ 18 million to $ 14 million. On November 23, 2021, the borrowing base of $ 14 million was reaffirmed until May 1, 2022, the next periodic redetermination of the borrowing base. 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. to secure any outstanding amounts under the agreement. Under the terms of the agreement, the Company must maintain the following covenants: ● Interest coverage ratio greater than 3 based on income adjusted for interest, taxes and non-cash amounts. ● Current ratio, adjusted for line of credit amounts used and available and non-cash amounts, greater than 1 . 55 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 ● Leverage ratio less than 3.0 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, 2021 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at Balance at ​ ​ ​ ​ December 31, December 31, ​ Current ​ Interest Rate ​ 2021 ​ 2020 Borrowing Base 3 mo. Revolving line of credit ​ $ — ​ $ — ​ $ 14,000,000 ​ ​ LIBOR + 3.25 % (1) (1) At December 31, 2021, the interest rate was 3.50 % . ​ ​ ​ 6. 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. (b) Purchases of Equity Shares Commencing on January 1, 2021, Epsilon has conducted a normal course issuer bid (“NCIB”) to repurchase our issued and outstanding common shares, when doing so has been accretive to management's estimates of intrinsic value per share. The NCIB ended on December 31, 2021. The Company used discretionary cash to fund these repurchases. During the year ended December 31, 2021, Epsilon has repurchased 534,015 common shares of the authorized 1,193,000 purchase amount and spent $ 2,423,007 under the NCIB. The repurchased stock had an average price of $ 4.54 per share. Commencing on May 20, 2019, Epsilon conducted a normal course issuer bid (“NCIB”) to repurchase up to 1,367,762 issued and outstanding common shares. The NCIB ended on May 19, 2020. Additionally, 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. The tender offer expired on June 30, 2020. During the year ended December 31, 2020, the Company repurchased 2,994,348 common shares and spent $ 9,062,089 , excluding fees and expenses The Company canceled all common shares taken up and paid for under the NCIB and tender offer. The Company funded the repurchases with cash on hand 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. 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. 56 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 The following table contains information about our repurchase of equity securities during the year ended December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Maximum number ​ ​ ​ ​ ​ ​ of shares that ​ ​ ​ ​ ​ ​ may yet be ​ ​ Total number ​ Average price ​ purchased under ​ ​ of shares ​ paid per ​ the plans or ​ purchased ​ share programs Beginning of normal-course issuer bid, January 1, 2021 ​ ​ ​ ​ ​ ​ ​ 1,193,000 January 2021 (1) ​ — ​ $ — ​ ​ ​ February 2021 (1) ​ 62,400 ​ $ 4.07 ​ ​ ​ March 2021 (1) ​ 60,800 ​ $ 3.92 ​ ​ ​ April 2021 (1) ​ 63,315 ​ $ 3.89 ​ ​ ​ May 2021 (1) ​ 63,900 ​ $ 4.02 ​ ​ ​ June 2021 (1) ​ 13,800 ​ $ 4.77 ​ ​ ​ July 2021 (1) ​ 134,200 ​ $ 5.09 ​ ​ ​ August 2021 (1) ​ 127,200 ​ $ 4.97 ​ ​ ​ September 2021 (1) ​ — ​ $ — ​ ​ ​ October 2021 (1) ​ — ​ $ — ​ ​ ​ November 2021 (1) ​ — ​ $ — ​ ​ ​ December 2021 (1) ​ 8,400 ​ $ 5.46 ​ ​ ​ Total as of December 31, 2021 ​ 534,015 ​ $ 4.54 ​ ​ 658,985 (1) Epsilon repurchased these shares under its share repurchase program that commenced on January 1, 2021, as described above. ​ ​ ​ (c) Equity Incentive Plan 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, 2021, the Company granted, after the Compensation Committee approved the terms, target formulas, and peer group applicable to the performance incentive awards, 20,834 common shares and 48,000 time-based restricted shares to the CEO and the board of directors. Restricted Stock Awards For the year ended December 31, 2021, 48,000 common shares of Restricted Stock with a weighted average market price at grant date of $ 5.04 were awarded to the Company’s board of directors. 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. 57 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 The following table summarizes restricted stock for the years ended December 31, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ Year ended ​ ​ December 31, 2021 ​ December 31, 2020 ​ ​ ​ ​ Weighted ​ ​ ​ Weighted ​ ​ Number of ​ Average ​ Number of ​ Average ​ ​ Shares ​ Remaining Life ​ Shares ​ Remaining Life ​ Outstanding (years) Outstanding (years) Balance non-vested Restricted Stock at beginning of period ​ 290,070 ​ 1.60 ​ 346,499 ​ 1.67 Granted ​ 48,000 ​ 3.00 ​ 111,900 ​ 3.00 Vested ​ ( 137,668 ) ​ — ​ ( 168,329 ) ​ — Forfeited ​ ( 34,400 ) ​ — ​ — ​ — Balance non-vested Restricted Stock at end of period ​ 166,002 ​ 1.38 ​ 290,070 ​ 1.60 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock compensation expense for the granted Restricted Stock is recognized over the vesting period. Stock compensation expense recognized during the year ended December 31, 2021 was $ 554,249 (for the year ended December 31, 2020, $ 655,924 ). At December 31, 2021, the Company had unrecognized stock-based compensation related to these shares of $ 696,833 to be recognized over a weighted average period of 1.11 years. Performance Share Unit Awards (“PSU”) The Company grants PSUs, which are paid in stock to certain key employees. 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. For the year ended December 31, 2021, a total of 62,501 common shares were issued and vested, of which 20,834 of the common shares were granted as a result of the Company exceeding its 2020 TSR performance target. The PSUs are accounted for as equity awards. The fair value of the 50 % for performance based on CFDAS is determined as the market price of the common shares of the Company on the date of grant. 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. For the year ended December 31, 2021, the Compensation Committee did not approve the issuance of any new PSU’s. ​ 58 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 The Monte Carlo simulation model calculated grant date fair value using the following assumptions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ 2021 ​ 2020 Expected life (in years) ​ ​ — ​ ​ 0.33 - 3 Expected volatility ​ ​ — ​ ​ 42.1 % - 53.6 % Risk-free rate of return ​ ​ — ​ ​ 0.10 % - 0.17 % Weighted average grant-date fair value per PSU ​ $ — ​ $ 4.10 ​ 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 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, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ Year ended ​ ​ December 31, 2021 ​ December 31, 2020 ​ ​ ​ ​ Weighted ​ ​ ​ Weighted ​ ​ Number of ​ Average ​ Number of ​ Average ​ ​ Shares ​ Remaining Life ​ Shares ​ Remaining Life ​ Outstanding (years) Outstanding (years) Balance non-vested PSUs at beginning of period ​ 193,167 ​ 1.60 ​ — ​ — Granted ​ 20,834 ​ — ​ 214,000 ​ 1.61 Vested ​ ( 62,501 ) ​ — ​ ( 20,833 ) ​ — Balance non-vested PSUs at end of period ​ 151,500 ​ 0.75 ​ 193,167 ​ 1.60 ​ Stock compensation expense for the granted PSUs is recognized over the vesting period. Stock compensation expense recognized during the year ended December 31, 2021 related to PSUs was $ 401,835 (for the year ended December 31, 2020, $ 191,840 ). At December 31, 2021, the Company had unrecognized stock-based compensation related to these shares of $ 310,790 to be recognized over a weighted average period of 1.01 years (at December 31, 2020: $ 568,585 over 1.37 years). Stock Options As of December 31, 2021, the Company had outstanding stock options covering 218,750 Common Shares at an overall average exercise price of $ 5.28 per Common Share to directors, officers, and employees of the Company and its subsidiaries. These 218,750 options have a weighted average expected remaining term of approximately 1.22 years. The following table summarizes stock option activity for the years ended December 31, 2021 and 2020: ​ 59 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ Year ended ​ ​ December 31, 2021 ​ December 31, 2020 ​ ​ ​ ​ Weighted ​ ​ ​ Weighted ​ ​ Number of ​ Average ​ Number of ​ Average ​ ​ Options ​ Exercise ​ Options ​ Exercise Exercise price in US$ Outstanding Price (1) Outstanding Price (1) Balance at beginning of period ​ 245,000 ​ $ 5.27 ​ ​ 245,000 ​ $ 5.27 Exercised ​ ( 16,250 ) ​ ​ ​ ​ ​ — ​ ​ ​ Expired/Forfeited ​ ( 10,000 ) ​ ​ ​ ​ ​ — ​ ​ ​ Balance at period-end ​ 218,750 ​ $ 5.28 ​ ​ 245,000 ​ $ 5.27 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercisable at period-end ​ 218,750 ​ $ 5.28 ​ ​ 245,000 ​ $ 5.27 ​ ​ At December 31, 2021, the Company had unrecognized stock-based compensation related to these options of nil (for the year ended December 31, 2020: nil ). The aggregate intrinsic value at December 31, 2021 was nil (at December 31, 2020: nil ). During the year ended December 31, 2021, the Company awarded no stock options (During the year ended December 31, 2020: no stock options). The following table summarizes information for stock options outstanding at December 31, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ Option ​ Average ​ ​ Number of ​ Number of ​ Pricing ​ Remaining ​ ​ Options ​ Options ​ Model ​ Contractual Life Exercise Price Outstanding Exercisable Valuations (in years) As of December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ $ 5.03 106,250 106,250 ​ $ 250,727 2.05 $ 5.51 112,500 112,500 ​ 424,868 0.43 Total 218,750 218,750 ​ $ 675,595 2.20 ​ The value of the options was recorded as stock-based compensation expense, with an offsetting amount to additional paid-in capital based on the vesting terms. Stock-based compensation for the options, for the years ended December 31, 2021 and 2020, was nil and $ 1,867 , respectively. ​ ​ 7. 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. Overall, product sales revenue generally is recorded in the month when contractual delivery obligations are satisfied, which occurs when control is transferred to the Company’s customers at delivery points based on contractual terms and conditions. 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, 2021 and 2020: ​ 60 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2021 2020 Operating revenue ​ ​ ​ ​ ​ ​ Natural gas ​ $ 31,708,185 ​ $ 15,207,227 Natural gas liquids ​ ​ 1,053,486 ​ ​ 88,185 Oil and condensate ​ ​ 1,776,496 ​ ​ 250,140 Gathering and compression fees ​ ​ 7,865,825 ​ ​ 8,879,728 Total operating revenue ​ $ 42,403,992 ​ $ 24,425,280 ​ 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. 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. For the year ended December 31, 2021, there were no accounts for which collection was 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. Epsilon recorded an allowance for doubtful accounts for the Company’s 35 % share of these payment for a total bad debt expense of $ 0.8 million. In December 2020, a global resolution between Williams and CHK was approved by the United States Bankruptcy Court. 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. The following table details accounts receivable as of December 31, 2021 and 2020: ​ 61 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2021 ​ 2020 Accounts receivable ​ ​ ​ ​ ​ ​ Natural gas and oil sales ​ $ 2,996,344 ​ $ 2,107,910 Joint interest billing ​ ​ 60,134 ​ ​ 69,495 Gathering and compression fees ​ ​ 1,539,976 ​ ​ 1,736,043 Other ​ ​ 477 ​ ​ 3,840 Total accounts receivable ​ $ 4,596,931 ​ $ 3,917,288 ​ ​ ​ 8. Accumulated Other Comprehensive Income 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, 2021 and 2020 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2021 2020 ​ Balance at beginning of period ​ $ 9,820,647 ​ $ 9,810,478 ​ Translation (loss) gain ​ ​ ( 2,042 ) ​ ​ 10,169 ​ Balance at end of period ​ $ 9,818,605 ​ $ 9,820,647 ​ ​ ​ ​ 9. Income Taxes Income (loss) before income taxes is as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Foreign $ ( 571,646 ) ​ $ ( 614,617 ) U.S. ​ 16,639,671 ​ 2,065,208 ​ ​ $ 16,068,025 ​ $ 1,450,591 ​ 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, 2018 through December 31, 2021. 62 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 The following tables present the Company’s current and deferred tax expense (benefit) for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Current: ​ ​ ​ ​ ​ ​ Federal ​ $ 3,152,866 ​ $ 2,214,430 State ​ ​ 1,485,054 ​ ​ 659,602 Total current income tax expense ​ ​ 4,637,920 ​ ​ 2,874,032 Deferred: ​ ​ ​ ​ ​ ​ Federal ​ ​ 84,631 ​ ​ ( 1,788,587 ) State ​ ​ ( 282,043 ) ​ ​ ( 510,025 ) Total deferred tax expense (benefit) ​ ​ ( 197,412 ) ​ ​ ( 2,298,612 ) Income tax expense ​ $ 4,440,508 ​ $ 575,420 ​ 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 2021 differs from the statutory rate primarily due to states taxes and the recognition of a valuation allowance on our Canadian and Oklahoma state deferred tax assets. Our effective tax rate for 2020 differs from the statutory rate primarily due to the recognition of a valuation allowance on our Canadian and Oklahoma state deferred tax assets. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Year Ended ​ ​ ​ December 31, ​ Effective ​ December 31, ​ Effective ​ ​ 2021 Tax Rate 2020 Tax Rate Income tax provision computed at the statutory federal tax rate ​ $ 3,377,625 21.00 % $ 304,622 21.00 % Difference in Canadian and U.S. tax rate ​ ( 11,433 ) ( 0.07 ) % ( 33,804 ) ( 2.33 ) % Correction of Canadian deferred tax balances ​ ​ 762,000 ​ 4.74 % ​ — ​ — % Valuation allowance on Canadian loss ​ ( 688,388 ) ( 4.28 ) % 162,874 11.23 % Return to provision adjustment ​ 57,875 0.36 % ( 87 ) ( 0.01 ) % State taxes ​ 1,057,924 6.58 % ( 141,695 ) ( 9.77 ) % State Valuation Allowance ​ ​ ( 107,545 ) ​ ( 0.67 ) % ​ 259,858 ​ 17.91 % Miscellaneous other items ​ ( 7,550 ) ( 0.05 ) % 23,652 1.63 % Income tax expense ​ $ 4,440,508 27.61 % $ 575,420 39.66 % ​ 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. Net deferred tax liabilities consisted of the following at December 31, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, ​ 2021 2020 Deferred tax assets: ​ ​ ​ ​ ​ ​ State net operating loss carryforwards ​ $ 244,582 ​ $ 350,565 Canadian net operating loss carryforwards ​ 11,669,601 ​ 12,357,988 ARO ​ ​ 796,339 ​ ​ 902,419 Unrealized derivatives/other ​ 255,852 ​ 137,275 Gross deferred tax assets ​ 12,966,374 ​ 13,748,247 Valuation allowance ​ ( 11,821,914 ) ​ ( 12,617,846 ) Total deferred tax assets ​ 1,144,460 ​ 1,130,401 Deferred tax liabilities: ​ ​ Oil and gas property ​ ( 8,558,064 ) ​ ( 8,459,810 ) Partnership ​ ( 2,491,836 ) ​ ( 2,773,443 ) Gross deferred tax liabilities ​ ( 11,049,900 ) ​ ( 11,233,253 ) Net deferred tax liability ​ $ ( 9,905,440 ) ​ $ ( 10,102,852 ) ​ 63 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 As of December 31, 2021, we have no federal net operating loss carry-forwards and approximately $ 7.7 million of state net operating loss carry-forwards, of which $ .3 million expires in 2037 and the remaining can be carried forward indefinitely. These loss carryforwards may reduce future taxable income, however, the extent of which may be limited due to any IRC Section 382 limitation. A valuation allowance of $ 0.2 million is applicable to the net state deferred tax assets attributable to Oklahoma because of objective negative evidence on the cumulative loss incurred in the state over the three-year period ended December 31, 2021. As of December 31, 2021, we have $ 42.5 M of Canadian net operating loss carry-forwards. A valuation allowance of $ 11.7 million attributable to Canadian net operating losses and other tax carryovers is recorded because it is more likely than not that they will not be utilized. On March 18, 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. 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, 2021 and 2020. ​ ​ 10. Commitments and Contingencies The Company’s future minimum lease commitments as of December 31, 2021 are summarized in the following table: ​ ​ ​ ​ ​ Year ended ​ December 31, Payments 2022 ​ $ 106,797 2023 ​ ​ 36,013 ​ ​ $ 142,810 ​ The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of December 31, 2021, we had commitments of $ 3.7 million for capital expenditures. 64 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 Litigation 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 requested a preliminary injunction but was unsuccessful in obtaining that injunction. Epsilon filed a motion to amend its original Complaint. Chesapeake opposed. The Court ruled in Epsilon’s favor and allowed Epsilon’s amendment. Chesapeake moved to dismiss the amended Complaint. The Court granted the motion to dismiss without prejudice to Epsilon’s right to file a new lawsuit based on new proposals made after the Court’s decision. Epsilon filed a motion for reconsideration of that decision. The motion for reconsideration was fully briefed in November 2021. Epsilon filed a notice of additional evidence to the motion for reconsideration on January 4, 2022. The motion for reconsideration was denied on January 18, 2022. Epsilon filed a notice of appeal on February 15, 2022 challenging both the motion to dismiss and motion for reconsideration decisions. Chesapeake filed a cross-appeal on March 1, 2022. A briefing schedule has not yet been set but a decision on the appeal is expected in the fourth quarter of 2022. ​ 11. Net Income Per Share Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed based upon the weighted-average number of common shares outstanding during the period plus the assumed issuance of common shares for all potentially dilutive securities. The net income used in the calculation of basic and diluted net income per share are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Net income (loss) available to shareholders ​ $ 11,627,517 ​ $ 875,171 ​ In calculating the net income per share, basic and diluted, the following weighted-average shares were used: ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Basic weighted-average number of shares outstanding ​ 23,705,193 ​ 25,122,501 Unvested time-based restricted shares 82,958 — Unvested performance-based restricted shares 68,951 — Diluted weighted average shares outstanding 23,857,102 25,122,501 ​ We excluded the following shares from the diluted EPS because their inclusion would have been anti-dilutive. ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Anti-dilutive options ​ 218,750 ​ 245,000 Anti-dilutive unvested time-based restricted shares ​ 83,044 ​ 290,070 Anti-dilutive unvested performance-based restricted shares ​ 82,549 ​ 193,167 Total Anti-dilutive shares 384,343 728,237 ​ ​ ​ ​ 65 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 12. Operating Segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as executive management. Segment performance is evaluated based on operating profit or loss as shown in the table below. Interest expense, interest income and income taxes are managed separately on a group basis. The Company’s reportable segments are as follows: a. The Upstream segment activities include acquisition, development and production of primarily natural gas reserves on properties within the United States; b. The Gas Gathering segment partners with two other companies to operate a natural gas gathering system; and c. The Corporate segment activities include corporate listing and governance functions of the Company. Segment activity as of, and for the years ended December 31, 2021 and 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Upstream Gas Gathering Corporate Elimination Consolidated As of and for the year ended December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 31,708,185 ​ $ — ​ $ — ​ $ — ​ $ 31,708,185 Natural gas liquids ​ ​ 1,053,486 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,053,486 Oil and condensate ​ ​ 1,776,496 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,776,496 Gathering and compression fees ​ ​ — ​ ​ 9,460,508 ​ ​ — ​ ​ ( 1,594,683 ) ​ ​ 7,865,825 Total operating revenue (1) ​ $ 34,538,167 ​ $ 9,460,508 ​ $ — ​ $ ( 1,594,683 ) ​ $ 42,403,992 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net earnings (loss) for the period ​ $ 21,168,455 ​ $ 5,790,780 ​ $ ( 15,331,718 ) (3) $ — ​ $ 11,627,517 Operating costs ​ ​ 7,897,738 ​ ​ 2,321,329 ​ ​ — ​ ​ ( 1,594,683 ) ​ ​ 8,624,384 Development geological and geophysical expenses ​ ​ 40,299 ​ ​ — ​ ​ — ​ ​ — ​ ​ 40,299 Depletion, depreciation, amortization and accretion ​ ​ 5,278,617 ​ ​ 1,348,399 ​ ​ — ​ ​ — ​ ​ 6,627,016 Impairment ​ ​ 153,058 ​ ​ — ​ ​ — ​ ​ — ​ ​ 153,058 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment assets ​ $ 85,828,508 ​ $ 13,506,775 ​ $ 127,311 ​ $ — ​ $ 99,462,594 Capital expenditures (2) ​ ​ 4,638,448 ​ ​ 272,442 ​ ​ — ​ ​ — ​ ​ 4,910,890 Proved properties (net) ​ ​ 35,551,441 ​ ​ — ​ ​ — ​ ​ — ​ ​ 35,551,441 Unproved properties (net) ​ ​ 21,700,926 ​ ​ — ​ ​ — ​ ​ — ​ ​ 21,700,926 Gathering system (net) ​ ​ — ​ ​ 9,031,137 ​ ​ — ​ ​ — ​ ​ 9,031,137 Other property and equipment (net) ​ ​ 946,866 ​ ​ — ​ ​ — ​ ​ — ​ ​ 946,866 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of and for the year ended December 31, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 15,207,227 ​ $ — ​ $ — ​ $ — ​ $ 15,207,227 Natural gas liquids ​ ​ 88,185 ​ ​ — ​ ​ — ​ ​ — ​ ​ 88,185 Oil and condensate ​ ​ 250,140 ​ ​ — ​ ​ — ​ ​ — ​ ​ 250,140 Gathering and compression fees ​ ​ — ​ ​ 10,711,823 ​ ​ — ​ ​ ( 1,832,095 ) ​ ​ 8,879,728 Total operating revenue (1) ​ $ 15,545,552 ​ $ 10,711,823 ​ $ — ​ $ ( 1,832,095 ) ​ $ 24,425,280 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net earnings (loss) for the period ​ $ ( 1,692,091 ) ​ $ 6,304,350 ​ $ ( 3,737,088 ) (3) $ — ​ $ 875,171 Operating costs ​ ​ 8,052,471 ​ ​ 2,261,844 ​ ​ — ​ ​ ( 1,832,095 ) ​ ​ 8,482,220 Development geological and geophysical expenses ​ ​ 12,910 ​ ​ — ​ ​ — ​ ​ — ​ ​ 12,910 Depletion, depreciation, amortization and accretion ​ ​ 7,412,262 ​ ​ 2,145,629 ​ ​ — ​ ​ — ​ ​ 9,557,891 Impairment ​ ​ 1,760,000 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,760,000 Bad Debt Expense ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment assets ​ $ 68,274,707 ​ $ 18,241,454 ​ $ 160,023 ​ $ — ​ $ 86,676,184 Capital expenditures (2) ​ ​ 3,969,422 ​ ​ 757,419 ​ ​ — ​ ​ — ​ ​ 4,726,841 Proved properties (net) ​ ​ 35,702,612 ​ ​ — ​ ​ — ​ ​ — ​ ​ 35,702,612 Unproved properties (net) ​ ​ 21,552,063 ​ ​ — ​ ​ — ​ ​ — ​ ​ 21,552,063 Gathering system (net) ​ ​ — ​ ​ 10,101,020 ​ ​ — ​ ​ — ​ ​ 10,101,020 Other property and equipment (net) ​ ​ 976,183 ​ ​ — ​ ​ — ​ ​ — ​ ​ 976,183 66 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 (1) Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the years ended December 31, 2021 and 2020 have been eliminated upon consolidation. For the year ended December 31, 2021, we sold natural gas to 30 unique customers. Direct Energy Business Marketing, LLC and SWN Energy Services Company, LLC each accounted for 10 % or more of our total revenue. For the 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. (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. (3) Segment reporting for net earnings for the period does not include non-monetary compensation, general and administrative expense, interest income, interest expense or income tax amounts as they are managed on a group basis and are instead included in the corporate column for reconciliation purposes. Additionally, gains & (losses) from commodity hedging contracts are also included in the corporate column for reconciliation purposes. ​ ​ 13. Commodity Risk Management Activities Commodity Price Risks Epsilon engages in price risk management activities from time to time. These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas by securing fixed price contracts for a portion of expected sales volumes. 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. The Company enters into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its future natural gas production and related cash flows. 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. Under this accounting method, changes in the fair value of outstanding financial instruments are recognized as gains or losses in the period of change and are recorded as g ain (loss) on derivative contracts on the consolidated statements of operations and comprehensive income. The related cash flow impact is reflected in cash flows from operating activities. During 2021, Epsilon recognized losses on financial commodity derivative contracts of $ 4,482,909 . This amount included settlements of these contracts of $ 4,243,085 . For 2020, Epsilon recognized gains on financial commodity derivative contracts of $ 2,503,655 . This amount included cash received on settlements of these contracts of $ 4,503,457 . Commodity Derivative Contracts At December 31, 2021, Epsilon had two outstanding natural gas commodity two-way costless collar contracts. 67 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 At December 31, 2020, we had no outstanding contracts. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value of Derivative Assets ​ December 31, December 31, ​ ​ 2021 ​ 2020 Current ​ ​ Basis swap $ — ​ $ — Two-way costless collar 13,312 ​ — ​ $ 13,312 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value of Derivative Liabilities ​ December 31, December 31, ​ ​ 2021 ​ 2020 Current ​ ​ Basis swap $ — ​ $ — Two-way costless collar ​ ( 253,136 ) ​ — ​ $ ( 253,136 ) ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Fair Value of Derivatives $ ( 239,824 ) ​ $ — ​ The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Fair value of asset (liability), beginning of the period ​ $ — ​ $ 1,999,802 Gains (losses) on derivative contracts included in earnings ​ ( 4,482,909 ) ​ 2,503,655 Settlement of commodity derivative contracts ​ 4,243,085 ​ ( 4,503,457 ) Fair value of asset, end of the period ​ $ ( 239,824 ) ​ $ — ​ ​ ​ 14. 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 $ 2.8 million as of December 31, 2021 ($ 3.2 million at December 31, 2020) based on a total net future undiscounted liability of approximately $ 7.4 million ($ 8.8 million at December 31, 2020). Each year we review, and to the extent necessary, revise our asset retirement obligations estimates. During 2021 and 2020, we reviewed the actual abandonment costs with previous estimates. As a result, estimates of abandonment costs remained constant in 2021. Our overall liability decreased due to the sale of the shallow acreage leases and wells in Oklahoma. 68 Epsilon Energy Ltd. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2021 and 2020 The following table presents the activity in Epsilon’s asset retirement obligations for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Year ended ​ ​ ​ December 31, ​ ​ December 31, ​ ​ 2021 2020 Balance beginning of period ​ $ 3,150,243 ​ $ 2,909,855 Liabilities acquired (disposed of) ​ ​ ( 374,337 ) ​ ​ 5,826 Wells plugged and abandoned ​ ​ ( 31,945 ) ​ ​ ( 850 ) Change in estimates ​ ​ ( 8,299 ) ​ ​ 32,668 Accretion ​ ​ 97,994 ​ ​ 202,744 Balance end of period ​ $ 2,833,656 ​ $ 3,150,243 ​ ​ ​ ​ ​ ​ ​ ​ 15. Subsequent Events On February 25, 2022, the Board of Directors approved a quarterly cash dividend of $ 0.0625 per common share, payable on March 31, 2022, to shareholders of record at the close of business on March 8, 2022. With the initiation of a cash dividend, Epsilon intends to pay regular quarterly dividends, with future dividend payments subject to quarterly review and approval by its Board of Directors. At this quarterly dividend rate, the annual dividend rate for the fiscal year 2022 is $ 0.25 per share. ​ The Board of Directors also authorized the repurchase of up to 1,183,410 of the outstanding common shares, representing 5 % of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $ 8.0 million, pursuant to a normal course issuer bid, during the one-year period commencing on March 8, 2022. The program will end on March 7, 2023 unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination. ​ ​ ​ ​ 69 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) ​ NATURAL GAS AND OIL PRODUCING ACTIVITIES 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.’’ 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. 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; evolving production history; crude oil and condensate, NGL and natural gas prices; and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. Proved reserves represent estimated quantities of crude oil, NGLs and natural gas, which, by analysis of geoscience and engineering data, can be estimated, with reasonable certainty, to be economically producible from a given date forward from known reservoirs under then-existing economic conditions, operating methods and government regulations before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Proved developed reserves are proved reserves expected to be recovered under operating methods being utilized at the time the estimates were made, through wells and equipment in place or if the cost of any required equipment is relatively minor compared to the cost of a new well. Proved undeveloped reserves (PUDs) are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. PUDs can be recorded in respect of a particular undrilled location only if the location is scheduled, under the then-current drilling and development plan, to be drilled within five years from the date that the PUDs are to be recorded, unless specific factors (such as those described in interpretative guidance issued by the Staff of the SEC) justify a longer timeframe. Likewise, absent any such specific factors, PUDs associated with a particular undeveloped drilling location shall be removed from the estimates of proved reserves if the location is scheduled, under the then-current drilling and development plan, to be drilled on a date that is beyond five years from the date that the PUDs were recorded. Epsilon has formulated development plans for all drilling locations associated with its PUDs at December 31, 2021. Under these plans, each PUD location will be drilled within five years from the date it was recorded. 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, 2021 and 2020 and changes for each of the two years in the year ended December 31, 2021. Net proved reserves at December 31 are estimated by the Company’s independent petroleum engineers, DeGolyer and MacNaughton. ​ 70 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) ​ NET PROVED RESERVE SUMMARY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural ​ ​ ​ ​ ​ ​ All reserves located in United States ​ Gas ​ NGL ​ Oil ​ Total ​ (MMcf) (MBbl) (MBbl) (MMcfe) Net proved reserves at December 31, 2019 ​ 124,161 ​ — ​ 116 ​ 125,780 Revisions of previous estimates (1)(2) (24,251) ​ — ​ 262 ​ (21,810) Production (11,252) ​ — ​ (7) ​ (11,291) Net proved reserves at December 31, 2020 88,658 ​ — ​ 371 ​ 92,679 Revisions of previous estimates (1)(3) ​ 11,161 ​ 709 ​ (128) ​ 12,853 Extensions (4) ​ 917 ​ 82 ​ 36 ​ 1,627 Production ​ 10,233 ​ 29 ​ 25 ​ 10,558 Net proved reserves at December 31, 2021 ​ 110,969 ​ 820 ​ 305 ​ 117,718 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Proved developed reserves: ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2019 ​ 67,158 ​ — ​ 35 ​ 67,367 At December 31, 2020 ​ 63,789 ​ — ​ 19 ​ 63,901 At December 31, 2021 ​ 72,226 ​ 157 ​ 66 ​ 73,562 ​ ​ ​ ​ ​ ​ ​ ​ ​ Proved undeveloped reserves: ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2019 ​ 57,003 ​ — ​ 81 ​ 58,413 At December 31, 2020 ​ 24,869 ​ — ​ 353 ​ 28,778 At December 31, 2021 ​ 38,743 ​ 663 ​ 239 ​ 44,156 (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) Revisions of previous estimates in natural gas reserves in 2021 are primarily attributable to a higher price of natural gas in Pennsylvania. (4) Extensions in 2021 are primarily attributable to the successful production results of the Company’s Oklahoma well allowing for the booking of additional proved reserves on adjacent sections in which the Company owns leases. 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, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Proved properties $ 138,032,413 ​ $ 133,902,723 Unproved properties ​ 21,700,926 ​ ​ 21,552,063 Gathering system properties ​ ​ 42,475,086 ​ ​ 42,202,644 Total Oil & Gas Properties ​ ​ 202,208,425 ​ ​ 197,657,430 Accumulated depreciation, depletion, amortization and impairment ​ ​ (135,924,921) ​ (130,301,735) Net capitalized costs ​ $ 66,283,504 ​ $ 67,355,695 ​ 71 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) ​ Costs incurred for oil and natural gas property acquisition, exploration and development activities The following table summarizes costs incurred and capitalized in oil and natural gas properties related to acquisition, exploration and development activities. Property acquisition costs are those costs incurred to lease property, including both undeveloped leasehold and the purchase of reserves in place. Exploration costs include costs of identifying areas that may warrant examination and examining specific areas that are considered to have prospects containing oil and natural gas reserves, including costs of drilling exploratory wells, geological and geophysical costs and carrying costs on undeveloped properties. Development costs are incurred to obtain access to proved reserves, including the cost of drilling, as well as the costs to develop the gathering system. ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Oil and Natural Gas Activities: ​ ​ ​ ​ ​ Unproved acquisition costs ​ $ 148,863 ​ $ 504,551 Development costs ​ ​ 3,751,827 ​ ​ 3,083,468 Total costs incurred for oil and natural gas activities ​ ​ 3,900,690 ​ ​ 3,588,019 Gathering System development costs ​ ​ 272,442 ​ 757,419 Total costs incurred ​ $ 4,173,132 ​ $ 4,345,438 ​ Results of Operations for Natural gas and oil Producing Activities The following table sets forth results of operations for gas producing activities for the years ended December 31, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Oil and gas producing activities: ​ ​ ​ ​ ​ Gas sales $ 31,708,185 ​ $ 15,207,227 Oil and other liquid sales ​ ​ 2,829,982 ​ ​ 338,325 Total revenues ​ ​ 34,538,167 ​ ​ 15,545,552 Lease operating costs ​ ​ (7,897,738) ​ ​ (8,052,471) Depreciation, depletion, amortization, accretion and impairment ​ ​ (5,431,675) ​ ​ (9,172,262) Total costs ​ ​ (13,329,413) ​ ​ (17,224,733) Results of operations from oil and gas producing activities ​ $ 21,208,754 ​ $ (1,679,181) ​ 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 2021 and 2020. The following information may be useful for certain comparative purposes, but should not be solely relied upon in evaluating Epsilon or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of Epsilon. The future cash flows presented below are based on expense and cost rates in existence as of the date of the projections. It is expected that material revisions to some estimates of natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used. Estimated future income taxes are computed using current statutory income tax rates including consideration of the current tax basis of the properties and related carryforwards. The resulting tax-effected future net cash flows are reduced to present value amounts by applying a 10% annual discount factor. 72 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) ​ Management does not rely upon the following information in making investment and operating decisions. 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, 2021 and 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Future cash inflows $ 353,162,054 ​ $ 136,438,862 Future production costs ​ (104,161,488) ​ ​ (66,615,749) Future development costs (1) ​ ​ (36,751,965) ​ ​ (29,982,715) Future income taxes (2) ​ ​ (60,131,474) ​ ​ (5,768,850) 10% annual discount for estimated timing of cash flows ​ ​ (74,408,997) ​ ​ (18,055,680) Standardized measure of discounted future net cash flows ​ $ 77,708,130 ​ $ 16,015,868 ​ (1) Costs associated with the abandonment of proved properties are included in future development costs. (2) Future income taxes for 2021 and 2020 were estimated using a combined federal and state statutory tax rate of approximately 28%. Changes in Standardized Measure of Discounted Future Net Cash Flows The following table sets forth the changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2021 2020 Beginning balance $ 16,015,868 ​ $ 49,617,041 Revenue less production and other costs ​ ​ (26,680,071) ​ ​ (7,497,390) Changes in price, net of production costs ​ ​ 70,063,892 ​ ​ (60,108,841) Development costs incurred ​ ​ 4,581,988 ​ ​ 2,486,362 Net changes in future development costs ​ ​ (8,732,332) ​ ​ 10,853,422 Extensions and discoveries, less related costs ​ ​ 3,705,395 ​ ​ 9,414,097 Revisions of previous quantity estimates ​ ​ 40,997,786 ​ ​ (9,646,260) Accretion of discount ​ 2,218,430 ​ ​ 6,776,761 Net change in income taxes ​ ​ (25,325,983) ​ ​ 13,499,337 Purchases of reserves in place ​ ​ 446,240 ​ ​ — Timing differences and other technical revisions ​ ​ 416,917 ​ ​ 621,339 Ending balance ​ $ 77,708,130 ​ $ 16,015,868 ​ ​ 73 ​ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ​ ​