Epsilon Energy Ltd. 10-Q

Table of Contents ​ ​ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-38770 EPSILON ENERGY LTD. (Exact name of registrant as specified in its charter) ​ ​ ​ Alberta, Canada ​ 98-1476367 (State or other jurisdiction of incorporation or organization) ​ (I.R.S Employer Identification No.) ​ 500 Dallas Street , Suite 1250 Houston , Texas 77002 ( 281 ) 670-0002 (Address of principal executive offices including zip code and telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: ​ ​ ​ ​ Title of each class Trading Symbol Name of each exchange on which registered Common Shares, no par value EPSN NASDAQ Global Market ​ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ​ ​ ​ ​ ​ ​ Large accelerated filer ◻ Accelerated filer ◻ Non-accelerated filer ⌧ Smaller reporting company ☒ Emerging growth company ☒ ​ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ⌧ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧ ​ As of November 8, 2023, there were 22,160,439 Common Shares outstanding . ​ ​ ​ ​ Table of Contents Table of Contents ​ ​ ​ Contents ​ ​ ​ ​ FORWARD-LOOKING STATEMENTS ​ 4 PART I-FINANCIAL INFORMATION ​ 5 ITEM 1. FINANCIAL STATEMENTS ​ 5 Unaudited Condensed Consolidated Balance Sheets ​ 5 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) ​ 5 Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity ​ 7 Unaudited Condensed Consolidated Statements of Cash Flows ​ 9 Notes to the Unaudited Condensed Consolidated Financial Statements ​ ​ 1. Description of Business ​ 10 2. Basis of Preparation ​ 10 ​ Interim Financial Statements ​ 10 ​ Principles of Consolidation ​ 10 ​ Use of Estimates ​ 10 ​ Reclassification ​ 10 ​ Recently Issued Accounting Standards ​ 10 3. Cash, Cash Equivalents, and Restricted Cash ​ 11 4. Short Term Investments ​ 11 5. Property and Equipment ​ 12 ​ Property Impairment ​ 13 6 . Revolving Line of Credit ​ 13 7. Shareholders’ Equity ​ 13 8. Revenue Recognition ​ 17 9. Income Taxes ​ 18 10. Commitments and Contingencies ​ 18 ​ Litigation ​ 19 11. Leases ​ 19 12. Net Income Per Share ​ 20 13. Operating Segments ​ 21 14. Commodity Risk Management Activities ​ 24 ​ Commodity Price Risks ​ 24 ​ Commodity Derivative Contracts ​ 24 15. Asset Retirement Obligations ​ 25 16. Fair Value Measurements ​ 26 17. Current Expected Credit Loss ​ 26 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ​ 27 ​ Overview ​ 27 ​ Business Strategy ​ 27 ​ Operational Highlights ​ 28 ​ Non-GAAP Financial Measures-Adjusted EBITDA ​ 28 ​ Net Operating Revenues ​ 30 ​ Operating Costs ​ 31 ​ Depletion, Depreciation, Amortization and Accretion ​ 31 ​ General and Administrative ​ 32 Table of Contents ​ Loss on Derivative Contracts ​ 33 ​ Capital Resources and Liquidity ​ 33 ​ Cash Flow ​ 33 ​ Credit Agreement ​ 33 ​ Repurchase Transactions ​ 34 ​ Derivative Transactions ​ 34 ​ Contractual Obligations ​ 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ​ 35 ​ Gathering System Revenue Risk ​ 35 ​ Interest Rate Risk ​ 35 ​ Derivative Contracts ​ 35 ITEM 4. CONTROLS AND PROCEDURES ​ 36 ​ Disclosure Controls and Procedures ​ 36 ​ Changes in Internal Control Over Financial Reporting ​ 36 ​ Inherent Limitations on Effectiveness of Controls ​ 36 PART II OTHER INFORMATION ​ 36 ITEM 1. LEGAL PROCEEDINGS ​ 36 ITEM 1A. RISK FACTORS ​ 37 ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS ​ 37 ITEM 3. DEFAULTS UPON SENIOR SECURITIES ​ 37 ITEM 4. MINE SAFETY DISCLOSURES ​ 37 ITEM 5. OTHER INFORMATION ​ 37 ITEM 6. EXHIBITS ​ 39 SIGNATURES ​ 39 ​ ​ ​ ​ Table of Contents FORWARD-LOOKING STATEMENTS Certain statements contained in this report constitute forward-looking statements. The use of any of the words ‘‘anticipate,’’ ‘‘continue,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘may,’’ ‘‘will,’’ ‘‘project,’’ ‘‘should,’’ ‘‘believe,’’ and similar expressions and statements relating to matters that are not historical facts constitute ‘‘forward looking information’’ within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Such forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this report should not be unduly relied upon. These statements are made only as of the date of this report. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to natural gas and oil production rates, commodity prices for crude oil or natural gas, supply and demand for natural gas and oil; the estimated quantity of natural gas and oil reserves, including reserve life; future development and production costs, and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2022, and those described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider carefully the statements under Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2022. Our Annual Report on Form 10-K for the year ended December 31, 2022 is available on our website at www.epsilonenergyltd.com. ​ ​ 4 Table of Contents PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EPSILON ENERGY LTD. Unaudited Condensed Consolidated Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ 2023 ​ 2022 ASSETS ​ ​ ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 12,498,051 ​ $ 45,236,584 Accounts receivable ​ ​ 4,006,278 ​ ​ 7,201,386 Short term investments ​ ​ 18,870,468 ​ ​ — Fair value of derivatives ​ ​ — ​ ​ 1,222,090 Prepaid income taxes ​ ​ 1,954,788 ​ ​ 1,140,094 Other current assets ​ ​ 920,224 ​ ​ 632,154 Operating lease right-of-use assets ​ ​ — ​ ​ 31,383 Total current assets ​ ​ 38,249,809 ​ ​ 55,463,691 Non-current assets ​ ​ ​ ​ ​ ​ Property and equipment: ​ ​ ​ ​ ​ ​ Oil and gas properties, successful efforts method ​ ​ ​ ​ ​ ​ Proved properties ​ ​ 154,190,226 ​ ​ 148,326,265 Unproved properties ​ ​ 26,185,843 ​ ​ 18,169,157 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 111,142,288 ) ​ ​ ( 107,729,293 ) Total oil and gas properties, net ​ ​ 69,233,781 ​ ​ 58,766,129 Gathering system ​ ​ 42,694,512 ​ ​ 42,639,001 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 35,241,595 ) ​ ​ ( 34,500,740 ) Total gathering system, net ​ ​ 7,452,917 ​ ​ 8,138,261 Land ​ ​ 637,764 ​ ​ 637,764 Buildings and other property and equipment, net ​ ​ 303,211 ​ ​ 286,035 Total property and equipment, net ​ ​ 77,627,673 ​ ​ 67,828,189 Other assets: ​ ​ ​ ​ ​ ​ Operating lease right-of-use assets, long term ​ ​ 468,833 ​ ​ — Restricted cash ​ ​ 495,000 ​ ​ 570,363 Fair value of derivatives, long term ​ ​ 42,005 ​ ​ — Prepaid drilling costs ​ ​ 2,891,250 ​ ​ — Total non-current assets ​ ​ 81,524,761 ​ ​ 68,398,552 Total assets ​ $ 119,774,570 ​ $ 123,862,243 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS' EQUITY ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable trade ​ $ 1,855,591 ​ $ 1,695,353 Gathering fees payable ​ ​ 556,437 ​ ​ 935,012 Royalties payable ​ ​ 1,241,533 ​ ​ 2,223,043 Accrued capital expenditures ​ ​ 195,917 ​ ​ 41,694 Accrued compensation ​ ​ 631,646 ​ ​ 598,351 Other accrued liabilities ​ ​ 556,814 ​ ​ 690,655 Fair value of derivatives ​ ​ 126,508 ​ ​ — Operating lease liabilities ​ ​ 55,656 ​ ​ 35,299 Total current liabilities ​ ​ 5,220,102 ​ ​ 6,219,407 Non-current liabilities ​ ​ ​ ​ ​ ​ Asset retirement obligations ​ ​ 2,794,743 ​ ​ 2,780,237 Deferred income taxes ​ ​ 11,805,453 ​ ​ 10,617,394 Operating lease liabilities, long term ​ ​ 498,155 ​ ​ — Total non-current liabilities ​ ​ 15,098,351 ​ ​ 13,397,631 Total liabilities ​ ​ 20,318,453 ​ ​ 19,617,038 Commitments and contingencies (Note 10) ​ ​ ​ ​ ​ ​ Shareholders' equity ​ ​ ​ ​ ​ ​ Preferred shares, no par value, unlimited shares authorized, none issued or outstanding ​ ​ — ​ ​ — Common shares, no par value, unlimited shares authorized and 22,126,800 shares issued and outstanding at September 30, 2023 and 23,117,144 issued and outstanding at December 31, 2022 ​ ​ 118,209,690 ​ ​ 123,904,965 Additional paid-in capital ​ ​ 10,655,378 ​ ​ 9,856,229 Accumulated deficit ​ ​ ( 39,158,820 ) ​ ​ ( 39,290,540 ) Accumulated other comprehensive income ​ ​ 9,749,869 ​ ​ 9,774,551 Total shareholders' equity ​ ​ 99,456,117 ​ ​ 104,245,205 Total liabilities and shareholders' equity ​ $ 119,774,570 ​ $ 123,862,243 ​ ​ The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements ​ 5 Table of Contents EPSILON ENERGY LTD. Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Revenues from contracts with customers: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gas, oil, NGL, and condensate revenue ​ $ 3,241,531 ​ $ 19,171,121 ​ $ 14,509,184 ​ $ 48,566,282 Gas gathering and compression revenue ​ ​ 3,068,996 ​ ​ 2,072,806 ​ ​ 7,657,755 ​ ​ 6,180,747 Total revenue ​ ​ 6,310,527 ​ ​ 21,243,927 ​ ​ 22,166,939 ​ ​ 54,747,029 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs and expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Lease operating expenses ​ ​ 1,559,957 ​ ​ 2,024,229 ​ ​ 4,404,757 ​ ​ 5,681,736 Gathering system operating expenses ​ ​ 631,725 ​ ​ 600,672 ​ ​ 1,854,000 ​ ​ 1,666,275 Development geological and geophysical expenses ​ ​ — ​ ​ 2,387 ​ ​ — ​ ​ 7,159 Depletion, depreciation, amortization, and accretion ​ ​ 1,392,032 ​ ​ 1,706,030 ​ ​ 4,780,766 ​ ​ 4,898,988 Loss (gain) on sale of oil and gas properties ​ ​ — ​ ​ — ​ ​ 1,449,871 ​ ​ ( 221,642 ) General and administrative expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock based compensation expense ​ ​ 439,653 ​ ​ 500,597 ​ ​ 799,149 ​ ​ 836,949 Other general and administrative expenses ​ ​ 1,540,358 ​ ​ 2,015,272 ​ ​ 5,160,757 ​ ​ 4,651,547 Total operating costs and expenses ​ ​ 5,563,725 ​ ​ 6,849,187 ​ ​ 18,449,300 ​ ​ 17,521,012 Operating income ​ ​ 746,802 ​ ​ 14,394,740 ​ ​ 3,717,639 ​ ​ 37,226,017 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ ​ 384,732 ​ ​ 89,638 ​ ​ 1,308,695 ​ ​ 126,804 Interest expense ​ ​ ( 8,760 ) ​ ​ ( 17,501 ) ​ ​ ( 71,619 ) ​ ​ ( 33,565 ) (Loss) gain on derivative contracts ​ ​ ( 24,303 ) ​ ​ ( 929,637 ) ​ ​ 1,672,535 ​ ​ ( 1,124,547 ) Other income (expense), net ​ ​ 468 ​ ​ ( 32,777 ) ​ ​ 5,169 ​ ​ ( 99,896 ) Other income (expense), net ​ ​ 352,137 ​ ​ ( 890,277 ) ​ ​ 2,914,780 ​ ​ ( 1,131,204 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income before income tax expense ​ ​ 1,098,939 ​ ​ 13,504,463 ​ ​ 6,632,419 ​ ​ 36,094,813 Income tax expense ​ ​ 710,164 ​ ​ 3,896,010 ​ ​ 2,283,228 ​ ​ 10,097,484 NET INCOME ​ $ 388,775 ​ $ 9,608,453 ​ $ 4,349,191 ​ $ 25,997,329 Currency translation adjustments ​ ​ ( 846 ) ​ ​ ( 34,524 ) ​ ​ ( 2,317 ) ​ ​ ( 48,272 ) Unrealized gain (loss) on securities ​ ​ 24,641 ​ ​ — ​ ​ ( 22,365 ) ​ ​ — NET COMPREHENSIVE INCOME ​ $ 412,570 ​ $ 9,573,929 ​ $ 4,324,509 ​ $ 25,949,057 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income per share, basic ​ $ 0.02 ​ $ 0.42 ​ $ 0.19 ​ $ 1.11 Net income per share, diluted ​ $ 0.02 ​ $ 0.41 ​ $ 0.19 ​ $ 1.11 Weighted average number of shares outstanding, basic ​ ​ 22,118,984 ​ ​ 23,011,729 ​ ​ 22,616,539 ​ ​ 23,419,666 Weighted average number of shares outstanding, diluted ​ ​ 22,178,686 ​ ​ 23,169,658 ​ ​ 22,631,550 ​ ​ 23,524,574 ​ ​ The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements ​ 6 Table of Contents EPSILON ENERGY LTD. Unaudited Condensed 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 January 1, 2023 ​ 23,117,144 ​ $ 123,904,965 ​ — ​ $ — ​ $ 9,856,229 ​ $ 9,774,551 ​ $ ( 39,290,540 ) ​ $ 104,245,205 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,529,827 ​ ​ 3,529,827 Dividends paid ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,412,455 ) ​ ​ ( 1,412,455 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 179,748 ​ ​ — ​ ​ — ​ ​ 179,748 Buyback of common shares ​ — ​ ​ — ​ ( 237,920 ) ​ ​ ( 1,367,425 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,367,425 ) Retirement of treasury shares ​ ( 190,700 ) ​ ​ ( 1,115,306 ) ​ 190,700 ​ ​ 1,115,306 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 2,600 ) ​ ​ — ​ ​ ( 2,600 ) Balance at March 31, 2023 ​ 22,926,444 ​ $ 122,789,659 ​ ( 47,220 ) ​ $ ( 252,119 ) ​ $ 10,035,977 ​ $ 9,771,951 ​ $ ( 37,173,168 ) ​ $ 105,172,300 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 430,589 ​ ​ 430,589 Dividends paid ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,416,147 ) ​ ​ ( 1,416,147 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 179,748 ​ ​ — ​ ​ — ​ ​ 179,748 Buyback of common shares ​ — ​ ​ — ​ ( 325,055 ) ​ ​ ( 1,687,350 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,687,350 ) Retirement of treasury shares ​ ( 277,154 ) ​ ​ ( 1,441,655 ) ​ 277,154 ​ ​ 1,441,655 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 45,877 ) ​ ​ — ​ ​ ( 45,877 ) Balance at June 30, 2023 ​ 22,649,290 ​ $ 121,348,004 ​ ( 95,121 ) ​ $ ( 497,814 ) ​ $ 10,215,725 ​ $ 9,726,074 ​ $ ( 38,158,726 ) ​ $ 102,633,263 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 388,775 ​ ​ 388,775 Dividends paid ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,388,869 ) ​ ​ ( 1,388,869 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 439,653 ​ ​ — ​ ​ — ​ ​ 439,653 Buyback of common shares ​ — ​ ​ — ​ ( 525,000 ) ​ ​ ( 2,640,500 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 2,640,500 ) Retirement of treasury shares ​ ( 620,121 ) ​ ​ ( 3,138,314 ) ​ 620,121 ​ ​ 3,138,314 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Vesting of shares of restricted stock ​ 97,631 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 23,795 ​ ​ — ​ ​ 23,795 Balance at September 30, 2023 ​ 22,126,800 ​ $ 118,209,690 ​ — ​ $ — ​ $ 10,655,378 ​ $ 9,749,869 ​ $ ( 39,158,820 ) ​ $ 99,456,117 ​ The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements ​ 7 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ Total ​ ​ Common Shares Issued ​ Treasury Shares ​ Additional ​ Comprehensive ​ Accumulated ​ Shareholders' ​ ​ Shares ​ Amount ​ Shares ​ Amount ​ paid-in Capital ​ Income ​ Deficit ​ Equity Balance at January 1, 2022 ​ 24,202,218 ​ $ 131,815,739 ​ ( 534,015 ) ​ $ ( 2,423,007 ) ​ $ 8,835,203 ​ $ 9,818,605 ​ $ ( 68,783,207 ) ​ $ 79,263,333 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 5,805,888 ​ ​ 5,805,888 Dividends paid ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,483,027 ) ​ ​ ( 1,483,027 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 142,302 ​ ​ — ​ ​ — ​ ​ 142,302 Exercise of stock options ​ 38,750 ​ ​ 209,312 ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 209,312 Retirement of treasury shares ​ ( 534,015 ) ​ ​ ( 2,423,007 ) ​ 534,015 ​ ​ 2,423,007 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 5,402 ​ ​ — ​ ​ 5,402 Balance at March 31, 2022 ​ 23,706,953 ​ $ 129,602,044 ​ — ​ $ — ​ $ 8,977,505 ​ $ 9,824,007 ​ $ ( 64,460,346 ) ​ $ 83,943,210 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 10,582,988 ​ ​ 10,582,988 Dividends paid ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,486,650 ) ​ ​ ( 1,486,650 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 194,050 ​ ​ — ​ ​ — ​ ​ 194,050 Exercise of stock options ​ 72,500 ​ ​ 399,475 ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 399,475 Buyback of common shares ​ — ​ ​ — ​ ( 697,100 ) ​ ​ ( 4,554,822 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 4,554,822 ) Retirement of treasury shares ​ ( 423,000 ) ​ ​ ( 2,907,999 ) ​ 423,000 ​ ​ 2,907,999 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 19,150 ) ​ ​ — ​ ​ ( 19,150 ) Balance at June 30, 2022 ​ 23,356,453 ​ $ 127,093,520 ​ ( 274,100 ) ​ $ ( 1,646,823 ) ​ $ 9,171,555 ​ $ 9,804,857 ​ $ ( 55,364,008 ) ​ $ 89,059,101 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 9,608,453 ​ ​ 9,608,453 Dividends paid ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,453,043 ) ​ ​ ( 1,453,043 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 500,597 ​ ​ — ​ ​ — ​ ​ 500,597 Exercise of stock options ​ 27,500 ​ ​ 138,325 ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 138,325 Buyback of common shares ​ — ​ ​ — ​ ( 285,400 ) ​ ​ ( 1,680,057 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,680,057 ) Vesting of shares of restricted stock ​ 187,155 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 34,524 ) ​ ​ — ​ ​ ( 34,524 ) Balance at September 30, 2022 ​ 23,571,108 ​ $ 127,231,845 ​ ( 559,500 ) ​ $ ( 3,326,880 ) ​ $ 9,672,152 ​ $ 9,770,333 ​ $ ( 47,208,598 ) ​ $ 96,138,852 ​ ​ The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements ​ 8 Table of Contents EPSILON ENERGY LTD. Unaudited Condensed Consolidated Statements of Cash Flows ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ 2023 2022 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income ​ $ 4,349,191 ​ $ 25,997,329 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Depletion, depreciation, amortization, and accretion ​ ​ 4,780,766 ​ ​ 4,898,988 Accretion of discount on available for sale securities ​ ​ ( 574,341 ) ​ ​ — Gain on available for sale securities ​ ​ ( 60,494 ) ​ ​ — Loss (gain) on sale of oil and gas properties ​ ​ 1,449,871 ​ ​ ( 221,642 ) (Gain) loss on derivative contracts ​ ​ ( 1,672,535 ) ​ ​ 1,124,547 Settlement received (paid) on derivative contracts ​ ​ 2,979,128 ​ ​ ( 1,396,698 ) Settlement of asset retirement obligation ​ ​ ( 3,482 ) ​ ​ ( 118,259 ) Stock-based compensation expense ​ ​ 799,149 ​ ​ 836,949 Deferred income tax expense (benefit) ​ ​ 1,188,059 ​ ​ 439,857 Changes in assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ 3,195,108 ​ ​ ( 5,472,585 ) Prepaid income taxes ​ ​ ( 814,694 ) ​ ​ — Other assets and liabilities ​ ​ ( 67,008 ) ​ ​ ( 205,717 ) Accounts payable, royalties payable and other accrued liabilities ​ ​ ( 1,191,558 ) ​ ​ 1,511,652 Income taxes payable ​ ​ — ​ ​ 2,021,246 Net cash provided by operating activities ​ ​ 14,357,160 ​ ​ 29,415,667 Cash flows from investing activities: ​ ​ ​ ​ ​ ​ Additions to unproved oil and gas properties ​ ​ ( 8,017,412 ) ​ ​ ( 226,439 ) Additions to proved oil and gas properties ​ ​ ( 7,860,073 ) ​ ​ ( 5,528,037 ) Additions to gathering system properties ​ ​ ( 52,069 ) ​ ​ ( 129,985 ) Additions to land, buildings and property and equipment ​ ​ ( 49,689 ) ​ ​ ( 13,258 ) Purchases of short term investments ​ ​ ( 32,812,974 ) ​ ​ — Proceeds from short term investments ​ ​ 14,554,976 ​ ​ — Proceeds from sale of oil and gas properties ​ ​ 12,498 ​ ​ 200,000 Prepaid drilling costs ​ ​ ( 2,891,250 ) ​ ​ — Net cash used in investing activities ​ ​ ( 37,115,993 ) ​ ​ ( 5,697,719 ) Cash flows from financing activities: ​ ​ ​ ​ ​ ​ Buyback of common shares ​ ​ ( 5,695,275 ) ​ ​ ( 6,234,879 ) Exercise of stock options ​ ​ — ​ ​ 747,112 Dividends paid ​ ​ ( 4,217,471 ) ​ ​ ( 4,422,720 ) Debt issuance costs ​ ​ ( 140,000 ) ​ ​ — Net cash used in financing activities ​ ​ ( 10,052,746 ) ​ ​ ( 9,910,487 ) Effect of currency rates on cash, cash equivalents, and restricted cash ​ ​ ( 2,317 ) ​ ​ ( 48,272 ) (Decrease) increase in cash, cash equivalents, and restricted cash ​ ​ ( 32,813,896 ) ​ ​ 13,759,189 Cash, cash equivalents, and restricted cash, beginning of period ​ ​ 45,806,947 ​ ​ 27,065,423 Cash, cash equivalents, and restricted cash, end of period ​ $ 12,993,051 ​ $ 40,824,612 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow disclosures: ​ ​ ​ ​ ​ ​ Income taxes paid ​ $ 1,442,304 ​ $ 7,626 Interest paid ​ $ 88,835 ​ $ 50,872 ​ ​ ​ ​ ​ ​ ​ Non-cash investing activities: ​ ​ ​ ​ ​ ​ Change in proved properties accrued in accounts payable and accrued liabilities ​ $ 41,947 ​ $ ( 194,391 ) Change in gathering system accrued in accounts payable and accrued liabilities ​ $ 3,441 ​ $ 12,882 Asset retirement obligation asset additions and adjustments ​ $ 4,640 ​ $ 10,821 ​ ​ ​ The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements ​ 9 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements 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. Epsilon is a North American on-shore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. 2. Basis of Preparation Interim Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments which are, in the opinion of management, necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2022. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year. Principles of Consolidation The Company’s unaudited condensed 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, Epsilon Operating, 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. 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 and oil reserves and related cash flow estimates used in impairment tests of natural gas and oil, 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. Reclassification The consolidated financial statements for the prior periods include certain reclassifications that were made to conform to the current period presentation. Such reclassifications have no impact on previously reported consolidated financial position, results of operations or cash flows. 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. 10 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements 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 removes all recognition thresholds and requires 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. Epsilon has adopted ASU 2016-13 as of January 1, 2023. There was no impact from the adoption of this ASU. In 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which, for a limited period of time, adds ASC 848 to the Codification providing entities with certain practical expedients and exceptions from applying modification accounting if certain criteria are met. The amendments are designed to reduce operational challenges that entities will face in applying modification accounting to all contracts that will be revised due to reference rate reform. The guidance in ASC 848 was triggered by the pending discontinuation of certain benchmark reference rates and, in some cases, their replacement by new rates that are more observable or transaction-based and, therefore, less susceptible to manipulation, than certain interest-rate benchmark reference rates commonly used today, including the London Interbank Offered Rate (LIBOR). This process of reference rate reform will require entities to modify certain contracts by removing the discontinued rates and including new rates. Epsilon has adopted ASU 2020-04 as of January 1, 2023. There was no impact from the adoption of this ASU. In July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification (“ASC”) to primarily reflect the issuance of SEC Staff Accounting Bulletin No. 120. ASU No. 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120 (“SAB 120”), SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force (“EITF”) Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 amends the ASC for SEC updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 EITF Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 – General Revision of Regulation S-X; Income or Loss Applicable to Common Stock. SAB 120 provides guidance on the measurement and disclosure of share-based awards shortly before announcing material nonpublic information. These updates were immediately effective and did not have any impact on our condensed consolidated financial statements. 3. 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 September 30, 2023 and December, 31 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ 2023 ​ 2022 Cash and cash equivalents ​ $ 12,498,051 ​ $ 45,236,584 Restricted cash included in other assets ​ ​ 495,000 ​ ​ 570,363 Cash, cash equivalents, and restricted cash in the statement of cash flows ​ $ 12,993,051 ​ $ 45,806,947 ​ ​ 4. Short Term Investments Short term investments are highly liquid investments with original maturities between three and twelve months. The Company’s short term investments consist of US Treasury Bills. These investments were previously classified as 11 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements held-to-maturity. In May 2023, as a result of a change in business investment strategy, the Company transferred all of its held-to-maturity short term investments to the available-for-sale category. The securities transferred had a total amortized cost of $ 33,026,959 , fair value of $ 33,021,293 and unrealized losses of $ 5,666 at the time of transfer. The unrealized loss was recorded as accumulated other comprehensive income at the time of transfer. Available-for-sale short term investments are reported at fair value in the Consolidated Balance Sheets. Unrealized gains and losses are excluded from earnings and are reported in accumulated other comprehensive income in the Consolidated Statements of Operations and Comprehensive Income. The following table summarizes the available-for-sale short term investments as of September 30, 2023 and December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2023 December 31, 2022 ​ ​ Amortized ​ Unrealized ​ Fair ​ Amortized ​ Unrealized ​ Fair ​ Cost Losses Value Cost Losses Value U.S. Treasury Bills ​ $ 18,892,833 ​ $ ( 22,365 ) ​ $ 18,870,468 ​ $ — ​ $ — ​ $ — ​ During the nine months ended September 30, 2023, the Company sold securities with a carrying amount of $ 10,394,482 for total proceeds of $ 10,454,976 . The realized gains on these sales were $ 60,494 . An additional $ 4,100,000 of securities reached maturity with total realized gains of $ 97,333 . During the three months ended September 30, 2023, the Company sold securities with a carrying amount of $ 4,089,668 for total proceeds of $ 4,102,503 . The realized gains on these sales were $ 12,835 . These securities were sold to raise cash during the quarter to fund capital expenditures. An additional $ 4,100,000 of securities reached maturity with total realized gains of $ 97,333 . The realized gains are included in other income in the consolidated Statements of Operations and Comprehensive Income. ​ ​ 5. Property and Equipment The following table summarizes the Company’s property and equipment as of September 30, 2023 and December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ 2023 ​ 2022 Property and equipment: ​ ​ ​ ​ ​ ​ Oil and gas properties, successful efforts method ​ ​ ​ ​ ​ ​ Proved properties ​ $ 154,190,226 ​ $ 148,326,265 Unproved properties ​ ​ 26,185,843 ​ ​ 18,169,157 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 111,142,288 ) ​ ​ ( 107,729,293 ) Total oil and gas properties, net ​ ​ 69,233,781 ​ ​ 58,766,129 Gathering system ​ ​ 42,694,512 ​ ​ 42,639,001 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 35,241,595 ) ​ ​ ( 34,500,740 ) Total gathering system, net ​ ​ 7,452,917 ​ ​ 8,138,261 Land ​ ​ 637,764 ​ ​ 637,764 Buildings and other property and equipment, net ​ ​ 303,211 ​ ​ 286,035 Total property and equipment, net ​ $ 77,627,673 ​ $ 67,828,189 ​ Asset Acquisitions During the nine months ended September 30, 2023, Epsilon made the following three acquisitions: ● a 10 % interest in two wellbores located in Eddy County, New Mexico for $ 2.1 million. ● a 25 % working interest in 1,297 gross acres in Ector County, Texas including the drilling of one well for $ 3.7 million and a commitment for the completion of that well for $ 1.6 million. 12 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements ● a 25 % working interest in 11,067 gross acres in Ector County, Texas for $ 6.3 million. There were no acquisitions during the nine months ended September 30, 2022. Property Sale During the nine months ended September 30, 2023, Epsilon sold two wellbore-only Oklahoma assets for $ 12,498 . This sale resulted in a loss of $ 1.45 million. During the nine months ended September 30, 2022, Epsilon sold one wellbore-only Oklahoma asset for $ 200,000 . This sale resulted in a gain of $ 0.22 million. Property Impairment We perform 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, GAAP requires 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. Additionally, 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 and nine months ended September 30, 2023 and 2022, no impairment was recorded. 6 . Revolving Line of Credit The Company closed a senior secured reserve based revolving credit facility on June 28, 2023 with Frost Bank as issuing bank and sole lender. The new facility replaced the Company’s previous facility. The initial commitment and borrowing base is $ 35 million, supported by the Company’s upstream assets in Pennsylvania and subject to semi-annual redeterminations with a maturity date of the earlier of June 28, 2027 or the date that the commitments are terminated. The next redetermination will be December 1, 2023. Interest will be charged at the Daily Simple SOFR rate plus a margin of 3.25 %. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower). There are currently no borrowings under the facility. Under the terms of the facility, the Company must adhere to the following financial covenants: ● Current ratio of 1.0 to 1.0 (current assets / current liabilities) ● Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts) Additionally, if the Leverage ratio is greater than 1.0 to 1.0, or the borrowing base utilization is greater than 50 %, the Company is required to hedge 50 % of the anticipated production from PDP reserves for a rolling 24 month period. We were in compliance with the financial covenants of the agreement as of September 30, 2023. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at Balance at ​ ​ ​ ​ September 30, December 31, ​ Current ​ ​ ​ 2023 ​ 2022 Borrowing Base Interest Rate Revolving line of credit ​ $ — ​ $ — ​ $ 35,000,000 ​ ​ SOFR + 3.25 % ​ ​ 7. 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. 13 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements (b) Purchases of Equity Shares Normal Course Issuer Bid On March 9, 2023, the Board of Directors authorized a new share repurchase program of up to 2,292,644 common shares, representing 10 % of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $ 15.0 million. The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on March 27, 2023 and will end on March 26, 2024, unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination. During the nine months ended September 30, 2023, we repurchased 897,275 common shares at an average price of $ 5.08 per share (excluding commissions) under the new plan. The previous share repurchase program commenced on March 8, 2022. During the year ended December 31, 2022, we repurchased 982,500 common shares of the maximum of 1,183,410 authorized for repurchase and spent $ 6,234,879 under the plan. The repurchased stock had an average price of $ 6.32 per share (excluding commissions) and was subsequently retired during the year ended December 31, 2022. In 2023, we repurchased and retired 190,700 common shares at an average price of $ 5.82 per share (excluding commissions) before the plan terminated on March 7, 2023. During the nine months ended September 30, 2023, the Company repurchased 1,087,975 shares at an average price of $ 5.21 per share (excluding commissions) under the two consecutive repurchase programs. The following table contains activity relating to our acquisition of equity securities during the nine months ended September 30, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Maximum number ​ ​ ​ ​ ​ ​ of shares ​ ​ Total number ​ Average price ​ remaining to be ​ ​ of shares ​ paid per ​ purchased under ​ purchased ​ share the program Beginning of normal-course issuer bid, March 8, 2022 (1) ​ ​ ​ ​ ​ ​ ​ 1,183,410 January 2023 ​ 125,200 ​ $ 5.96 ​ ​ ​ February 2023 ​ 65,500 ​ $ 5.63 ​ ​ ​ Total as of March 7, 2023 ​ 190,700 ​ $ 5.82 ​ ​ 10,210 ​ ​ ​ ​ ​ ​ ​ ​ ​ Beginning of normal-course issuer bid, March 27, 2023 (2) ​ ​ ​ ​ ​ ​ ​ 2,292,644 March 2023 ​ 47,220 ​ $ 5.32 ​ ​ ​ April 2023 ​ 70,406 ​ $ 5.35 ​ ​ ​ May 2023 ​ 83,097 ​ $ 5.11 ​ ​ ​ June 2023 ​ 171,552 ​ $ 5.13 ​ ​ ​ July 2023 ​ 525,000 ​ $ 5.00 ​ ​ ​ Total as of September 30, 2023 ​ 897,275 ​ $ 5.08 ​ ​ 1,395,369 (1) Epsilon repurchased these shares under its 2022-2023 share repurchase program that commenced on March 8, 2022 and terminated on March 7, 2023, as described above. (2) Epsilon repurchased these shares under its 2023-2024 share repurchase program that commenced on March 27, 2023, 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 had determined that it was 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 14 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements 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. Restricted Stock Awards For the nine months ended September 30, 2023, 144,564 shares of Restricted Stock with a weighted average market price at the grant date of $ 5.92 were awarded to the Company’s board of directors and employees. For the year ended December 31, 2022, 289,231 common shares of Restricted Stock with a weighted average market price at the grant date of $ 6.28 were awarded to the Company’s officers, employees, and board of directors. These shares vest over a three or four-year period, with an equal number of shares being issued per period on the anniversary of the award resolution. The vesting of the shares is contingent on the individuals’ continued employment or service. The Company determined the fair value of the granted Restricted Stock-based on the market price of the common shares of the Company on the date of grant. The following table summarizes Restricted Stock activity for the nine months ended September 30, 2023, and the year ended December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ Year ended ​ ​ September 30, 2023 ​ December 31, 2022 ​ ​ Number of ​ Weighted ​ Number of ​ Weighted ​ ​ Restricted ​ Average ​ Restricted ​ Average ​ ​ Shares ​ Remaining Life ​ Shares ​ Remaining Life ​ Outstanding (years) Outstanding (years) Balance non-vested Restricted Stock at beginning of period ​ 298,210 ​ 1.74 ​ 166,002 ​ 1.38 Granted ​ 144,564 ​ 1.75 ​ 289,231 ​ 1.86 Vested ​ ( 97,631 ) ​ — ​ ( 157,023 ) ​ — Balance non-vested Restricted Stock at end of period ​ 345,143 ​ 1.49 ​ 298,210 ​ 1.74 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock compensation expense for the granted Restricted Stock is recognized over the vesting period. Stock compensation expense recognized during the three and nine months ended September 30, 2023 was $ 424,969 and $ 755,097 , respectively (for the three and nine months ended September 30, 2022, $ 366,763 and $ 608,735 , respectively). At September 30, 2023, the Company had unrecognized stock-based compensation related to these shares of $ 1,769,257 to be recognized over a weighted average period of 1.38 years (at December 31, 2022: $ 1,668,564 over 1.55 years). Performance Share Unit Awards (“PSU”) For the nine months ended September 30, 2023, no PSUs vested and were issued. For the year ended December 31, 2022, a total of 135,667 common shares vested and were issued. Previously granted 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 Company, each as compared to the Company’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. 15 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements ● 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 Company at the time of vesting. The number of shares ultimately issued under these awards can range from zero to 200 % of target award amounts at the discretion of the Compensation Committee of the Board of Directors. The following table summarizes PSUs for the nine months ended September 30, 2023 and the year ended December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ Year ended ​ ​ September 30, 2023 ​ December 31, 2022 ​ ​ Number of ​ Weighted ​ Number of ​ Weighted ​ ​ Performance ​ Average ​ Performance ​ Average ​ ​ Shares ​ Remaining Life ​ Shares ​ Remaining Life ​ Outstanding (years) Outstanding (years) Balance non-vested PSUs at beginning of period ​ 15,833 ​ 1.00 ​ 151,500 ​ 3.84 Vested ​ — ​ — ​ ( 135,667 ) ​ — Balance non-vested PSUs at end of period ​ 15,833 ​ 0.25 ​ 15,833 ​ 1.00 ​ Stock compensation expense for the granted PSUs is recognized over the vesting period. Stock compensation expense recognized during the three and nine months ended September 30, 2023 related to PSUs was $ 14,684 and $ 44,052 , respectively (for the three and nine months ended September 30, 2022, $ 133,834 and $ 228,214 , respectively). At September 30, 2023, the Company had unrecognized stock-based compensation related to these shares of $ 14,684 to be recognized over a weighted average period of 0.25 years (at December 31, 2022: $ 63,328 over 0.63 years). ​ Stock Options As of September 30, 2023, the Company had outstanding stock options covering 70,000 Common Shares at an overall average exercise price of $ 5.03 per Common Share to directors, officers, and employees of the Company and its subsidiaries. These 70,000 options have a weighted average expected remaining term of approximately 0.30 years. The following table summarizes stock option activity for the nine months ended September 30, 2023 and the year ended December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended ​ Year ended ​ ​ September 30, 2023 ​ December 31, 2022 ​ ​ ​ ​ Weighted ​ ​ ​ Weighted ​ ​ Number of ​ Average ​ Number of ​ Average ​ ​ Options ​ Exercise ​ Options ​ Exercise Exercise price in US$ Outstanding Price Outstanding Price (1) Balance at beginning of period ​ 70,000 ​ $ 5.03 ​ ​ 218,750 ​ $ 5.28 Exercised ​ — ​ $ — ​ ​ ( 138,750 ) ​ $ 5.38 Expired/Forfeited ​ — ​ $ — ​ ​ ( 10,000 ) ​ $ 5.51 Balance at period-end ​ 70,000 ​ $ 5.03 ​ ​ 70,000 ​ $ 5.03 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercisable at period-end ​ 70,000 ​ $ 5.03 ​ ​ 70,000 ​ $ 5.03 ​ At September 30, 2023, the Company had unrecognized stock-based compensation, related to these options, of nil (at December 31, 2022: nil ). The aggregate intrinsic value at September 30, 2023 was $ 17,500 (at December 31, 2022: $ 112,000 ). During the nine months ended September 30, 2023 and the year ended December 31, 2022, the Company awarded no stock options. ​ 16 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements (d) Dividends ​ On March 3, 2023, June 6, 2023 and August 29, 2023, the Board declared quarterly dividends of $ 0.0625 per common share (annualized $ 0.25 per common share) totaling in aggregate an amount of approximately $4.3 million that has been paid for the nine months ended September 30, 2023. ​ ​ 8. Revenue Recognition Revenues are comprised of sales of natural gas, 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. 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 three and nine months ended September 30, 2023 and 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine Months Ended September 30, ​ ​ 2023 2022 2023 2022 Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 2,088,745 ​ $ 17,893,822 ​ $ 11,351,618 ​ $ 44,581,254 Natural gas liquids ​ ​ 228,012 ​ ​ 497,843 ​ ​ 669,295 ​ ​ 1,500,668 Oil and condensate ​ ​ 924,774 ​ ​ 779,456 ​ ​ 2,488,271 ​ ​ 2,484,360 Gathering and compression fees (1) ​ ​ 3,068,996 ​ ​ 2,072,806 ​ ​ 7,657,755 ​ ​ 6,180,747 Total operating revenue ​ $ 6,310,527 ​ $ 21,243,927 ​ $ 22,166,939 ​ $ 54,747,029 (1) Net of the elimination entry ​ 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 generally 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 GGS is received two months after gathering and compression has occurred. As a result, the Company must estimate the amount of production that was gathered 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. 17 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements Allowance for Credit Losses The Company records an allowance for credit losses on a case-by-case basis once there is evidence that collection is not probable. For the three and nine months ended September 30, 2023, there were no accounts for which collection was not probable. The following table details accounts receivable as of September 30, 2023, December 31,2022, and December 31, 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, December 31, ​ ​ 2023 ​ 2022 ​ 2021 Accounts receivable ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas and oil sales ​ $ 2,053,428 ​ $ 5,696,419 ​ $ 2,996,344 Joint interest billing ​ ​ 17,476 ​ ​ 20,454 ​ ​ 60,134 Gathering and compression fees ​ ​ 1,449,103 ​ ​ 1,483,956 ​ ​ 1,539,976 Commodity contract ​ ​ 417,260 ​ ​ — ​ ​ — Interest ​ ​ 69,011 ​ ​ 557 ​ ​ 477 Total accounts receivable ​ $ 4,006,278 ​ $ 7,201,386 ​ $ 4,596,931 ​ ​ 9. Income Taxes Income tax provisions for the three and nine months ended September 30, 2023 and 2022 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Current: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal ​ $ ( 105,913 ) ​ $ 2,566,416 ​ $ 940,873 ​ $ 6,564,117 State ​ ​ ( 141,655 ) ​ ​ 1,209,063 ​ ​ 154,296 ​ ​ 3,093,510 Total current income tax expense ​ ​ ( 247,568 ) ​ ​ 3,775,479 ​ ​ 1,095,169 ​ ​ 9,657,627 Deferred: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal ​ ​ 762,495 ​ ​ 98,367 ​ ​ 1,140,543 ​ ​ 353,980 State ​ ​ 195,237 ​ ​ 22,164 ​ ​ 47,516 ​ ​ 85,877 Total deferred tax expense ​ ​ 957,732 ​ ​ 120,531 ​ ​ 1,188,059 ​ ​ 439,857 Income tax expense ​ $ 710,164 ​ $ 3,896,010 ​ $ 2,283,228 ​ $ 10,097,484 ​ The Company files federal income tax returns in the United States and Canada, and various returns in state and local jurisdictions. The Company believes it has no uncertain income tax positions. The Company's tax returns are open to audit under the statute of limitations for the years ending December 31, 2019 through December 31, 2022. To the extent we utilize net operating losses generated in earlier years, such earlier years may also be subject to audit. Starting in 2023, distributions of Epsilon Energy USA Inc. earnings to Epsilon Energy Ltd. incur a 5% U.S. dividend withholding tax, provided the Company is eligible for benefits under the U.S. / Canada income treaty. Our effective tax rate will typically differ from the statutory federal rate primarily as a result of state income taxes and the valuation allowance against the Canadian net operating loss. The effective tax rate for the nine months ended September 30, 2023 was higher than the statutory federal rate primarily as a result of the state income taxes and U.S dividend withholding taxes on distributions to Epsilon Energy Ltd. ​ 10 . Commitments and Contingencies The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of September 30, 2023, the Company had no commitments for capital expenditures. 18 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements 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 (“Middle District”). 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 on a narrow issue 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, but the court denied the motion for reconsideration on January 18, 2022. Epsilon filed a notice of appeal on February 15, 2022 challenging the District Court's rulings in the case. Following the Third Circuit's ruling to remand the case back to District court, Epsilon has sought and was granted a dismissal of the case without prejudice in September 2023. 11. Leases ​ Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of September 30, 2023 summarized in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ 2023 ​ 2022 Asset ​ ​ ​ ​ ​ ​ Operating lease right-of-use assets ​ $ - ​ $ 31,383 Operating lease right-of-use assets, long term ​ ​ 468,833 ​ ​ - Total operating lease right-of-use assets ​ $ 468,833 ​ $ 31,383 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ ​ ​ ​ ​ Operating lease liabilities ​ $ 55,656 ​ $ 35,299 Operating lease liabilities, long term ​ ​ 498,155 ​ ​ - Total operating lease liabilities ​ $ 553,811 ​ $ 35,299 ​ ​ ​ ​ ​ ​ ​ Operating lease costs ​ $ 108,071 ​ $ 32,097 ​ ​ ​ ​ ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities ​ ​ ​ ​ ​ ​ Operating cash flows from operating leases ​ $ 27,010 ​ $ 106,798 ​ ​ ​ ​ ​ ​ ​ Weighted average remaining lease term (years) - operating lease ​ ​ 3.14 ​ ​ 0.33 Weighted average discount rate (annualized) - operating lease ​ ​ 8.25 % ​ ​ 8.09 % ​ 19 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements The Company had one office lease that expired in April 2023. On March 1, 2023, the Company commenced a new office lease with a 70 month lease term and future lease payments estimated to be approximately $ 0.85 million. There are no other pending leases, and no lease arrangements in which the Company is the lessor. Lease expense for operating leases was $ 0.11 million and $ 0.03 million as of September 30, 2023 and December 31, 2022, respectively. This lease expense is presented in other general and administrative expenses in the consolidated statements of operations and comprehensive income. ​ Future minimum lease payments as of September 30, 2023 are as follows: ​ ​ ​ ​ ​ ​ ​ Operating Leases 2023 ​ $ — 2024 ​ ​ 134,750 2025 ​ ​ 173,550 2026 ​ ​ 177,021 2027 ​ ​ 180,492 Thereafter ​ ​ 183,963 Total minimum lease payments ​ ​ 849,776 Less: imputed interest ​ ​ ( 295,965 ) Present value of future minimum lease payments ​ ​ 553,811 Less: current obligations under leases ​ ​ ( 55,656 ) Long-term lease obligations ​ $ 498,155 ​ ​ ​ ​ ​ ​ 12. 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 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Net income ​ $ 388,775 ​ $ 9,608,453 ​ $ 4,349,191 ​ $ 25,997,329 ​ In calculating the net income per share, basic and diluted, the following weighted-average shares were used: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Basic weighted-average number of shares outstanding ​ 22,118,984 ​ 23,011,729 ​ 22,616,539 ​ 23,419,666 Dilutive stock options ​ 6,786 ​ 15,914 ​ 5,865 ​ 14,725 Unvested time-based restricted shares 41,037 104,525 — — Unvested performance-based restricted shares 11,879 37,490 9,146 90,183 Diluted weighted average shares outstanding 22,178,686 23,169,658 22,631,550 23,524,574 ​ 20 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements The Company excluded the following shares from the diluted EPS because their inclusion would have been anti-dilutive. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Anti-dilutive options ​ 63,214 ​ 54,086 ​ 64,135 ​ 77,870 Anti-dilutive unvested time-based restricted shares ​ 355,788 ​ 240,526 ​ 327,300 ​ 169,127 Anti-dilutive unvested performance-based restricted shares ​ 3,954 ​ 22,445 ​ 6,687 ​ 41,319 Total Anti-dilutive shares 422,956 317,057 398,122 288,316 ​ ​ 13. 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 income (loss) as shown in the table below. Interest income and expense, and income taxes are managed separately on a group basis. As of September 30, 2023, general and administrative costs and interest income were moved to the Corporate segment because they are entirely comprised of corporate expenses and are not allocated to the Upstream and Gas Gathering segments. To be consistent with this current presentation, the general administrative costs and interest income for the three and nine months ended September 30, 2022 has been reclassed as well. The Company’s reportable segments are as follows: a. The Upstream segment activities include acquisition, development and production of oil, natural gas, and other liquid 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 general and administrative costs, interest income, and corporate listing and governance functions of the Company. 21 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements Segment activity as of, and for the nine months ended September 30, 2023 and 2022 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Upstream Gas Gathering Corporate Elimination Consolidated As of and for the nine months ended September 30, 2023 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 11,351,618 ​ $ — ​ $ — ​ $ — ​ $ 11,351,618 Natural gas liquids ​ ​ 669,295 ​ ​ — ​ ​ — ​ ​ — ​ ​ 669,295 Oil and condensate ​ ​ 2,488,271 ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,488,271 Gathering and compression fees ​ ​ — ​ ​ 8,694,987 ​ ​ — ​ ​ ( 1,037,232 ) ​ ​ 7,657,755 Total operating revenue (1) ​ ​ 14,509,184 ​ ​ 8,694,987 ​ ​ — ​ ​ ( 1,037,232 ) ​ ​ 22,166,939 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ 6,891,860 ​ ​ 1,854,030 ​ ​ 5,959,876 ​ ​ ( 1,037,232 ) ​ ​ 13,668,534 Depletion, depreciation, amortization and accretion ​ ​ 4,034,760 ​ ​ 746,006 ​ ​ — ​ ​ — ​ ​ 4,780,766 Operating income (loss) ​ ​ 3,582,564 ​ ​ 6,094,951 ​ ​ ( 5,959,876 ) ​ ​ — ​ ​ 3,717,639 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ ​ — ​ ​ — ​ ​ 1,308,695 ​ ​ — ​ ​ 1,308,695 Interest expense ​ ​ ( 71,619 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 71,619 ) Gain on derivative contracts ​ ​ 1,672,535 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,672,535 Other income ​ ​ 4,083 ​ ​ — ​ ​ 1,086 ​ ​ — ​ ​ 5,169 Other income (expense), net ​ ​ 1,604,999 ​ ​ — ​ ​ 1,309,781 ​ ​ — ​ ​ 2,914,780 Net income (loss) before income tax expense ​ $ 5,187,563 ​ $ 6,094,951 ​ $ ( 4,650,095 ) ​ $ — ​ $ 6,632,419 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current assets, net ​ $ — ​ $ — ​ $ 38,786,814 ​ $ — ​ $ 38,786,814 Proved properties ​ ​ 43,047,938 ​ ​ — ​ ​ — ​ ​ — ​ ​ 43,047,938 Unproved properties ​ ​ 26,185,843 ​ ​ — ​ ​ — ​ ​ — ​ ​ 26,185,843 Gathering system ​ ​ — ​ ​ 7,452,917 ​ ​ — ​ ​ — ​ ​ 7,452,917 Other property and equipment ​ ​ 3,832,225 ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,832,225 Operating lease right-of-use asset ​ ​ — ​ ​ — ​ ​ 468,833 ​ ​ — ​ ​ 468,833 Total segment assets ​ $ 73,066,006 ​ $ 7,452,917 ​ $ 39,255,647 ​ $ — ​ $ 119,774,570 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of and for the nine months ended September 30, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 44,581,254 ​ $ — ​ $ — ​ $ — ​ $ 44,581,254 Natural gas liquids ​ ​ 1,500,668 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,500,668 Oil and condensate ​ ​ 2,484,360 ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,484,360 Gathering and compression fees ​ ​ — ​ ​ 7,290,507 ​ ​ — ​ ​ ( 1,109,760 ) ​ ​ 6,180,747 Total operating revenue (1) ​ ​ 48,566,282 ​ ​ 7,290,507 ​ ​ — ​ ​ ( 1,109,760 ) ​ ​ 54,747,029 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ 6,577,013 ​ ​ 1,666,275 ​ ​ 5,488,496 ​ ​ ( 1,109,760 ) ​ ​ 12,622,024 Depletion, depreciation, amortization and accretion ​ ​ 4,075,282 ​ ​ 823,706 ​ ​ — ​ ​ — ​ ​ 4,898,988 Operating income (loss) ​ ​ 37,913,987 ​ ​ 4,800,526 ​ ​ ( 5,488,496 ) ​ ​ — ​ ​ 37,226,017 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ ​ — ​ ​ — ​ ​ 126,804 ​ ​ — ​ ​ 126,804 Interest expense ​ ​ ( 33,565 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 33,565 ) Loss on derivative contracts ​ ​ ( 1,124,547 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,124,547 ) Other (expense) income ​ ​ ( 100,315 ) ​ ​ — ​ ​ 419 ​ ​ — ​ ​ ( 99,896 ) Other income (expense), net ​ ​ ( 1,258,427 ) ​ ​ — ​ ​ 127,223 ​ ​ — ​ ​ ( 1,131,204 ) Net income (loss) before income tax expense ​ $ 36,655,560 ​ $ 4,800,526 ​ $ ( 5,361,273 ) ​ $ — ​ $ 36,094,813 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current assets, net ​ $ — ​ $ — ​ $ 51,702,041 ​ $ — ​ $ 51,702,041 Proved properties ​ ​ 40,738,961 ​ ​ — ​ ​ — ​ ​ — ​ ​ 40,738,961 Unproved properties ​ ​ 18,085,385 ​ ​ — ​ ​ — ​ ​ — ​ ​ 18,085,385 Gathering system ​ ​ — ​ ​ 8,355,116 ​ ​ — ​ ​ — ​ ​ 8,355,116 Other property and equipment ​ ​ 933,210 ​ ​ — ​ ​ — ​ ​ — ​ ​ 933,210 Total segment assets ​ $ 59,757,556 ​ ​ 8,355,116 ​ ​ 51,702,041 ​ ​ — ​ ​ 119,814,713 (1) Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the nine months ended September 30, 2023 and 2022 have been eliminated upon consolidation. For the nine months ended September 30, 2023, Epsilon sold natural gas to 34 unique customers. The one customer over 10 % comprised 20 % of total revenue. For the nine months ended September 30, 2022, Epsilon sold natural gas to 26 unique customers. The two customers over 10 % comprised 34 % and 12 % of total revenue. 22 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements Segment activity for the three months ended September 30, 2023 and 2022 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Upstream Gas Gathering Corporate Elimination Consolidated For the three months ended September 30, 2023 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 2,088,745 ​ $ — ​ $ — ​ $ — ​ $ 2,088,745 Natural gas liquids ​ ​ 228,012 ​ ​ — ​ ​ — ​ ​ — ​ ​ 228,012 Oil and condensate ​ ​ 924,774 ​ ​ — ​ ​ — ​ ​ — ​ ​ 924,774 Gathering and compression fees ​ ​ — ​ ​ 3,366,370 ​ ​ — ​ ​ ( 297,374 ) ​ ​ 3,068,996 Total operating revenue (1) ​ ​ 3,241,531 ​ ​ 3,366,370 ​ ​ — ​ ​ ( 297,374 ) ​ ​ 6,310,527 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ 1,857,331 ​ ​ 631,725 ​ ​ 1,980,011 ​ ​ ( 297,374 ) ​ ​ 4,171,693 Depletion, depreciation, amortization and accretion ​ ​ 1,175,402 ​ ​ 216,630 ​ ​ — ​ ​ — ​ ​ 1,392,032 Operating income (loss) ​ ​ 208,798 ​ ​ 2,518,015 ​ ​ ( 1,980,011 ) ​ ​ — ​ ​ 746,802 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ ​ — ​ ​ — ​ ​ 384,732 ​ ​ — ​ ​ 384,732 Interest expense ​ ​ ( 8,760 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 8,760 ) Loss on derivative contracts ​ ​ ( 24,303 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 24,303 ) Other income ​ ​ 369 ​ ​ — ​ ​ 99 ​ ​ — ​ ​ 468 Other income (expense), net ​ ​ ( 32,694 ) ​ ​ — ​ ​ 384,831 ​ ​ — ​ ​ 352,137 Net income (loss) before income tax expense ​ $ 176,104 ​ $ 2,518,015 ​ $ ( 1,595,180 ) ​ $ — ​ $ 1,098,939 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capital expenditures (2) ​ $ 12,450,319 ​ $ 12,880 ​ $ — ​ $ — ​ $ 12,463,199 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended September 30, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 17,893,822 ​ $ — ​ $ — ​ $ — ​ $ 17,893,822 Natural gas liquids ​ ​ 497,843 ​ ​ — ​ ​ — ​ ​ — ​ ​ 497,843 Oil and condensate ​ ​ 779,456 ​ ​ — ​ ​ — ​ ​ — ​ ​ 779,456 Gathering and compression fees ​ ​ — ​ ​ 2,447,669 ​ ​ — ​ ​ ( 374,863 ) ​ ​ 2,072,806 Total operating revenue (1) ​ ​ 19,171,121 ​ ​ 2,447,669 ​ ​ — ​ ​ ( 374,863 ) ​ ​ 21,243,927 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ 2,401,479 ​ ​ 600,672 ​ ​ 2,515,869 ​ ​ ( 374,863 ) ​ ​ 5,143,157 Depletion, depreciation, amortization and accretion ​ ​ 1,436,870 ​ ​ 269,160 ​ ​ — ​ ​ — ​ ​ 1,706,030 Operating income (loss) ​ ​ 15,332,772 ​ ​ 1,577,837 ​ ​ ( 2,515,869 ) ​ ​ — ​ ​ 14,394,740 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ ​ — ​ ​ — ​ ​ 89,638 ​ ​ — ​ ​ 89,638 Interest expense ​ ​ ( 17,501 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 17,501 ) Loss on derivative contracts ​ ​ ( 929,637 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 929,637 ) Other (expense) income ​ ​ ( 37,527 ) ​ ​ — ​ ​ 4,750 ​ ​ — ​ ​ ( 32,777 ) Other income (expense), net ​ ​ ( 984,665 ) ​ ​ — ​ ​ 94,388 ​ ​ — ​ ​ ( 890,277 ) Net income (loss) before income tax expense ​ $ 14,348,107 ​ $ 1,577,837 ​ $ ( 2,421,481 ) ​ $ — ​ $ 13,504,463 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capital expenditures (2) ​ $ 1,390,908 ​ $ 76,016 ​ $ — ​ $ — ​ $ 1,466,924 (1) Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the three months ended September 30, 2023 and 2022 have been eliminated upon consolidation. For the three months ended September 30, 2023, Epsilon sold natural gas to 28 unique customers. The two customers over 10 % comprised 36 % and 24 % of total revenue. For the three months ended September 30, 2022, Epsilon sold natural gas to 17 unique customers. The seven customers over 10 % comprised 13.5 % , 13.29 % , 13.27 % , 11.04 % , 10.84 % , 10.51 % , and 10.25 % of total revenue. (2) Capital expenditures for the Upstream segment consist primarily of the acquisition of properties, and the drilling and completing of wells while Gas Gathering consists of expenditures relating to the expansion, completion, and maintenance of the gathering and compression facility. 23 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements 14. 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 derivative 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 currently 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 gain ( loss) on derivative contracts on the condensed consolidated statements of operations and comprehensive income (loss). The related cash flow impact is reflected in cash flows from operating activities. During the three and nine months ended September 30, 2023, Epsilon recognized (losses) gains on commodity derivative contracts of ($ 24,303 ) and $ 1,672,535 , respectively. This amount included cash received on settlements on these contracts of $ 1,346,270 and $ 2,979,128 for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2022, Epsilon recognized losses on commodity derivative contracts of $ 929,637 and $ 1,124,547 , respectively. This amount included cash paid on settlements on these contracts of $ 21,410 and $ 1,396,698 for the three and nine months ended September 30, 2022, respectively. Commodity Derivative Contracts At September 30, 2023, the Company had outstanding NYMEX Henry Hub (“HH”) swaps totaling 1.45 Bcf and Tennessee Z4 basis swaps totaling 1.45 Bcf outstanding. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value of Derivative Assets ​ September 30, December 31, ​ ​ 2023 ​ 2022 Current ​ ​ NYMEX Henry Hub swap $ 102,027 ​ $ 1,219,865 Tennessee Z4 basis swap ​ 72,981 ​ ​ 181,775 Long-term ​ ​ ​ ​ Basis swap ​ 70,138 ​ ​ — ​ $ 245,146 ​ $ 1,401,640 ​ 24 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value of Derivative Liabilities ​ September 30, December 31, ​ ​ 2023 ​ 2022 Current ​ ​ Henry Hub Nymex Swap $ ( 80,360 ) ​ $ — Tennessee Z4 basis swap ​ ( 221,156 ) ​ ​ ( 179,550 ) Long-term ​ ​ ​ ​ Henry Hub Nymex Swap ​ ( 28,133 ) ​ ​ — ​ $ ( 329,649 ) ​ $ ( 179,550 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Fair Value of Derivatives $ ( 84,503 ) ​ $ 1,222,090 ​ The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Fair value of asset (liability), beginning of the period ​ $ 1,286,070 ​ $ 940,553 ​ $ 1,222,090 ​ $ ( 239,824 ) (Losses) gains on derivative contracts included in earnings ​ ( 24,303 ) ​ ( 929,637 ) ​ 1,672,535 ​ ( 1,124,547 ) Settlement of commodity derivative contracts ​ ( 1,346,270 ) ​ 21,410 ​ ( 2,979,128 ) ​ 1,396,697 Fair value of (liability) asset, end of the period ​ $ ( 84,503 ) ​ $ 32,326 ​ $ ( 84,503 ) ​ $ 32,326 ​ ​ ​ 15. Asset Retirement Obligations Asset retirement obligations are 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 value of its total asset retirement obligations to be $ 2.8 million as of September 30, 2023 ($ 2.8 million at December 31, 2022) based on a total net future undiscounted liability of approximately $ 7.4 million ($ 7.4 million at December 31, 2022). Each year we review, and to the extent necessary, revise our asset retirement obligations estimates. The following tables summarize the changes in asset retirement obligations for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ Year ended ​ ​ ​ September 30, ​ ​ December 31, ​ ​ 2023 2022 Balance beginning of period ​ $ 2,780,237 ​ $ 2,833,656 Liabilities acquired ​ ​ 4,640 ​ ​ 12,053 Liabilities disposed of ​ ​ ( 46,961 ) ​ ​ ( 25,835 ) Wells plugged and abandoned ​ ​ ( 3,482 ) ​ ​ ( 118,260 ) Accretion ​ ​ 60,309 ​ ​ 78,623 Balance end of period ​ $ 2,794,743 ​ $ 2,780,237 ​ ​ 25 Table of Contents Epsilon Energy Ltd. Notes to the Unaudited Condensed Consolidated Financial Statements 16. Fair Value Measurements The methodologies used to determine the fair value of our financial assets and liabilities at September 30, 2023 were the same as those used at December 31, 2022. ​ Cash and 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. The revolving line of credit is classified within Level 2 of the fair value hierarchy. ​ The Company has investments in U.S. Treasury Bills, some of which mature over a period greater than 90 days and are classified as short term investments. The U.S. Treasury Bills are carried at fair value. The U.S. Treasury Bills are classified within Level 1 of the fair value hierarchy. ​ Commodity derivative instruments consist of NYMEX HH swap and basis swap contracts for natural gas. The Company’s derivative contracts are valued based on a marked to market approach. These assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy. The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2023 ​ Level 1 ​ Level 2 Level 3 Effect of Netting Net Fair Value Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative contracts ​ $ — ​ $ 245,146 ​ $ — ​ $ ( 245,146 ) ​ $ — Short term investments ​ $ 18,870,468 ​ $ — ​ $ — ​ $ — ​ $ 18,870,468 Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative contracts ​ $ — ​ $ ( 329,649 ) ​ $ — ​ $ 245,146 ​ $ ( 84,503 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ Level 1 ​ Level 2 Level 3 Effect of Netting Net Fair Value Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative contracts ​ $ — ​ $ 1,401,640 ​ $ — ​ $ ( 179,550 ) ​ $ 1,222,090 Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative contracts ​ $ — ​ $ ( 179,550 ) ​ $ — ​ $ 179,550 ​ $ — ​ ​ ​ ​ ​ 17. Current Expected Credit Loss Under ASU 326, Financial Instruments – Credit Losses, estimated losses on financial assets are provided through an allowance for credit losses. The majority of our financial assets are invested in U.S. Treasury Bills. We also have accounts receivable which are primarily from purchasers of oil and natural gas, counterparties to our financial instruments, and revenues earned for compression and gathering services. Our oil, gas, and natural gas liquids accounts 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. We assess collectability 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. As of September 30, 2023 and December 31, 2022, we determined that our allowance for credit loss was nil . ​ ​ ​ ​ ​ 26 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in the understanding of trends and significant changes in or results of operations and the financial condition of Epsilon Energy Ltd. and its subsidiaries for the periods presented. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report, including the unaudited condensed consolidated financial statements as of September 30, 2023 and 2022 and for the nine months then ended together with accompanying notes, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Actual results and the timing of events may differ materially from those contained in these forward- looking statements due to a number of factors. See “Part II. Item 1A. Risk Factors” and “Forward-Looking Statements.” Overview Epsilon Energy Ltd. (the “Company”) is a North American onshore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. Our areas of operations are the Marcellus shale section of the Appalachian basin in Pennsylvania, the NW Anadarko basin in Oklahoma, and the Permian basin in Eddy County, New Mexico and Ector County, Texas. In Pennsylvania, we hold 5,098 net acres producing 25 MMcf/d net to our working interest. In Oklahoma, we hold 7,228 net acres producing 2.4 MMcfe/d net to our working interest. In Texas, we hold 3,093 net acres. In New Mexico, we hold wellbore interests producing 204 BOE/d net to our working interest. In Pennsylvania, the Company owns a 35% interest in the 52-mile Auburn Gas Gathering System (“Auburn GGS") which is operated by a subsidiary of Williams Partners, LP. Our common shares trade on the NASDAQ Global Market under the ticker symbol “EPSN.” Business Strategy The Company is focused on high rate of return capital investments in onshore North American natural gas and oil basins. We are committed to disciplined capital allocation which should include shareholder returns in the form of dividends and share buybacks. We expect that our strong balance sheet and cash flows will allow us to opportunistically invest in both our existing project areas and potential new projects. To date, our investments have been focused in our position in the prolific Marcellus unconventional reservoir in Pennsylvania (“PA”). Our PA assets are supported by our 35% ownership in the Auburn GGS. We have a substantial remaining drillable location inventory within our existing leaseholds. ​ On May 9, 2023, Epsilon acquired a 10% interest in two wellbores located in Eddy County, New Mexico from a private operator. The wells are currently on production. Total capital expenditure (net to Epsilon) was $2.1 million. ​ On May 16, 2023, Epsilon acquired a 25% working interest in 1,297 gross acres on the Central Basin Platform in Ector County, Texas from a private operator. The Company participated in the drilling and completion of 2 gross wells, both 10,000’ laterals, in the second and third quarter of 2023. The wells are drilled, and the completions are underway with first production from both wells expected early in the fourth quarter of 2023. Total capital expenditures (net to Epsilon) to date are $8.5 million, including leasehold and prepaid drilling and completion costs. ​ On June 20, 2023, Epsilon acquired a 25% working interest in 11,067 gross acres on the Central Basin Platform in Ector County, Texas from a private operator. Initial plans call for 4 wells to be drilled on the position in the first half of 2024 with plans expected to be finalized by the end of 2023. Total capital expenditures (net to Epsilon) to date are $6.2 million. ​ We continue to evaluate new opportunities in numerous onshore North American natural gas and oil basins. 27 Table of Contents Three and nine months ended September 30, 2023 Highlights Operational Highlights Marcellus Shale – Pennsylvania ● During the three months ended September 30, 2023, Epsilon's realized natural gas price was $1.07 per Mcf, an 85% decrease over the three months ended September 30, 2022. During the nine months ended September 30, 2023, Epsilon's realized natural gas price was $1.74 per Mcf, a 72% decrease from the nine months ended September 30, 2022. ● During the three months ended September 30, 2023, Epsilon’s net revenue interest natural gas production was 1.7 Bcf compared to 2.3 Bcf during the same period in 2022, a 26% decrease. During the nine months ended September 30, 2023, Epsilon’s net revenue interest natural gas production was 6.0 Bcf compared to 6.7 Bcf during the same period in 2022, a 10% decrease. ● Gathered and delivered 16.6 Bcf gross (5.8 net to Epsilon's interest) during the three months ended September 30, 2023, or 181 MMcf/d through the Auburn Gas Gathering System. Gathered and delivered 48.6 Bcf (17.0 net to Epsilon's interest) during the nine months ended September 30, 2023, or 178 MMcf/d through the Auburn Gas Gathering System. ● At September 30, 2023, the Company had three gross (.47 net) wells being drilled. Anadarko, NW Stack Trend – Oklahoma ● During the three months ended September 30, 2023, Epsilon's realized price for all Oklahoma production was $4.88 per Mcfe, a 48% decline from the three months ended September 30, 2022. During the nine months ended September 30, 2023, Epsilon's realized price for all Oklahoma production was $5.38 per Mcfe, a 39% decrease from the nine months ended September 30, 2022. ● Total net revenue interest production for the three months ended September 30, 2023 included natural gas, oil and other liquids and was 0.15 Bcfe, a 40% decrease from the same period in 2022. Total net revenue interest production for the nine months ended September 30, 2023 included natural gas, oil and other liquids and was 0.50 Bcfe, a 32% decrease over the same period in 2022. Permian Basin – New Mexico and Texas ● During the three and nine months ended September 30, 2023, Epsilon's realized price for all New Mexico production was $46.55 per Boe and $47.01 per Boe, respectively. ● Total net revenue interest production for the three and nine months ended September 30, 2023 included natural gas, oil and other liquids and was 13.9 Mboe and 28.8 Mboe, respectively. ● At September 30, 2023, the Company had 2 gross (.50 net) wells awaiting flowback operations in Texas. Non-GAAP Financial Measures-Adjusted EBITDA Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on sale of assets, (7) gain or loss on derivative contracts net of cash received or paid on settlement, and (8) net other income(expense). Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. 28 Table of Contents Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that Adjusted EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a normalized or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP. The table below sets forth a reconciliation of net income to Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022, which is the most directly comparable measure of financial performance calculated under U.S. GAAP and should be reviewed carefully. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Net income ​ $ 388,775 ​ $ 9,608,453 ​ $ 4,349,191 ​ $ 25,997,329 Add Back: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest (income) expense, net ​ ​ (375,972) ​ ​ (72,137) ​ ​ (1,237,076) ​ ​ (93,239) Income tax expense ​ ​ 710,164 ​ ​ 3,896,010 ​ ​ 2,283,228 ​ ​ 10,097,484 Depreciation, depletion, amortization, and accretion ​ ​ 1,392,032 ​ ​ 1,706,030 ​ ​ 4,780,766 ​ ​ 4,898,988 Stock based compensation expense ​ ​ 439,653 ​ ​ 500,597 ​ ​ 799,149 ​ ​ 836,949 Loss (gain) on sale of assets ​ ​ — ​ ​ — ​ ​ 1,449,871 ​ ​ (221,642) Loss (gain) on derivative contracts net of cash received or paid on settlement ​ ​ 1,370,573 ​ ​ 908,227 ​ ​ 1,306,593 ​ ​ (272,151) Foreign currency translation loss ​ ​ (98) ​ ​ 907 ​ ​ (1,086) ​ ​ 1,517 Adjusted EBITDA ​ $ 3,925,127 ​ $ 16,548,087 ​ $ 13,730,636 ​ $ 41,245,235 ​ ​ 29 Table of Contents Results of Operations ​ Net Operating Revenues For the nine months ended September 30, 2023 revenues decreased $32.5 million, or 60%, to $22.2 million from $54.7 million during the same period of 2022. For the three months ended September 30, 2023 revenues decreased $14.9 million, or 70%, to $6.3 million from $21.2 million during the same period of 2022. Revenue and volume statistics for the three and nine months ended September 30, 2023 and 2022 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ Nine months ended ​ ​ September 30, ​ September 30, ​ 2023 2022 2023 2022 Revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Pennsylvania ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas revenue ​ $ 1,873,658 ​ $ 16,810,450 ​ $ 10,482,695 ​ $ 42,030,790 Volume (MMcf) ​ 1,746 ​ 2,289 ​ 6,035 ​ 6,728 Avg. Price ($/Mcf) ​ $ 1.07 ​ $ 7.34 ​ $ 1.74 ​ $ 6.25 Gathering system revenue ​ $ 3,068,996 ​ $ 2,072,806 ​ $ 7,657,755 ​ $ 6,180,747 Total PA Revenues ​ $ 4,942,654 ​ $ 18,883,256 ​ $ 18,140,450 ​ $ 48,211,537 New Mexico ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas revenue ​ $ 23,298 ​ $ — ​ $ 57,742 ​ $ — Volume (MMcf) ​ 15 ​ — ​ 35 ​ — Avg. Price ($/Mcf) ​ $ 1.53 ​ $ — ​ $ 1.67 ​ $ — Natural gas liquids revenue ​ $ 67,441 ​ $ — ​ $ 136,640 ​ $ — Volume (MBO) ​ 3.2 ​ — ​ 7.1 ​ — Avg. Price ($/Bbl) ​ $ 21.09 ​ $ — ​ $ 19.30 ​ $ — Oil and condensate revenue ​ $ 555,335 ​ $ — ​ $ 1,158,750 ​ $ — Volume (MBO) ​ 8.1 ​ — ​ 15.9 ​ — Avg. Price ($/Bbl) ​ $ 68.19 ​ $ — ​ $ 72.73 ​ $ — Total NM Revenues ​ $ 646,074 ​ $ — ​ $ 1,353,132 ​ $ — Oklahoma ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas revenue ​ $ 191,789 ​ $ 1,083,372 ​ $ 811,181 ​ $ 2,550,464 Volume (MMcf) ​ 88 ​ 130 ​ 278 ​ 366 Avg. Price ($/Mcf) ​ $ 2.19 ​ $ 8.33 ​ $ 2.92 ​ $ 6.98 Natural gas liquids revenue ​ $ 160,571 ​ $ 497,843 ​ $ 532,655 ​ $ 1,500,668 Volume (MBO) ​ 5.4 ​ 12.5 ​ 19.0 ​ 38.5 Avg. Price ($/Bbl) ​ $ 29.70 ​ $ 39.91 ​ $ 28.08 ​ $ 38.96 Oil and condensate revenue ​ $ 369,439 ​ $ 779,456 ​ $ 1,329,521 ​ $ 2,484,360 Volume (MBO) ​ 4.7 ​ 7.6 ​ 17.5 ​ 24.1 Avg. Price ($/Bbl) ​ $ 79.42 ​ $ 102.26 ​ $ 75.77 ​ $ 103.21 Total OK Revenues ​ $ 721,799 ​ $ 2,360,671 ​ $ 2,673,357 ​ $ 6,535,492 Total Revenues ​ $ 6,310,527 ​ $ 21,243,927 ​ $ 22,166,939 ​ $ 54,747,029 ​ Upstream natural gas revenue for the nine months ended September 30, 2023 decreased by $33.2 million, or 75%, over the same period in 2022. A decrease of $28.5 million was due to lower natural gas prices and a decrease of $4.7 million was due to lower sales volumes as a result of natural decline in the wells and temporary down-time associated with workover operations. Upstream natural gas revenue for the three months ended September 30, 2023 decreased by $15.8 million, or 88%, over the same period in 2022. A decrease of $11.6 million was due to lower natural gas prices and a decrease of $4.2 million due to lower sales volumes as a result of natural decline in the wells and temporary down-time associated with workover operations. Upstream natural gas liquids revenue for the nine months ended September 30, 2023 decreased by $0.8 million, or 55% over the same period in 2022. A decrease of $0.3 million was due to lower prices and a decrease of $0.5 million was due to lower sales volumes. Upstream natural gas liquids revenue for the three months ended September 30, 2023 decreased by $0.3 million, or 54% over the same period in 2022. A decrease of $0.1 million was due to lower prices and a decrease of $0.2 million was due to lower sales volumes. 30 Table of Contents ​ Upstream oil and condensate revenue for the nine months ended September 30, 2023 was stable over the same period in 2022. Upstream oil and condensate revenue for the three months ended September 30, 2023 increased by $0.1 million, or 19% over the same period in 2022. An increase of $0.5 million was due to higher volumes because of the New Mexico acquisition offset by a decrease of $0.4 million due to lower prices. Gathering system revenue increased $1.5 million, or 24%, nine months ended September 30, 2023 over the same period in 2022. This was the result of anchor shipper volumes, which pay the full gathering rate, increasing from 69% to 78% of total throughput in addition to a one-time compressor fee adjustment as a result of the operator’s internal audit of the gathering system. Gathering system revenue increased by $1.0 million, or 48%, for the three months ended September 30, 2023 over the same period in 2022. This was the result of a one-time compressor fee adjustment as a result of the operator’s internal audit of the gathering system. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues amounted to $0.3 million and $1.0 for the three and nine months ended September 30, 2023 and $0.4 million and $1.1 for the three and nine months ended September 30, 2022. Operating Costs The following table presents total cost and cost per unit of production (Mcfe), including ad valorem, severance, and production taxes for the three and nine months ended September 30, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Lease operating costs ​ $ 1,559,957 ​ $ 2,024,229 ​ $ 4,404,757 ​ $ 5,681,736 Gathering system operating costs ​ ​ 631,725 ​ ​ 600,672 ​ ​ 1,854,000 ​ ​ 1,666,275 ​ ​ $ 2,191,682 ​ $ 2,624,901 ​ $ 6,258,757 ​ $ 7,348,011 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Upstream operating costs—Total $/Mcfe ​ ​ 0.79 ​ ​ 0.79 ​ ​ 0.66 ​ ​ 0.76 Gathering system operating costs $/Mcf ​ ​ 0.15 ​ ​ 0.17 ​ ​ 0.16 ​ ​ 0.14 ​ Operating costs include the effects of elimination entries to remove the gathering fees paid to Epsilon’s ownership in the gathering system. Upstream operating costs consist of lease operating expenses necessary to extract natural gas and oil, including gathering and treating the natural gas and oil to ready it for sale. For the nine months ended September 30, 2023 these costs decreased by $1.3 million, or 23%, over the same period in 2022. For the three months ended September 30, 2023 these costs decreased by $0.5 million, or 23%, over the same period in 2022. Operating costs in 2022 were higher due to higher produced volumes and extraordinary plugging and abandonment costs related to atypical wellbore conditions in two older vintage wells in Pennsylvania, which is not representative of the other wells. Gathering system operating costs consist primarily of rental payments for the natural gas fueled compression units and overhead fees due to the system’s operator. For the nine months ended September 30, 2023, gathering system operating costs increased by $0.2 million, or 11% from the same period in 2022. For the three months ended September 30, 2023, gathering system operating costs increased by $0.03 million, or 5% from the same period in 2022. This increase is primarily due to a CPI-U adjusted increase to the G&A fee on these volumes and compressor rentals. Depletion, Depreciation, Amortization and Accretion (“DD&A”) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Depletion, depreciation, amortization and accretion ​ $ 1,392,032 ​ $ 1,706,030 ​ $ 4,780,766 ​ $ 4,898,988 ​ Natural gas and oil and gathering system assets are depleted and depreciated using the units of production method aggregating properties on a field basis. For leasehold acquisition costs and the cost to acquire proved and unproved properties, the reserve base used to calculate depreciation and depletion is total proved reserves. For natural gas and oil 31 Table of Contents development and gathering system costs, the reserve base used to calculate depletion and depreciation is proved developed reserves. A reserve report is prepared as of December 31, each year. Depreciation expense includes amounts pertaining to our office furniture and fixtures, leasehold improvements, computer hardware. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 7 years. Also included in depreciation expense is an amount pertaining to buildings owned by the Company. Depreciation for the buildings is calculated using the straight-line method over an estimated useful life of 30 years. Accretion expense is related to the asset retirement costs. DD&A expense for the nine months ended September 30, 2023 decreased by $0.1 million, or 2% from the same period in 2022. DD&A expense for the three months ended September 30, 2023 decreased by $0.3 million, or 18% from the same period in 2022 as a result of two asset sales in 2023 with a large net book value. Loss (gain) on sale of assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Loss (gain) on sale of assets ​ $ — ​ $ — ​ $ 1,449,871 ​ $ (221,642) ​ Loss on sale of assets increased by $1.7 million during the nine months ended September 30, 2023 from 2022 due to the assets sold in 2023 having a larger net book value than the asset sold in 2022. Epsilon sold two Oklahoma assets in April 2023 and one Oklahoma asset in April 2022. There were no asset sales in the three months ended September 30, 2023 and 2022. General and Administrative (“G&A”) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 General and administrative ​ $ 1,980,011 ​ $ 2,515,869 ​ $ 5,959,906 ​ $ 5,488,496 ​ G&A expenses consist of general corporate expenses such as compensation, legal, accounting and professional fees, consulting services, travel and other related corporate costs such as stock options granted and restricted shares of stock granted and the related non-cash compensation. G&A expenses increased by $0.5 million, or 9%, during the nine months ended September 30, 2023 from 2022. This was primarily due to an increase of $0.4 million in compensation ($0.2 million from the 2022 management transition and $0.2 million from an increase in Director fees) and an increase of $0.1 million in other service fees. G&A expenses decreased by $0.5 million, or 21%, during the three months ended September 30, 2023 from 2022. This was primarily due to a $0.3 million decrease in compensation ($0.4 million decrease from the 2022 management transition offset by a $0.1 million increase in Director fees) and a decrease of $0.2 million in legal fees. Interest Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 Interest expense ​ $ 8,760 ​ $ 17,501 ​ $ 71,619 ​ $ 33,565 ​ Interest expense relates to the fees paid on the revolving credit facility. Interest expense for the nine months ended September 30, 2023 and 2022 increased due to an increase in the borrowing base in the Company’s previous credit facility in the first quarter of 2023. Interest expense for the three months ended September 30, 2023 and 2022 decreased as a result of a change in the fee structure under the new credit facility. 32 Table of Contents ​ (Loss) Gain on Derivative Contracts ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ 2023 2022 2023 2022 (Loss) gain on derivative contracts ​ $ (24,303) ​ $ (929,637) ​ $ 1,672,535 ​ $ (1,124,547) ​ For the three and nine months ended September 30, 2023, Epsilon had NYMEX HH Natural Gas Futures swaps and Tennessee Gas Pipeline Zone 4 basis swap derivative contracts for the purpose of hedging a portion of its physical natural gas sales revenue. For the three and nine months ended September 30, 2022, Epsilon had NYMEX HH two-way collars and Tennessee Gas Pipeline Zone 4 basis swap derivative contracts for the same hedging purpose. During the three and nine months ended September 30, 2023, we received cash settlements of $1,346,270 and $2,979,128, respectively. During the three and nine months ended June 30, 2022, we paid net cash settlements of $21,410 and $1,375,287, respectively. For the three and nine months ended September 30, 2023, realized gains on derivative contracts increased by $4.4 million and $1.4 million, respectively, primarily due to the decrease in NYMEX HH Natural Gas Futures prices resulting in an increase in value of the NYMEX HH swaps. On September 29, 2023, the Company entered into new NYMEX HH Natural Gas Futures swaps and Tennessee Gas Pipeline Zone 4 basis swaps covering November 2023 through March 2024 (1.45 Bcf) and April 2024 through October 2024 (1.45 Bcf). Capital Resources and Liquidity Cash Flow The primary source of cash for Epsilon during the nine months ended September 30, 2023 and 2022 was funds generated from operations. The primary uses of cash for the nine months ended September 30, 2023 were the development of upstream properties, investment in U.S. Treasury Bills, the repurchase of shares of common stock, and the distribution of dividends. The primary uses of cash for the nine months ended September 30, 2022 were the development of upstream properties, the repurchase of shares of common stock, and the distribution of dividends. At September 30, 2023, we had a working capital surplus of $32.5 million, a decrease of $16.7 million from the $49.2 million surplus at December 31, 2022. The Company anticipates its current cash balance, short term investments, available borrowings, and cash flows from operations to be sufficient to meet its cash requirements for at least the next twelve months. Nine months ended September 30, 2023 compared to 2022 During the nine months ended September 30, 2023, $14.4 million was provided by the Company’s operating activities, compared to $29.4 million during the same period in 2022, representing a 51% decrease. The Company used $37.1 million of cash for investing activities during the nine months ended September 30, 2023. The Company had a $18.3 million net investment in U.S Treasury Bills and $18.8 million on leasehold and well costs in Pennsylvania, Texas, and Oklahoma. The Company used $5.7 million of cash for investing activities during the nine months ended September 30, 2022. This was spent primarily on leasehold and well costs in Pennsylvania, Texas, and Oklahoma. The Company used $10.1 million of cash for financing activities during the nine months ended September 30, 2023 compared to $9.9 million during the same period in 2022. This was spent primarily on dividend payments and the repurchase of shares of common stock. Credit Agreement The Company closed a senior secured reserve based revolving credit facility on June 28, 2023 with Frost Bank as issuing bank and sole lender. The new facility replaced the Company’s previous facility. The initial commitment and 33 Table of Contents borrowing base is $35 million, supported by the Company’s upstream assets in Pennsylvania and subject to semi-annual redeterminations with a maturity date of the earlier of June 28, 2027 or the date that the commitments are terminated. Interest will be charged at the Daily Simple SOFR rate plus a margin of 3.25%. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower). There are currently no borrowings under the facility. Under the terms of the facility, the Company must adhere to the following financial covenants: ● Current ratio of 1.0 to 1.0 (current assets / current liabilities) ● Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts) Additionally, if the Leverage ratio is greater than 1.0 to 1.0, or the borrowing base utilization is greater than 50%, the Company is required to hedge 50% of the anticipated production from PDP reserves for a rolling 24 month period. ​ Repurchase Transactions On March 9, 2023, the Board of Directors authorized a new share repurchase program of up to 2,292,644 common shares, representing 10% of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $15.0 million. The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on March 27, 2023 and will end on March 26, 2024, unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination. During the nine months ended September 30, 2023, we repurchased 897,275 common shares at an average price of $5.08 per share (excluding commissions) under the new plan. The previous share repurchase program commenced on March 8, 2022. During the year ended December 31, 2022, we repurchased 982,500 common shares of the maximum of 1,183,410 authorized for repurchase and spent $6,234,879 under the plan. The repurchased stock had an average price of $6.32 per share (excluding commissions) and was subsequently retired during the year ended December 31, 2022. In 2023, we repurchased and retired 190,700 common shares at an average price of $5.82 per share (excluding commissions) before the plan terminated on March 7, 2023. During the nine months ended September 30, 2023, the Company repurchased 1,087,975 shares at an average price of $5.21 per share (excluding commissions) under the two consecutive repurchase programs. Derivative Transactions The Company has entered into hedging arrangements to reduce the impact of natural gas price volatility on operations. By reducing the price volatility from a portion of natural gas production, the potential effects of changing prices on operating cash flows have been partially mitigated, but not eliminated. While mitigating the negative effects of 34 Table of Contents falling commodity prices, these derivative contracts also limit the benefits we might otherwise receive from increases in commodity prices. At September 30, 2023, Epsilon’s outstanding natural gas commodity contracts consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted Average ​ ​ ​ ​ ​ Volume ​ Price ($/MMbtu) ​ Fair Value of Asset Derivative Type (MMbtu) Swaps September 30, 2023 2023 ​ ​ ​ ​ ​ ​ ​ ​ NYMEX Henry Hub Swap 152,500 ​ $ 3.32 $ 29,183 Tennessee Z4 Basis swap 152,500 ​ $ (0.73) $ 29,106 ​ ​ ​ ​ ​ ​ ​ ​ 2024 ​ ​ ​ ​ ​ ​ ​ ​ NYMEX Henry Hub swap 1,297,500 ​ $ 3.22 $ (35,648) Tennessee Z4 basis swap 1,297,500 ​ $ (1.07) $ (107,144) ​ 2,900,000 ​ ​ ​ ​ $ (84,503) ​ Contractual Obligations The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of September 30, 2023, the Company has no outstanding short term commitments for capital expenditures and has long term commitments of $7.4 million for asset retirement obligations. ​ ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings and cash flow are significantly affected by changes in the market price of commodities. The prices of natural gas and oil can fluctuate widely and are influenced by numerous factors such as demand, production levels, world political and economic events, and the strength of the US dollar relative to other currencies. Should the price of natural gas and oil decline substantially, the value of our assets could fall dramatically, impacting our future operations and exploration and development activities, along with our gas gathering system revenues. In addition, our operations are exposed to market risks in the ordinary course of our business, including interest rate and certain exposure as well as risks relating to changes in the general economic conditions in the United States. Gathering System Revenue Risk The Auburn Gas Gathering System lies within the Marcellus Basin with historically high levels of recoverable reserves and low cost of production. We believe that a short-term low commodity price environment will not significantly impact the reserves produced and thus the revenue of our gas gathering system. Interest Rate Risk Market risk is estimated as the change in fair value resulting from a hypothetical 100 basis point change in the interest rate on the outstanding balance under our credit agreement. The credit agreement allows us to fix the interest rate for all or a portion of the principal balance for a period up to three months. To the extent that the interest rate is fixed, interest rate changes affect the instrument’s fair market value but do not affect results of operations or cash flows. Conversely, for the portion of the credit agreement that has a floating interest rate, interest rate changes will not affect the fair market value but will affect future results of operations and cash flows. At September 30, 2023 and 2022, the outstanding principal balance under the credit agreement was nil. Derivative Contracts The Company’s financial results and condition depend on the prices received for natural gas production. Natural gas prices have fluctuated widely and are determined by economic and political factors. Supply and demand factors, including weather, general economic conditions, the ability to transport the gas to other regions, as well as conditions in 35 Table of Contents other natural gas regions, impact prices. Epsilon has established a hedging strategy and may manage the risk associated with changes in commodity prices by entering into various derivative financial instrument agreements and physical contracts. Although these commodity price risk management activities could expose Epsilon to losses or gains, entering into these contracts helps to stabilize cash flows and support the Company’s capital spending program. ​ ​ ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our principal executive officer and principal financial officer have concluded that our current disclosure controls and procedures were effective as of September 30, 2023 at the reasonable assurance level. ​ Changes in Internal Control over Financial Reporting No changes in our internal control over financial reporting occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that of limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk . ​ ​ PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 (“Middle District”). 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 on a narrow issue without prejudice to Epsilon’s right to file a new lawsuit based on new proposals made after the Court’s decision. 36 Table of Contents Epsilon filed a motion for reconsideration of that decision, but the court denied the motion for reconsideration on January 18, 2022. Epsilon filed a notice of appeal on February 15, 2022 challenging the District Court's rulings in the case. Following the Third Circuit's ruling to remand the case back to District court, Epsilon has sought and was granted a dismissal of the case without prejudice in September 2023. ​ ITEM 1A. RISK FACTORS There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022. ​ ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS (c) Purchases of Equity Securities by Epsilon Energy Ltd. The following table contains information about our acquisition of equity securities during the nine months ended September 30, 2023. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Maximum number ​ ​ ​ ​ ​ ​ of shares ​ ​ Total number ​ Average price ​ remaining to be ​ ​ of shares ​ paid per ​ purchased under ​ purchased ​ share the program Beginning of normal-course issuer bid, March 8, 2022 (1) ​ ​ ​ ​ ​ ​ ​ 1,183,410 January 2023 ​ 125,200 ​ $ 5.96 ​ ​ ​ February 2023 ​ 65,500 ​ $ 5.63 ​ ​ ​ Total as of March 7, 2023 ​ 190,700 ​ $ 5.82 ​ ​ 10,210 ​ ​ ​ ​ ​ ​ ​ ​ ​ Beginning of normal-course issuer bid, March 27, 2023 (2) ​ ​ ​ ​ ​ ​ ​ 2,292,644 March 2023 ​ 47,220 ​ $ 5.32 ​ ​ ​ April 2023 ​ 70,406 ​ $ 5.35 ​ ​ ​ May 2023 ​ 83,097 ​ $ 5.11 ​ ​ ​ June 2023 ​ 171,552 ​ $ 5.13 ​ ​ ​ July 2023 ​ 525,000 ​ $ 5.00 ​ ​ ​ Total as of September 30, 2023 ​ 897,275 ​ $ 5.08 ​ ​ 1,395,369 (1) Epsilon repurchased these shares under its 2022-2023 share repurchase program that commenced on March 8, 2022 and terminated on March 7, 2023. (2) Epsilon repurchased these shares under its 2023-2024 share repurchase program that commenced on March 27, 2023. ​ ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ​ ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ​ ITEM 5. OTHER INFORMATION Not applicable. 37 Table of Contents ​ ​ 38 Table of Contents ITEM 6. —EXHIBITS ​ Exhibit No. Description of Exhibit ​ ​ ​ 31.1 Sarbanes-Oxley Section 302 certification of Principal Executive Officer . 31.2 Sarbanes-Oxley Section 302 certification of Principal Financial Officer. 32.1 Sarbanes-Oxley Section 906 certification of Principal Executive Officer. 32.2 Sarbanes-Oxley Section 906 certification of Principal Financial Officer. ​ ​ 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Schema Document. 101.CAL Inline XBRL Calculation Linkbase Document. 101.DEF Inline XBRL Definition Linkbase Document. 101.LAB Inline XBRL Labels Linkbase Document. 101.PRE Inline XBRL Presentation Linkbase Document. ​ ​ ​ 104 ​ Cover Page Interactive Data File (embedded within the Inline XBRL document) ​ ​ ​ ​ ​ SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ​ ​ ​ ​ Epsilon Energy Ltd. ​ ​ (Registrant) ​ ​ ​ ​ ​ Date: November 9, 2023 ​ By: /s / J. Andrew Williamson ​ ​ ​ J. Andrew Williamson ​ ​ ​ Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) ​ ​ ​ 39