Epsilon Energy Ltd. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our consolidated balance sheets as of December 31, 2023 and 2022, and the consolidated statements of operations and comprehensive income, changes in shareholders’ equity and cash flows for years ended December 31, 2023 and 2022 included in this annual report have been prepared in accordance with U.S. GAAP. ​ ​ 41 ​ ​ Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Epsilon Energy Ltd. Houston, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Epsilon Energy Ltd. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, P.C. We have served as the Company’s auditor since 2017. Houston, Texas March 20, 2024 ​ ​ 42 ​ EPSILON ENERGY LTD. Consolidated Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2023 ​ 2022 ASSETS ​ ​ ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 13,403,628 ​ $ 45,236,584 Accounts receivable ​ ​ 6,015,448 ​ ​ 7,201,386 Short term investments ​ ​ 18,775,106 ​ ​ — Fair value of derivatives ​ ​ 1,219,025 ​ ​ 1,222,090 Prepaid income taxes ​ ​ 952,301 ​ ​ 1,140,094 Other current assets ​ ​ 763,288 ​ ​ 632,154 Operating lease right-of-use assets ​ ​ — ​ ​ 31,383 Total current assets ​ ​ 41,128,796 ​ ​ 55,463,691 Non-current assets ​ ​ ​ ​ ​ ​ Property and equipment: ​ ​ ​ ​ ​ ​ Oil and gas properties, successful efforts method ​ ​ ​ ​ ​ ​ Proved properties ​ ​ 160,263,511 ​ ​ 148,326,265 Unproved properties ​ ​ 25,504,873 ​ ​ 18,169,157 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 113,708,210 ) ​ ​ ( 107,729,293 ) Total oil and gas properties, net ​ ​ 72,060,174 ​ ​ 58,766,129 Gathering system ​ ​ 42,738,273 ​ ​ 42,639,001 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 35,539,996 ) ​ ​ ( 34,500,740 ) Total gathering system, net ​ ​ 7,198,277 ​ ​ 8,138,261 Land ​ ​ 637,764 ​ ​ 637,764 Buildings and other property and equipment, net ​ ​ 291,807 ​ ​ 286,035 Total property and equipment, net ​ ​ 80,188,022 ​ ​ 67,828,189 Other assets: ​ ​ ​ ​ ​ ​ Operating lease right-of-use assets, long term ​ ​ 441,987 ​ ​ — Restricted cash ​ ​ 470,000 ​ ​ 570,363 Prepaid drilling costs ​ ​ 1,813,808 ​ ​ — Total non-current assets ​ ​ 82,913,817 ​ ​ 68,398,552 Total assets ​ $ 124,042,613 ​ $ 123,862,243 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS' EQUITY ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable trade ​ $ 3,149,371 ​ $ 1,695,353 Gathering fees payable ​ ​ 1,136,237 ​ ​ 935,012 Royalties payable ​ ​ 1,422,898 ​ ​ 2,223,043 Accrued capital expenditures ​ ​ 696,761 ​ ​ 41,694 Accrued compensation ​ ​ 636,295 ​ ​ 598,351 Other accrued liabilities ​ ​ 649,037 ​ ​ 690,655 Fair value of derivatives ​ ​ 118,770 ​ ​ — Operating lease liabilities ​ ​ 86,473 ​ ​ 35,299 Total current liabilities ​ ​ 7,895,842 ​ ​ 6,219,407 Non-current liabilities ​ ​ ​ ​ ​ ​ Asset retirement obligations ​ ​ 3,502,952 ​ ​ 2,780,237 Deferred income taxes ​ ​ 11,553,943 ​ ​ 10,617,394 Operating lease liabilities, long term ​ ​ 476,911 ​ ​ — Total non-current liabilities ​ ​ 15,533,806 ​ ​ 13,397,631 Total liabilities ​ ​ 23,429,648 ​ ​ 19,617,038 Commitments and contingencies (Note 11) ​ ​ ​ ​ ​ ​ Shareholders' equity ​ ​ ​ ​ ​ ​ Preferred shares, no par value, unlimited shares authorized, none issued or outstanding ​ ​ — ​ ​ — Common shares, no par value, unlimited shares authorized and 22,222,722 shares issued and 22,151,848 shares outstanding at December 31, 2023 and 23,117,144 issued and outstanding at December 31, 2022 ​ ​ 118,272,565 ​ ​ 123,904,965 Treasury shares, at cost, 70,874 at December 31, 2023 and 0 at December 31, 2022 ​ ​ ( 360,326 ) ​ ​ — Additional paid-in capital ​ ​ 10,874,491 ​ ​ 9,856,229 Accumulated deficit ​ ​ ( 37,946,042 ) ​ ​ ( 39,290,540 ) Accumulated other comprehensive income ​ ​ 9,772,277 ​ ​ 9,774,551 Total shareholders' equity ​ ​ 100,612,965 ​ ​ 104,245,205 Total liabilities and shareholders' equity ​ $ 124,042,613 ​ $ 123,862,243 ​ ​ The accompanying notes are an integral part of these consolidated financial statements 43 ​ EPSILON ENERGY LTD. Consolidated Statements of Operations and Comprehensive Income ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Revenues from contracts with customers: ​ ​ ​ ​ ​ ​ Gas, oil, NGL, and condensate revenue ​ $ 20,939,221 ​ $ 61,877,197 Gas gathering and compression revenue ​ ​ 9,790,531 ​ ​ 8,085,512 Total revenue ​ ​ 30,729,752 ​ ​ 69,962,709 ​ ​ ​ ​ ​ ​ ​ Operating costs and expenses: ​ ​ ​ ​ ​ ​ Lease operating expenses ​ ​ 6,405,281 ​ ​ 7,128,631 Gathering system operating expenses ​ ​ 2,459,694 ​ ​ 2,287,763 Development geological and geophysical expenses ​ ​ — ​ ​ 9,545 Depletion, depreciation, amortization, and accretion ​ ​ 7,685,084 ​ ​ 6,438,511 Loss (gain) on sale of oil and gas properties ​ ​ 1,449,871 ​ ​ ( 221,642 ) General and administrative expenses: ​ ​ ​ ​ ​ ​ Stock based compensation expense ​ ​ 1,018,262 ​ ​ 1,021,026 Other general and administrative expenses ​ ​ 6,293,234 ​ ​ 6,325,412 Total operating costs and expenses ​ ​ 25,311,426 ​ ​ 22,989,246 Operating income ​ ​ 5,418,326 ​ ​ 46,973,463 ​ ​ ​ ​ ​ ​ ​ Other income (expense): ​ ​ ​ ​ ​ ​ Interest income ​ ​ 1,673,241 ​ ​ 452,877 Interest expense ​ ​ ( 80,379 ) ​ ​ ( 50,782 ) Gain on derivative contracts ​ ​ 3,130,055 ​ ​ 236,077 Other income (expense), net ​ ​ 4,357 ​ ​ ( 99,469 ) Other income, net ​ ​ 4,727,274 ​ ​ 538,703 ​ ​ ​ ​ ​ ​ ​ Net income before income tax expense ​ ​ 10,145,600 ​ ​ 47,512,166 Income tax expense ​ ​ 3,200,447 ​ ​ 12,157,487 NET INCOME ​ $ 6,945,153 ​ $ 35,354,679 Currency translation adjustments ​ ​ ( 3,872 ) ​ ​ ( 44,054 ) Unrealized gain on securities ​ ​ 1,598 ​ ​ — NET COMPREHENSIVE INCOME ​ $ 6,942,879 ​ $ 35,310,625 ​ ​ ​ ​ ​ ​ ​ Net income per share, basic ​ $ 0.31 ​ $ 1.52 Net income per share, diluted ​ $ 0.31 ​ $ 1.51 Weighted average number of shares outstanding, basic ​ ​ 22,496,772 ​ ​ 23,319,633 Weighted average number of shares outstanding, diluted ​ ​ 22,511,647 ​ ​ 23,406,189 ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements 44 ​ EPSILON ENERGY LTD. Consolidated Statements of Changes in Shareholders’ Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ Total ​ ​ Common Shares Issued ​ Treasury Shares ​ Additional ​ Comprehensive ​ Accumulated ​ Shareholders' ​ ​ Shares ​ Amount ​ Shares ​ Amount ​ paid-in Capital ​ Income ​ Deficit ​ Equity Balance at December 31, 2021 ​ 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 ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 35,354,679 ​ ​ 35,354,679 Dividends ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 5,862,012 ) ​ ​ ( 5,862,012 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 1,021,026 ​ ​ — ​ ​ — ​ ​ 1,021,026 Buyback of common shares ​ — ​ ​ — ​ ( 982,500 ) ​ ​ ( 6,234,879 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 6,234,879 ) Retirement of treasury shares ​ ( 1,516,515 ) ​ ​ ( 8,657,886 ) ​ 1,516,515 ​ ​ 8,657,886 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Exercise of stock options ​ 138,750 ​ ​ 747,112 ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 747,112 Vesting of shares of restricted stock ​ 292,691 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 44,054 ) ​ ​ — ​ ​ ( 44,054 ) Balance at December 31, 2022 ​ 23,117,144 ​ $ 123,904,965 ​ — ​ $ — ​ $ 9,856,229 ​ $ 9,774,551 ​ $ ( 39,290,540 ) ​ $ 104,245,205 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 6,945,153 ​ ​ 6,945,153 Dividends ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 5,600,655 ) ​ ​ ( 5,600,655 ) Stock-based compensation expense ​ — ​ ​ — ​ — ​ ​ — ​ ​ 1,018,262 ​ ​ — ​ ​ — ​ ​ 1,018,262 Buyback of common shares ​ — ​ ​ — ​ ( 1,158,849 ) ​ ​ ( 6,055,601 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 6,055,601 ) Retirement of treasury shares ​ ( 1,087,975 ) ​ ​ ( 5,695,275 ) ​ 1,087,975 ​ ​ 5,695,275 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Exercise of stock options ​ 12,500 ​ ​ 62,875 ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 62,875 Vesting of shares of restricted stock ​ 181,053 ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Other comprehensive loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 2,274 ) ​ ​ — ​ ​ ( 2,274 ) Balance at December 31, 2023 ​ 22,222,722 ​ $ 118,272,565 ​ ( 70,874 ) ​ $ ( 360,326 ) ​ $ 10,874,491 ​ $ 9,772,277 ​ $ ( 37,946,042 ) ​ $ 100,612,965 ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements 45 ​ EPSILON ENERGY LTD. Consolidated Statements of Cash Flows ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income ​ $ 6,945,153 ​ $ 35,354,679 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Depletion, depreciation, amortization, and accretion ​ ​ 7,685,084 ​ ​ 6,438,511 Accretion of discount on available for sale securities ​ ​ ( 836,528 ) ​ ​ — Loss (gain) on sale of oil and gas properties ​ ​ 1,449,871 ​ ​ ( 221,642 ) Gain on derivative contracts ​ ​ ( 3,130,055 ) ​ ​ ( 236,077 ) Settlement received (paid) on derivative contracts ​ ​ 3,251,890 ​ ​ ( 1,225,837 ) Settlement of asset retirement obligation ​ ​ ( 509,802 ) ​ ​ ( 118,260 ) Stock-based compensation expense ​ ​ 1,018,262 ​ ​ 1,021,026 Deferred income tax expense ​ ​ 936,549 ​ ​ 711,954 Changes in assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ 1,185,938 ​ ​ ( 2,604,455 ) Prepaid income taxes ​ ​ 187,793 ​ ​ — Other assets and liabilities ​ ​ 126,347 ​ ​ ( 58,368 ) Accounts payable, royalties payable and other accrued liabilities ​ ​ ( 122,203 ) ​ ​ 1,182,348 Income taxes payable ​ ​ — ​ ​ ( 2,238,519 ) Net cash provided by operating activities ​ ​ 18,188,299 ​ ​ 38,005,360 Cash flows from investing activities: ​ ​ ​ ​ ​ ​ Additions to unproved oil and gas properties ​ ​ ( 8,136,442 ) ​ ​ ( 310,211 ) Additions to proved oil and gas properties ​ ​ ( 10,377,642 ) ​ ​ ( 7,562,502 ) Additions to gathering system properties ​ ​ ( 82,302 ) ​ ​ ( 184,032 ) Additions to land, buildings and property and equipment ​ ​ ( 49,689 ) ​ ​ ( 13,258 ) Purchases of short term investments - held to maturity ​ ​ ( 32,812,974 ) ​ ​ — Purchases of short term investments - available for sale ​ ​ ( 11,988,982 ) ​ ​ — Proceeds from sales and maturities of short term investments ​ ​ 26,864,976 ​ ​ — Proceeds from sale of oil and gas properties ​ ​ 12,498 ​ ​ 200,000 Prepaid drilling costs ​ ​ ( 1,813,808 ) ​ ​ — Net cash used in investing activities ​ ​ ( 38,384,365 ) ​ ​ ( 7,870,003 ) Cash flows from financing activities: ​ ​ ​ ​ ​ ​ Buyback of common shares ​ ​ ( 6,055,601 ) ​ ​ ( 6,234,879 ) Exercise of stock options ​ ​ 62,875 ​ ​ 747,112 Dividends paid ​ ​ ( 5,600,655 ) ​ ​ ( 5,862,012 ) Debt issuance costs ​ ​ ( 140,000 ) ​ ​ — Net cash used in financing activities ​ ​ ( 11,733,381 ) ​ ​ ( 11,349,779 ) Effect of currency rates on cash, cash equivalents, and restricted cash ​ ​ ( 3,872 ) ​ ​ ( 44,054 ) (Decrease) increase in cash, cash equivalents, and restricted cash ​ ​ ( 31,933,319 ) ​ ​ 18,741,524 Cash, cash equivalents, and restricted cash, beginning of period ​ ​ 45,806,947 ​ ​ 27,065,423 Cash, cash equivalents, and restricted cash, end of period ​ $ 13,873,628 ​ $ 45,806,947 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow disclosures: ​ ​ ​ ​ ​ ​ Income taxes paid ​ $ 1,439,583 ​ $ 13,669,000 Interest paid ​ $ 97,595 ​ $ 68,328 ​ ​ ​ ​ ​ ​ ​ Non-cash investing activities: ​ ​ ​ ​ ​ ​ Change in proved properties accrued in accounts payable and accrued liabilities ​ $ 1,611,724 ​ $ ( 1,100,041 ) Change in gathering system accrued in accounts payable and accrued liabilities ​ $ 16,969 ​ $ ( 20,118 ) Asset retirement obligation asset additions and adjustments ​ $ 1,190,579 ​ $ 12,053 ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements 46 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements For the years ended December 31, 2023 and 2022 ​ 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 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.” 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 Principles of Consolidation The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Epsilon Operating, LLC, Dewey Energy GP, LLC, Dewey Energy Holdings, LLC and Altolisa Holdings, LLC. With regard to the gathering system, in which Epsilon owns an undivided interest in the asset, proportionate consolidation accounting is used. All inter-company transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved natural gas reserves and related cash flow estimates used in impairment tests of oil and natural gas and gathering system properties, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates. ​ ​ 3. Summary of Significant Accounting Policies Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents include cash on hand and short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Restricted cash consists of amounts deposited to back bonds or letters of credit for potential well liabilities. The Company presents restricted cash with cash and cash equivalents in the Consolidated Statements of Cash Flows. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2023 ​ 2022 Cash and cash equivalents ​ $ 13,403,628 ​ $ 45,236,584 Restricted cash included in other assets ​ ​ 470,000 ​ ​ 570,363 Cash, cash equivalents, and restricted cash in the statement of cash flows ​ $ 13,873,628 ​ $ 45,806,947 ​ 47 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 Oil and Natural Gas Properties Epsilon accounts for its crude oil and natural gas exploration and production activities under the successful efforts method of accounting. Oil and natural gas lease acquisition costs are capitalized when incurred. Unproved properties with acquisition costs that are not individually significant are aggregated. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and natural gas properties. Lease delay rentals are expensed as incurred. Oil and natural gas exploration costs, other than the costs of drilling exploratory wells, are expensed as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether Epsilon has discovered proved commercial reserves. If proved commercial reserves are not discovered, such drilling costs are expensed. In some circumstances, it may be uncertain whether proved commercial reserves have been discovered when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized (see Note 5). Depreciation, depletion and amortization of the cost of proved oil and natural gas properties is calculated using the unit-of-production method. The reserve base used to calculate depreciation, depletion and amortization for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. With respect to lease and well equipment costs, which include development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. When circumstances indicate that proved (developed and undeveloped) oil and natural gas properties may be impaired, Epsilon compares expected undiscounted future cash flows at a depreciation, depletion and amortization group level to the carrying value of the asset. If the expected undiscounted future cash flows, based on Epsilon’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the carrying value of the asset, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income Approach which considers estimated discounted future cash flows. Gas Gathering System Properties Epsilon’s 35 % portion of asset development costs are capitalized when incurred. All other costs are expensed. Depreciation, depletion and amortization of the cost of gathering system properties is calculated using the unit-of- production method. The reserve base used to calculate depreciation, depletion and amortization for the gathering system includes only proved Pennsylvania natural gas developed reserves. When circumstances indicate that the gathering system properties may be impaired, Epsilon compares expected undiscounted future cash flows related to the gathering system to the unamortized capitalized cost of the asset. If the expected undiscounted future cash flows are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income Approach, which considers estimated discounted future cash flows. Revenue Recognition Revenues are comprised primarily of sales of natural gas and to a much lesser degree crude oil and NGLs, along with the revenue generated from the Company’s ownership interest in the gas gathering system in the Auburn field in Northeastern Pennsylvania. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. 48 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 Accounting Policies Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The Company recognizes upstream revenue at the point in time when control has been transferred to the customer, generally at the time natural gas reaches an agreed-upon delivery point and collectability is reasonably assured. Upstream revenue is generally based upon a fixed price, based on a market index, and is measured as the amount of consideration the Company expects to receive in exchange for the transferring of the natural gas. The services provided by the gas gathering system take place continuously and as a practical expedient, the revenues are recognized monthly for the volumes that are processed and transported for the upstream producers during that period of time. Revenue for the services performed are based on the rates outlined in the cost of service agreement that governs all volumes gathered and processed by the system. The gathering rates are adjusted, and fixed annually. Typically, the Company sells its natural gas directly to customers, under agreements with payment terms less than 30 days after delivery and 60 days on the revenue generated by the gas gathering system. Natural Gas Revenues The Company’s natural gas purchase contracts are generally structured such that Epsilon commits and dedicates for sale its proportionate share of natural gas production per day to a purchaser. Natural gas is sold at a percentage of index prices of each component, less any stated deductions. Control transfers at the delivery point specified in the contract, which typically is stated as the inlet of the third-party sales transportation pipeline. The Company recognizes revenue proportionate to its entitled share of volumes sold. Currently, the vast majority of Epsilon’s natural gas production comes from the Marcellus Field in Northeastern Pennsylvania. Epsilon uses a third-party service for its natural gas marketing. In this capacity, the third-party is responsible for carrying out marketing activities such as submission of nominations, receipt of payments, submission of invoices and negotiation of contracts. Commissions payable to the third-party broker for these services are treated as lease operating expenses in the financial statements. Gas Gathering System Revenue The Company has a 35 % ownership interest in the Auburn Gas Gathering System (“Auburn GGS”). This system aggregates the natural gas from the various pads in the field and transports the natural gas to the inlet of the Auburn compression facility where it is dehydrated, compressed and injected into the Tennessee Gas Pipeline. The gathering and compression services operate under fee-based contracts. The producers in the area served by the gathering system pay fees to the system owners based on the services provided to them in getting their share of the gas production to the third-party sales transmission point. Revenue is recognized over time as the services are provided. Oil and Other Liquids Revenue The source of the Company’s oil and other liquids revenue is its ownership interest in wells in the Permian Basin and Oklahoma. The Company does not operate the wells and has elected not to receive its proportionate share of the production. As such, under the Joint Operating Agreement, the operators have control of the marketing of this production at current market prices and remits our net revenue interest less taxes and fees on a monthly basis. The Company recognizes revenue with a monthly accrual of its proportionate share of volumes produced at an estimated market price. Accounts Receivable and Other Oil, natural gas liquid and natural gas receivables consist of amounts due from purchasers for commodity sales from our revenue interest in the leases in Northeastern Pennsylvania, the Permian Basin, and Oklahoma. Payments from purchasers are typically due by the last day of the month following the month of delivery. Gathering fee revenue consists of fees due from the operator of the Auburn GGS, as an agent for the Company fulfilling the operations of the gathering system. Payments from the operator are typically due 60 days from the last day of the month of transmission. The Company’s operations do not result in any contract assets or liabilities on the accompanying consolidated balance sheets. 49 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 Buildings and Other Property and Equipment Buildings are depreciated on a straight-line basis over the estimated useful life of the property, 30 years . Other property and equipment consists of computer hardware and software, and furniture and fixtures. Other property and equipment is generally depreciated on a straight-line basis over the estimated useful lives of the property and equipment, which range from 3 years to 7 years . Financial Instruments and Fair Value Epsilon’s financial instruments consist of cash and cash equivalents, short term investments, restricted cash, commodity derivative contracts, accounts receivable, accounts payable, and long-term debt. The Company classifies the fair value of financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instrument. Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2—Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. Level 3—Valuations in this level are those with inputs for the asset or liability that are not based on observable market data. The Company makes its own assumptions about how market participants would price the assets and liabilities. Cash 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, which mature over a period between 3 and 12 months 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. ​ Derivative Instruments The Company enters into derivative contracts to hedge price risk associated with a portion of natural gas production. While it is never management’s intention to hold or issue derivative instruments for speculative trading purposes, conditions sometimes arise where actual production is less than estimated, which has, and could, result in over-hedged volumes. Natural gas production is primarily sold under market sensitive contracts which are typically priced at a differential to the NYMEX or the published natural gas index prices for the producing area due to the natural gas quality and the proximity to major consuming markets. Our derivative transactions have included the following: ● Fixed-price swaps—where a fixed-price is received for production and a variable market price is paid to the contract counterparty. 50 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 ● Basis swap contracts—which guarantee a specified price differential between the price at Henry Hub and our physical pricing points. If the settled price differential is greater than the swapped basis, then we receive a payment from the counterparty in the amount of the difference between the two. If the settled price differential is less than the swapped basis, then we make a payment to the counterparty for the difference between the two. ● Two-way collar contracts—which guarantee a specified price range for NYMEX by using the proceeds of selling a call option at a specified strike price (the “Ceiling”) to finance the purchase of a put option at a specified strike price (the “Floor”). Derivative instruments are recorded on the consolidated balance sheets at fair value as either current or non-current assets or liabilities based on their anticipated settlement date. Gains or losses on derivative contracts are recorded as gain (loss) on commodity contracts in the consolidated statements of operations and comprehensive income. Hedge accounting is not used for our derivative assets and liabilities. Asset Retirement Obligations The Company records a liability for asset retirement obligations at fair value in the period in which the liability is incurred if a reasonable estimate of fair value can be made. The associated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset. Subsequently, the asset retirement cost is allocated to expense using a systematic and rational method of the asset’s useful life. Recognized asset retirement obligations relate to the plugging and abandonment of oil and natural gas wells and decommissioning of the gas gathering system. Management reviews the estimates of the timing of well abandonments as well as the estimated plugging and abandonment costs, which are discounted at the credit adjusted risk free rate. These adjustments are recorded to the asset retirement obligations with an offsetting change to oil and gas properties. An ongoing accretion expense is recognized for changes in the value of the liability as a result of the forecast inflation due to the passage of time, which is recorded in depreciation, depletion, amortization, and accretion expense in the consolidated statements of operations and comprehensive income. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short term investments, accounts receivable and derivative contracts. Exposure to credit risk associated with these instruments is controlled by (i) placing assets and other financial interests with credit-worthy financial institutions, (ii) maintaining policies over credit extension that include the evaluation of customers’ financial condition and monitoring paying history, although the Company does not have collateral requirements and (iii) netting derivative assets and liabilities for counterparties with a legal right of offset. At December 31, 2023 and 2022, the cash and cash equivalents and short term investments were primarily concentrated in one financial institution the U.S. We currently have $ 15.6 million in excess of the federally insured limits. The Company periodically assesses the financial condition of these institutions and believe that any possible credit risk is minimal. For the year ended December 31, 2023, the Company had four customers that accounted for 90.7 % of the total trade accounts receivable. For the year ended December 31, 2022, the Company had three customers that accounted for 95.7 % of the total trade accounts receivable. Geographic Locations of Operations Approximately 77 % and 88 % of our revenue during fiscal years 2023 and 2022, respectively, was derived from natural gas production and gathering system revenues in the state of Pennsylvania. As a result of prolonged weak pricing in Zone 4 of the Tennessee Gas Pipeline and, therefore, a reduced pace of development, Epsilon’s management is striving to allocate capital to additional upstream opportunities outside of the Marcellus Shale. More specifically, the Company has allocated capital to the Permian Basin through its investments in New Mexico and Texas. Epsilon’s management expects to continue to seek opportunities outside of the Marcellus Shale in order to provide the Company the flexibility to respond to market conditions by allocating capital across multiple basins and commodities. 51 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 As a result of this geographic concentration, we may be disproportionately exposed to the effect of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, weather events or interruption of the processing or transportation of crude oil or natural gas. Income Taxes Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis. Epsilon assesses the realizability of deferred tax assets and recognizes valuation allowances as appropriate (see Note 10). Foreign Currency Transactions Even though the Canadian dollar is the functional currency of Epsilon Energy Ltd. (the parent entity), the United States dollar is the reporting currency for all of Epsilon’s consolidated subsidiaries. Any gains or losses on transactions or monetary assets or liabilities in currencies other than the functional currency are included in net income in the current period. Gains and losses on translation of balances denominated in Canadian dollars are included in accumulated other comprehensive income. Stock-Based Compensation The Company mainly estimates the fair value of all stock options awarded to employees and directors using the Black-Scholes option pricing model. Other models are used for options with more complex vesting criteria. Compensation expense and a corresponding increase to additional paid-in capital are recorded over the vesting period based on the fair value of the options granted using a graded vesting approach. When stock options are exercised for common shares, consideration paid by the stock option holders and additional paid-in capital associated with the stock options are recorded. The Company estimates a forfeiture rate and adjusts the corresponding expense each period based on an updated forfeiture estimate (see Note 7). The Company has issued time-based restricted stock and performance share units (“PSU”) to employees and directors of the Company. The fair value of the time-based restricted stock is determined using the fair value of the Company’s common shares on the date of grant. The fair value of the PSUs is determined by the performance requirements. These awards vest ratably over a three-year period. Compensation expense and a corresponding increase to additional paid in capital are recorded over the vesting period. Leases In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which significantly changed accounting for leases by requiring that lessees recognize a right of use asset and a related lease liability representing the obligation to make lease payments, for all lease transactions with terms greater than one year. Additional disclosures about an entity’s lease transactions are also required. ASU 2016-02 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” The Company adopted ASU 2016-02 as of January 1, 2022. We have chosen the transition using the comparative report at adoption method of applying the provisions of the new standard at the beginning of the period of adoption instead of the earliest comparative period presented in the consolidated financial statements. There was no material effect from the adoption. The Company leases office space to be used for general, administrative, and executive offices with terms typically ranging from five to seven years , subject to certain renewal options as applicable. The Company considers renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of lease liabilities and right-of-use assets. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Interest expense for finance leases is incurred based on the carrying value of the lease liability. Leases with an initial term of 12 months or less are not recorded on the Company’s Consolidated Balance Sheets and lease agreements with lease and non-lease components are generally accounted for as a single lease component. 52 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 The Company determines whether a contract is, or contains, a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate based on prevailing financial market conditions at the later of date of adoption or lease commencement, credit analysis of comparable companies and management judgments to determine the present values of its lease payments (see Note 12). Joint Interests The majority of the Company’s oil and natural gas exploration, development and production activities, and the gathering system, are conducted jointly with others and, accordingly, these financial statements reflect only the Company’s proportionate interest in such jointly controlled assets. Recently Issued Accounting Standards The Company, an emerging growth company (“EGC”), has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply to private companies. In June 2016 the FASB issued Accounting Standards Update (“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 Accounting Standards Codification (“ASC”) 848 to provide 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 FASB issued ASU No. 2023-03 to amend various SEC paragraphs in the 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 consolidated financial statements. 53 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, to amend certain disclosure and presentation requirements. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU required disclosure of incremental segment information, primarily through enhanced disclosures about significant segment expenses and amounts for each reportable segment on an annual and interim basis. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods with fiscal years beginning after December 15, 2024. The Company is currently assessing the potential effects of the standard. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to disclose disaggregated information about a reporting entity’s effective tax rate reconciliation, using both percentages and reporting currency amounts for specific standardized categories, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the potential effects of this standard. ​ 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 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 December 31, 2023 and 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 December 31, 2022 ​ ​ Amortized ​ Unrealized ​ Fair ​ Amortized ​ Unrealized ​ Fair ​ Cost Gains Value Cost Losses Value U.S. Treasury Bills ​ $ 18,773,508 ​ $ 1,598 ​ $ 18,775,106 ​ $ — ​ $ — ​ $ — ​ During the year ended December 31, 2023, the Company sold securities with a carrying amount of $ 10,394,482 for total proceeds of $ 10,454,976 . The realized gains on these sales were $ 60,494 . These securities were sold to raise cash to fund capital expenditures. An additional $ 16,410,000 of securities reached maturity with total realized gains of $ 395,767 . The realized gains are included in interest income in the consolidated statements of operations and comprehensive income. ​ 54 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 5. Property and Equipment The following table summarizes the Company’s property and equipment at December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2023 ​ 2022 Property and equipment: ​ ​ ​ ​ ​ ​ Oil and gas properties, successful efforts method ​ ​ ​ ​ ​ ​ Proved properties ​ $ 160,263,511 ​ $ 148,326,265 Unproved properties ​ ​ 25,504,873 ​ ​ 18,169,157 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 113,708,210 ) ​ ​ ( 107,729,293 ) Total oil and gas properties, net ​ ​ 72,060,174 ​ ​ 58,766,129 Gathering system ​ ​ 42,738,273 ​ ​ 42,639,001 Accumulated depletion, depreciation, amortization and impairment ​ ​ ( 35,539,996 ) ​ ​ ( 34,500,740 ) Total gathering system, net ​ ​ 7,198,277 ​ ​ 8,138,261 Land ​ ​ 637,764 ​ ​ 637,764 Buildings and other property and equipment, net ​ ​ 291,807 ​ ​ 286,035 Total property and equipment, net ​ $ 80,188,022 ​ $ 67,828,189 ​ Asset Acquisitions During the year ended December 31, 2023, Epsilon made the following three acquisitions. Management determined that substantially all of the fair value of the gross assets acquired were concentrated in oil and gas properties and therefore accounted for these transactions as asset acquisitions and allocated the purchase price based on the relative fair value of the assets acquired and liabilities assumed. There were no asset acquisitions for the year ended December 31, 2022. ● a 10 % interest in two wellbores located in Eddy County, New Mexico for total consideration of $ 2.1 million paid in cash. ● a 25 % working interest in 1,297 gross acres in Ector County, Texas for total consideration of $ 1.3 million paid in cash. ● a 25 % working interest in 11,067 gross acres in Ector County, Texas for total consideration of $ 6.3 million paid in cash. Property Sale During the year ended December 31, 2023, Epsilon sold two wellbore-only Oklahoma assets for $ 12,498 . This sale resulted in a loss of $ 1.45 million. During the year ended December 31, 2022, Epsilon sold one wellbore-only Oklahoma asset for $ 200,000 . This sale resulted in a gain of $ 0.22 million. Property Impairment Epsilon performs a quantitative impairment test whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable. When indicators of impairment are present, the Company first compares 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 to the estimated fair values is required. This is determined based on discounted cash flow techniques using significant assumptions including production volumes, future commodity prices, and a market-specific weighted average cost of capital which are affected by expectations about future market and economic conditions. Additionally, U.S. GAAP requires that if an exploratory well is determined not to have found proved reserves, the costs incurred, net of any salvage value, are charged to expense. For unproved properties, such as leasehold costs, expected current and future market prices for similar assets are considered relative to carrying values in evaluating impairment. 55 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 No impairment was recorded for the years ended December 31, 2023 and 2022. ​ ​ ​ 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 (redetermined as of December 6, 2023), 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. 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 subsidiary, Epsilon Energy USA. As of December 31, 2023, there were 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 December 31, 2023 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance at Balance at ​ ​ ​ ​ December 31, 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. (b) Purchases of Equity Securities On March 9, 2023, Epsilon’s Board of Directors (the “Board”) 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 year ended December 31, 2023, we repurchased 968,149 common shares and spent $ 4,940,295 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 56 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 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. In 2023, the Company repurchased 1,158,849 shares at an average price of $ 5.20 per share (excluding commissions) under the two consecutive repurchase programs. On March 19, 2024, the Board of Directors authorized a new share repurchase program of up to 2,191,320 common shares, representing 10 % of the current outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $ 12.0 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 will commence on March 27, 2024 and end on March 26, 2025, unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination. ​ (c) Equity Incentive Plan The Board adopted the 2020 Equity Incentive Plan (the “2020 Plan”) on July 22, 2020 subject to approval by Epsilon’s shareholders at Epsilon’s 2020 Annual General and Special Meeting of shareholders, which occurred on September 1, 2020 (the “Meeting”). Shareholders approved the 2020 Plan at the Meeting. Following Epsilon’s listing on the NASDAQ Global Market, the Board determined that it is in the best interest of the shareholders to approve a new incentive plan that is compliant with U.S. public company equity plan rules and practices that would replace Epsilon’s Amended and Restated 2017 Stock Option Plan (including its predecessors) and the Share Compensation Plan (collectively referred to as the “Predecessor Plans”). No further awards will be granted under the Predecessor Plans. The 2020 Plan provides for incentive compensation in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards. Under the 2020 Plan, Epsilon is authorized to issue up to 2,000,000 common shares. Restricted Stock Awards For the year ended December 31, 2023, 358,546 restricted common shares with a weighted average market price at grant date of $ 5.42 were awarded to the Company’s management, employees, and board of directors. For the year ended December 31, 2022, 289,231 restricted common shares with a weighted average market price at 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 for the years ended December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ Year ended ​ ​ December 31, 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 ​ 358,546 ​ 1.90 ​ 289,231 ​ 1.86 Vested ​ ( 165,220 ) ​ — ​ ( 157,023 ) ​ — Balance non-vested Restricted Stock at end of period ​ 491,536 ​ 1.74 ​ 298,210 ​ 1.74 ​ Stock compensation expense for the granted Restricted Stock is recognized over the vesting period. Stock compensation expense recognized during the year ended December 31, 2023 was $ 959,525 (during the year ended December 31, 2022, $ 776,939 ). The total value of vested shares during the year ended December 31, 2023 was $ 875,014 (during the year ended December 31, 2022: $ 1,010,911 ). 57 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 At December 31, 2023, the Company had unrecognized stock-based compensation related to these shares of $ 2,651,858 to be recognized over a weighted-average period of 1.42 years. Performance Share Unit Awards (“PSU”) The Company historically granted PSUs, which are paid in stock to certain key employees. The PSUs will vest on the last day of the performance period. The number of PSUs that will ultimately vest is based on two performance targets as follows: ● The targets for the PSUs are based on (i) the relative total stockholder return (“TSR”) percentile ranking and (ii) the relative cash flow per debt adjusted share – growth (“CFDAS Growth”) percentile ranking of the Company, each as compared to the Company’s peer group as specified in the award agreement 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 (i) 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 (ii) the actual share count at year end. ● The vesting of each PSU Award will be based 50 % on TSR performance and 50 % based on CFDAS Growth performance. ● The recipient of the award must be employed with the 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. During the year ended December 31, 2023, a total of 15,833 common shares vested. The following table summarizes PSUs for the years ended December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ Year ended ​ ​ December 31, 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 ​ ( 15,833 ) ​ — ​ ( 135,667 ) ​ — Balance non-vested PSUs at end of period ​ — ​ — ​ 15,833 ​ 1.00 ​ Stock compensation expense for the granted PSUs is recognized over the vesting period. Stock compensation expense recognized during the year ended December 31, 2023 related to PSUs was $ 58,737 (during the year ended December 31, 2022, $ 244,087 ). The total value of vested shares during the year ended December 31, 2023 was $ 80,432 (during the year ended December 31, 2022: $ 833,027 ). At December 31, 2023, the Company had no unrecognized stock-based compensation related to these shares. During the years ended December 31, 2023 and 2022, the Company awarded no PSUs. Stock Options As of December 31, 2023, the Company had outstanding stock options covering 57,500 common shares at an overall average exercise price of $ 5.03 per common share to officers and employees of the Company and its subsidiaries. These 57,500 options have a weighted-average expected remaining term of approximately 0.05 years. The following table summarizes stock option activity for the years ended December 31, 2023 and 2022: ​ 58 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended ​ Year ended ​ ​ December 31, 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 ​ ( 12,500 ) ​ $ 5.03 ​ ​ ( 138,750 ) ​ $ 5.38 Expired/Forfeited ​ — ​ $ — ​ ​ ( 10,000 ) ​ $ 5.51 Balance at period-end ​ 57,500 ​ $ 5.03 ​ ​ 70,000 ​ $ 5.03 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercisable at period-end ​ 57,500 ​ $ 5.03 ​ ​ 70,000 ​ $ 5.03 ​ ​ At December 31, 2023 and 2022, the Company had unrecognized stock-based compensation related to these options of nil . The total intrinsic value of the outstanding options at December 31, 2023 was $ 2,875 (at December 31, 2022: $ 112,000 ). The total intrinsic value of options exercised during the year ended December 31, 2023 was $ 5,500 (during the year ended December 31, 2022: $ 127,780 ). During the years ended December 31, 2023 and 2022, the Company awarded no stock options. The following table summarizes information for stock options outstanding at December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ Average ​ ​ Number of ​ Number of ​ Remaining ​ ​ Options ​ Options ​ Contractual Life Exercise Price Outstanding Exercisable (in years) As of December 31, 2023 ​ ​ ​ ​ ​ ​ $ 5.03 57,500 57,500 0.05 Total 57,500 57,500 0.05 ​ The value of the options was recorded as stock-based compensation expense, with an offsetting amount to additional paid-in capital based on the vesting terms. Stock-based compensation expense for the options, for the years ended December 31, 2023 and 2022 was nil . ​ ​ 8 . Revenue Recognition Revenues are comprised primarily of sales of natural gas, oil and NGLs, along with the revenue generated from the Company’s ownership interest in the 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. Gathering System revenues derived from Epsilon’s production, which have been eliminated from total gathering system revenues (“elimination entry”), amounted to $ 1.4 million and $ 1.5 million, respectively, for the years ended December 31, 2023 and 2022. ​ ​ ​ ​ 59 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 The following table details revenue for the years ended December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2023 2022 Operating revenue ​ ​ ​ ​ ​ ​ Natural gas ​ $ 14,864,214 ​ $ 56,948,734 Natural gas liquids ​ ​ 984,418 ​ ​ 1,733,130 Oil and condensate ​ ​ 5,090,589 ​ ​ 3,195,333 Gathering and compression fees (1) ​ ​ 9,790,531 ​ ​ 8,085,512 Total operating revenue ​ $ 30,729,752 ​ $ 69,962,709 (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 and comprehensive income. 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 transmission and compression has occurred. As a result, the Company must estimate the amount of production that was transmitted and compressed within the system. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received. Allowance for 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. At December 31, 2023 and 2022, there were no accounts for which collection was not probable. The following table details accounts receivable as of December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, December 31, ​ ​ 2023 ​ 2022 ​ 2021 Accounts receivable ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas and oil sales ​ $ 4,327,886 ​ $ 5,696,419 ​ $ 2,996,344 Joint interest billing ​ ​ 17,476 ​ ​ 20,454 ​ ​ 60,134 Gathering and compression fees ​ ​ 1,543,239 ​ ​ 1,483,956 ​ ​ 1,539,976 Commodity contract ​ ​ 72,075 ​ ​ — ​ ​ — Interest ​ ​ 54,772 ​ ​ 557 ​ ​ 477 Total accounts receivable ​ $ 6,015,448 ​ $ 7,201,386 ​ $ 4,596,931 ​ 60 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 ​ ​ ​ 9. Accumulated Other Comprehensive Income Accumulated other comprehensive income includes certain transactions that have generally been reported in the consolidated statements of changes in shareholders’ equity. The activity in accumulated other comprehensive income during the years ended December 31, 2023 and 2022 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2023 2022 ​ Balance at beginning of period ​ $ 9,774,551 ​ $ 9,818,605 ​ Translation loss ​ ​ ( 3,872 ) ​ ​ ( 44,054 ) ​ Unrealized gain on securities ​ ​ 1,598 ​ ​ — ​ Balance at end of period ​ $ 9,772,277 ​ $ 9,774,551 ​ ​ ​ ​ 10. Income Taxes Net income before income taxes is as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Foreign $ ( 1,167,609 ) ​ $ ( 700,255 ) U.S. ​ 11,313,209 ​ 48,212,421 ​ ​ $ 10,145,600 ​ $ 47,512,166 ​ We file a federal income tax return in the United States, Canada, and various state and local jurisdictions. We believe that we have appropriate support for the income tax positions taken and to be taken on the Company's tax returns and that the accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company's tax returns are open to audit under the statute of limitations for the years ending December 31, 2020 through December 31, 2023. The following tables present the Company’s current and deferred tax expense (benefit) for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Current: ​ ​ ​ ​ ​ ​ Foreign ​ $ 630,722 ​ $ — Federal ​ ​ 1,271,862 ​ ​ 7,788,302 State ​ ​ 361,314 ​ ​ 3,657,231 Total current income tax expense ​ ​ 2,263,898 ​ ​ 11,445,533 Deferred: ​ ​ ​ ​ ​ ​ Federal ​ ​ 1,013,452 ​ ​ 1,587,935 State ​ ​ ( 76,903 ) ​ ​ ( 875,981 ) Total deferred tax expense ​ ​ 936,549 ​ ​ 711,954 Income tax expense ​ $ 3,200,447 ​ $ 12,157,487 ​ The following table presents the reconciliation of our income taxes calculated at the statutory federal tax rate to the income tax provision in our financial statements. Our effective tax rate for 2023 differs from the statutory rate primarily due to states taxes, foreign withholding taxes, & the recognition of a valuation allowance on our Canadian and Oklahoma 61 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 state deferred tax assets. Our effective tax rate for 2022 differs from the statutory rate primarily due to states taxes & the recognition of a valuation allowance on our Canadian and Oklahoma state deferred tax assets. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Year Ended ​ ​ ​ December 31, ​ Effective ​ December 31, ​ Effective ​ ​ 2023 Tax Rate 2022 Tax Rate Income tax provision computed at the statutory federal tax rate ​ $ 2,130,576 21.00 % $ 9,977,555 21.00 % Difference in Canadian and U.S. tax rate ​ ( 23,352 ) ( 0.23 ) % ( 14,005 ) ( 0.03 ) % Adjustment of Canadian deferred tax balances ​ ​ ( 128,552 ) ​ ( 1.27 ) % ​ 39,839 ​ 0.08 % Valuation allowance on Canadian loss ​ 397,102 3.91 % 121,220 0.26 % Return to provision adjustment ​ 5,244 0.05 % ( 4,538 ) ( 0.01 ) % State taxes ​ 108,401 1.07 % 2,304,218 4.85 % State valuation allowance ​ ​ 100,133 ​ 0.99 % ​ ( 107,030 ) ​ ( 0.23 ) % Foreign withholding on dividends ​ ​ 630,722 ​ 6.22 % ​ — ​ - % Miscellaneous other items ​ ( 19,827 ) ( 0.20 ) % ( 159,772 ) ( 0.34 ) % Income tax expense ​ $ 3,200,447 31.54 % $ 12,157,487 25.58 % ​ Deferred income taxes primarily represent the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Net deferred tax liabilities consisted of the following at December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, ​ 2023 2022 Deferred tax assets: ​ ​ ​ ​ ​ ​ State net operating loss carryforwards ​ $ 396,416 ​ $ 313,018 Canadian net operating loss carryforwards ​ 11,510,422 ​ 11,113,319 ARO ​ ​ 865,214 ​ ​ 702,522 Lease Liabilities ​ ​ 139,153 ​ ​ — Unrealized derivatives/other ​ 89,758 ​ 92,785 Gross deferred tax assets ​ 13,000,963 ​ 12,221,644 Valuation allowance ​ ( 11,655,838 ) ​ ( 11,158,602 ) Total deferred tax assets ​ 1,345,125 ​ 1,063,042 Deferred tax liabilities: ​ ​ Oil and gas property ​ ( 10,765,374 ) ​ ( 9,336,638 ) Partnership ​ ( 1,752,767 ) ​ ( 2,034,995 ) ROU Assets ​ ​ ( 109,169 ) ​ ​ — Unrealized derivatives/other ​ ​ ( 271,758 ) ​ ​ ( 308,803 ) Gross deferred tax liabilities ​ ( 12,899,068 ) ​ ( 11,680,436 ) Net deferred tax liability ​ $ ( 11,553,943 ) ​ $ ( 10,617,394 ) ​ As of December 31, 2023, we have no federal net operating loss carry-forwards and approximately $ 12.5 million of state net operating loss carry-forwards, of which $ 0.3 million expires in 2037 and the remaining can be carried forward indefinitely. These loss carryforwards may reduce future taxable income, however, the extent of which may be limited due to any IRC Section 382 limitation. A state valuation allowance of $ 0.15 million is applicable to the net state deferred tax assets attributable to Oklahoma because of objective negative evidence on the cumulative loss incurred in the state over the three-year period ended December 31, 2023. As of December 31, 2023, we have $ 42.1 million of Canadian net operating loss carry-forwards, which will expire between 2027-2043. A separate valuation allowance of $ 11.5 million attributable to Canadian net operating losses and other tax carryovers is recorded because it is more likely than not to be utilized. The net change in the total valuation allowance for each of the years ended December 31, 2023 and 2022 was an increase of $ 0.50 million and a decrease of $ 0.66 million, respectively. On August 16, 2022, legislation commonly known as the Inflation Reduction Act was signed into law. Among other things, the Inflation Reduction Act includes a 1% excise tax on corporate stock repurchases applicable to repurchases 62 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 after December 31, 2022, and also a new minimum tax based on book income. The Inflation Reduction Act did not have a material impact on our effective tax rate. The Company does not have any material uncertain tax positions. The Company recognizes interest expense and penalties related to the uncertain tax position in the income tax expense line in the accompanying consolidated statements of operations and comprehensive income. Accrued interest and penalties are included in other non-current liabilities in the consolidated balance sheets and were $ 0 as of December 31, 2023 and 2022. ​ ​ 11. Commitments and Contingencies The Company also enters into commitments for capital expenditures in advance of the expenditures being made. As of December 31, 2023, our commitments for capital expenditures were nil . 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. ​ 63 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 12. Leases Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of December 31, 2023 summarized in the following table: ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ ​ 2023 ​ 2022 Asset ​ ​ ​ ​ ​ ​ Operating lease right-of-use assets ​ $ - ​ $ 31,383 Operating lease right-of-use assets, long term ​ ​ 441,987 ​ ​ - Total operating lease right-of-use assets ​ $ 441,987 ​ $ 31,383 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ ​ ​ ​ ​ Operating lease liabilities ​ $ 86,473 ​ $ 35,299 Operating lease liabilities, long term ​ ​ 476,911 ​ ​ - Total operating lease liabilities ​ $ 563,384 ​ $ 35,299 ​ ​ ​ ​ ​ ​ ​ Operating lease costs ​ $ 144,490 ​ $ 32,097 ​ ​ ​ ​ ​ ​ ​ Cash paid for amounts included in the measurement of lease liabilities ​ ​ ​ ​ ​ ​ Operating cash flows from operating leases ​ $ 27,010 ​ $ 106,798 Right-of-use assets obtained in exchange for new operating lease liabilities ​ $ 535,149 ​ $ 31,383 Weighted average remaining lease term (years) - operating lease ​ ​ 3.00 ​ ​ 0.33 Weighted average discount rate (annualized) - operating lease ​ ​ 8.25 % ​ ​ 8.09 % ​ 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 $ 0.14 million and $ 0.03 for the years ended December 31, 2023 and 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 December 31, 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 ​ ​ ( 286,392 ) Present value of future minimum lease payments ​ ​ 563,384 Less: current obligations under leases ​ ​ ( 86,473 ) Long-term lease obligations ​ $ 476,911 ​ ​ ​ ​ ​ ​ 13. 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 64 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 common shares outstanding during the period plus the assumed issuance of common shares for all potentially dilutive securities. The net income used in the calculation of basic and diluted net income per share are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Net income ​ $ 6,945,153 ​ $ 35,354,679 ​ In calculating the net income per share, basic and diluted, the following weighted-average shares were used: ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Basic weighted-average number of shares outstanding ​ 22,496,772 ​ 23,319,633 Dilutive stock options ​ 4,431 ​ 15,831 Unvested performance-based restricted shares 10,444 70,725 Diluted weighted-average shares outstanding 22,511,647 23,406,189 ​ We excluded the following shares from the diluted net income per share because their inclusion would have been anti-dilutive. ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Anti-dilutive options ​ 53,069 ​ 54,169 Anti-dilutive unvested time-based restricted shares ​ 331,810 ​ 273,448 Anti-dilutive unvested performance-based restricted shares ​ 5,389 ​ 28,519 Total Anti-dilutive shares 390,268 356,136 ​ ​ ​ ​ ​ ​ 14. 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 or loss as shown in the table below. Interest income and income taxes are managed separately on a group basis. The Company’s reportable segments are as follows: a. The Upstream segment activities include acquisition, development and production of natural gas and oil reserves on properties within the United States; b. The Gas Gathering segment partners with two other companies to operate a natural gas gathering system; and c. The Corporate segment activities include corporate listing and governance functions of the Company. 65 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 Segment activity as of, and for the years ended December 31, 2023 and 2022 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Upstream Gas Gathering Corporate Elimination Consolidated As of and for the year ended December 31, 2023 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 14,864,214 ​ $ — ​ $ — ​ $ — ​ $ 14,864,214 Natural gas liquids ​ ​ 984,418 ​ ​ — ​ ​ — ​ ​ — ​ ​ 984,418 Oil and condensate ​ ​ 5,090,589 ​ ​ — ​ ​ — ​ ​ — ​ ​ 5,090,589 Gathering and compression fees ​ ​ — ​ ​ 11,166,410 ​ ​ — ​ ​ ( 1,375,879 ) ​ ​ 9,790,531 Total operating revenue (1) ​ ​ 20,939,221 ​ ​ 11,166,410 ​ ​ — ​ ​ ( 1,375,879 ) ​ ​ 30,729,752 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs (2) ​ ​ 9,231,031 ​ ​ 2,459,694 ​ ​ 7,311,496 ​ ​ ( 1,375,879 ) ​ ​ 17,626,342 Depletion, depreciation, amortization and accretion ​ ​ 6,638,882 ​ ​ 1,046,202 ​ ​ — ​ ​ — ​ ​ 7,685,084 Operating income (loss) ​ ​ 5,069,308 ​ ​ 7,660,514 ​ ​ ( 7,311,496 ) ​ ​ — ​ ​ 5,418,326 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ ​ — ​ ​ — ​ ​ 1,673,241 ​ ​ — ​ ​ 1,673,241 Interest expense ​ ​ ( 80,379 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 80,379 ) Gain on derivative contracts ​ ​ 3,130,055 ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,130,055 Other income ​ ​ 4,083 ​ ​ — ​ ​ 274 ​ ​ — ​ ​ 4,357 Other income (expense), net ​ ​ 3,053,759 ​ ​ — ​ ​ 1,673,515 ​ ​ — ​ ​ 4,727,274 Net income (loss) before income tax expense ​ $ 8,123,067 ​ $ 7,660,514 ​ $ ( 5,637,981 ) ​ $ — ​ $ 10,145,600 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current assets, net ​ $ — ​ $ — ​ $ 41,598,796 ​ $ — ​ $ 41,598,796 Proved properties ​ ​ 46,555,301 ​ ​ — ​ ​ — ​ ​ — ​ ​ 46,555,301 Unproved properties ​ ​ 25,504,873 ​ ​ — ​ ​ — ​ ​ — ​ ​ 25,504,873 Gathering system ​ ​ — ​ ​ 7,198,277 ​ ​ — ​ ​ — ​ ​ 7,198,277 Other property and equipment ​ ​ 2,743,379 ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,743,379 Operating lease right-of-use asset ​ ​ — ​ ​ — ​ ​ 441,987 ​ ​ — ​ ​ 441,987 Total segment assets ​ $ 74,803,553 ​ $ 7,198,277 ​ $ 42,040,783 ​ $ — ​ $ 124,042,613 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capital expenditures (3) ​ $ 20,175,495 ​ $ 99,271 ​ $ — ​ $ — ​ $ 20,274,766 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of and for the year ended December 31, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Natural gas ​ $ 56,948,734 ​ $ — ​ $ — ​ $ — ​ $ 56,948,734 Natural gas liquids ​ ​ 1,733,130 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,733,130 Oil and condensate ​ ​ 3,195,333 ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,195,333 Gathering and compression fees ​ ​ — ​ ​ 9,609,172 ​ ​ — ​ ​ ( 1,523,660 ) ​ ​ 8,085,512 Total operating revenue (1) ​ ​ 61,877,197 ​ ​ 9,609,172 ​ ​ — ​ ​ ( 1,523,660 ) ​ ​ 69,962,709 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating costs ​ ​ 8,440,194 ​ ​ 2,287,763 ​ ​ 7,346,438 ​ ​ ( 1,523,660 ) ​ ​ 16,550,735 Depletion, depreciation, amortization and accretion ​ ​ 5,375,225 ​ ​ 1,063,286 ​ ​ — ​ ​ — ​ ​ 6,438,511 Operating income (loss) ​ ​ 48,061,778 ​ ​ 6,258,123 ​ ​ ( 7,346,438 ) ​ ​ — ​ ​ 46,973,463 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ ​ — ​ ​ — ​ ​ 452,877 ​ ​ — ​ ​ 452,877 Interest expense ​ ​ ( 50,782 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 50,782 ) Loss on derivative contracts ​ ​ 236,077 ​ ​ — ​ ​ — ​ ​ — ​ ​ 236,077 Other (expense) income ​ ​ ( 100,315 ) ​ ​ — ​ ​ 846 ​ ​ — ​ ​ ( 99,469 ) Other income (expense), net ​ ​ 84,980 ​ ​ — ​ ​ 453,723 ​ ​ — ​ ​ 538,703 Net income (loss) before income tax expense ​ $ 48,146,758 ​ $ 6,258,123 ​ $ ( 6,892,715 ) ​ $ — ​ $ 47,512,166 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current assets, net ​ $ — ​ $ — ​ $ 56,002,671 ​ $ — ​ $ 56,002,671 Proved properties ​ ​ 40,596,972 ​ ​ — ​ ​ — ​ ​ — ​ ​ 40,596,972 Unproved properties ​ ​ 18,169,157 ​ ​ — ​ ​ — ​ ​ — ​ ​ 18,169,157 Gathering system ​ ​ — ​ ​ 8,138,261 ​ ​ — ​ ​ — ​ ​ 8,138,261 Other property and equipment ​ ​ 923,799 ​ ​ — ​ ​ — ​ ​ — ​ ​ 923,799 Total segment assets ​ $ 59,689,928 ​ ​ 8,138,261 ​ ​ 56,002,671 ​ ​ — ​ ​ 123,830,860 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Capital expenditures (3) ​ $ 6,785,930 ​ ​ 163,915 ​ ​ — ​ ​ — ​ ​ 6,949,845 ​ ​ 66 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 (1) Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the years ended December 31, 2023 and 2022 have been eliminated upon consolidation. For the year ended December 31, 2023, we sold natural gas to 33 unique customers. Direct Energy Business Marketing, LLC and EQT Energy, LLC each accounted for 10 % or more of our total revenue. For the year ended December 31, 2022, we sold natural gas to 26 unique customers. Direct Energy Business Marketing, LLC and EQT Energy, LLC each accounted for 10 % or more of our total revenue. (2) Operating expenses for the year ended December 31, 2023 includes loss on the sale of Oklahoma assets of $ 1,449,871 . (3) 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. ​ ​ 15. Commodity Risk Management Activities Commodity Price Risks Epsilon engages in price risk management activities from time to time. These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas by securing fixed price contracts for a portion of expected sales volumes. Inherent in the Company’s fixed price contracts, are certain business risks, including market risk and credit risk. Market risk is the risk that the price of oil and natural gas will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not currently require collateral from any of its counterparties nor do its counterparties require collateral from the Company. The Company enters into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its future natural gas production and related cash flows. The natural gas revenues and cash flows are affected by changes in commodity product prices, which are volatile and cannot be accurately predicted. The objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future natural gas sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget. Epsilon has historically elected not to designate any of its financial commodity derivative contracts as accounting hedges and, accordingly, accounts for these financial commodity derivative contracts using the mark-to-market accounting method. Under this accounting method, changes in the fair value of outstanding financial instruments are recognized as gains or losses in the period of change and are recorded as g ain (loss) on derivative contracts on the consolidated statements of operations and comprehensive income. The related cash flow impact is reflected in cash flows from operating activities. During 2023, Epsilon recognized gains on financial commodity derivative contracts of $ 3,130,055 . This amount included cash received on the settlement of these contracts of $ 3,251,890 . During 2022, Epsilon recognized gains on financial commodity derivative contracts of $ 236,077 . This amount included cash paid on the settlement of these contracts of $ 1,225,837 . Commodity Derivative Contracts At December 31, 2023, the Company had outstanding NYMEX HH swaps totaling 1.905 Bcf with a weighted average strike price of $ 3.25 and Tennessee Z4 basis swaps totaling 1.905 Bcf with a weighted average strike price of ($ 1.10 ) to hedge a portion of expected volumes for the contract period of January 2024 to October 2024. At December 31, 2022, the Company had outstanding NYMEX HH swaps totaling 1.07 Bcf and Tennessee Z4 basis swaps totaling 1.07 Bcf outstanding. ​ 67 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value of Derivative Assets ​ December 31, December 31, ​ ​ 2023 ​ 2022 Current ​ ​ NYMEX Henry Hub swap $ 1,353,668 ​ $ 1,219,865 Tennessee Z4 basis swap ​ 112,719 ​ ​ 181,775 ​ $ 1,466,386 ​ $ 1,401,640 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value of Derivative Liabilities ​ December 31, December 31, ​ ​ 2023 ​ 2022 Current ​ ​ Tennessee Z4 basis swap ​ ( 366,131 ) ​ ​ ( 179,550 ) ​ $ ( 366,131 ) ​ $ ( 179,550 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Fair Value of Derivatives $ 1,100,255 ​ $ 1,222,090 ​ The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Fair value of asset (liability), beginning of the period ​ $ 1,222,090 ​ $ ( 239,824 ) Gains on derivative contracts included in earnings ​ 3,130,055 ​ 236,077 Settlement of commodity derivative contracts ​ ( 3,251,890 ) ​ 1,225,837 Fair value of asset, end of the period ​ $ 1,100,255 ​ $ 1,222,090 ​ ​ The following table presents the fair value of derivatives, as presented in the Consolidated Balance Sheets, on a net basis as they are subject to master netting arrangements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ​ December 31, 2022 ​ ​ Gross Fair ​ Amounts ​ Net Fair ​ Gross Fair ​ Amounts ​ Net Fair ​ Value Netted Value Value Netted Value Derivative Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value of derivatives $ 1,466,386 ​ $ ( 247,361 ) ​ $ 1,219,025 $ 1,401,640 ​ $ ( 179,550 ) ​ $ 1,222,090 Derivative Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value of derivatives $ ( 366,131 ) ​ $ 247,361 ​ $ ( 118,770 ) $ ( 179,550 ) ​ $ 179,550 ​ $ - ​ ​ ​ ​ ​ 16. 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 net present value of its total asset retirement obligations to be $ 3.5 million as of December 31, 2023 ($ 2.8 million at December 31, 2022). Each year we review, and to the extent necessary, revise our asset retirement obligations estimates in accordance with recent activity and current service costs. 68 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 The following table presents the activity in Epsilon’s asset retirement obligations for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ Year ended ​ ​ ​ December 31, ​ ​ December 31, ​ ​ 2023 2022 Balance beginning of period ​ $ 2,780,237 ​ $ 2,833,656 Liabilities acquired ​ ​ 12,437 ​ ​ 12,053 Liabilities disposed of ​ ​ ( 46,961 ) ​ ​ ( 25,835 ) Wells plugged and abandoned ​ ​ ( 509,802 ) ​ ​ ( 118,260 ) Change in estimates ​ ​ 1,178,142 ​ ​ — Accretion ​ ​ 88,899 ​ ​ 78,623 Balance end of period ​ $ 3,502,952 ​ $ 2,780,237 ​ ​ ​ ​ ​ 17. Fair Value Measurements ​ The methodologies used to determine the fair value of our financial assets and liabilities at December 31, 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, all of which mature over a period of 3 and 12 months 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ​ Level 1 ​ Level 2 Level 3 Effect of Netting Net Fair Value Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative contracts ​ $ — ​ $ 1,219,025 ​ $ — ​ $ — ​ $ 1,219,025 Cash equivalents ​ $ 195,669 ​ $ — ​ $ — ​ $ — ​ $ 195,669 Short term investments ​ $ 18,775,106 ​ $ — ​ $ — ​ $ — ​ $ 18,775,106 Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative contracts ​ $ — ​ $ 247,361 ​ $ — ​ $ ( 366,131 ) ​ $ ( 118,770 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 Cash equivalents ​ $ 7,711,118 ​ $ — ​ $ — ​ $ — ​ $ 7,711,118 Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Derivative contracts ​ $ — ​ $ ( 179,550 ) ​ $ — ​ $ 179,550 ​ $ — ​ ​ 69 EPSILON ENERGY LTD. Notes to the Consolidated Financial Statements (Continued) For the years ended December 31, 2023 and 2022 18. 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 December 31, 2023 and 2022, we determined that our allowance for credit loss was nil . ​ 19. Subsequent Events ​ On January 30, 2024, the Company repurchased 248,700 shares at $ 4.82 per share (excluding commissions) under the existing share repurchase plan. ​ On February 27, 2024 the Company closed an acquisition in the Permian Basin in Ector County, Texas. The acquired assets are a 25 % working interest in 3 producing wells and 3,246 gross undeveloped acres, in partnership with the same operator of the Company’s existing assets in Texas. The effective date for the transaction was (i) February 1, 2024 with respect to the leases and (ii) March 1, 2024 with respect to the wells. The total consideration paid was $ 15 million, funded from cash on-hand. ​ ​ 70 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) SUPPLEMENTAL NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) Natural gas and oil Reserves Users of this information should be aware that the process of estimating quantities of ‘‘proved,’’ ‘‘proved developed’’ and ‘‘proved undeveloped’’ crude oil, natural gas liquids (NGLs) and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors, including, but not limited to, additional development activity; evolving production history; crude oil and condensate, NGL and natural gas prices; and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. Proved reserves represent estimated quantities of crude oil, NGLs and natural gas, which, by analysis of geoscience and engineering data, can be estimated, with reasonable certainty, to be economically producible from a given date forward from known reservoirs under then-existing economic conditions, operating methods and government regulations before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Proved developed reserves are proved reserves expected to be recovered under operating methods being utilized at the time the estimates were made, through wells and equipment in place or if the cost of any required equipment is relatively minor compared to the cost of a new well. Proved undeveloped reserves (PUDs) are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. PUDs can be recorded in respect of a particular undrilled location only if the location is scheduled, under the then-current drilling and development plan, to be drilled within five years from the date that the PUDs are to be recorded, unless specific factors (such as those described in interpretative guidance issued by the Staff of the SEC) justify a longer timeframe. Likewise, absent any such specific factors, PUDs associated with a particular undeveloped drilling location shall be removed from the estimates of proved reserves if the location is scheduled, under the then-current drilling and development plan, to be drilled on a date that is beyond five years from the date that the PUDs were recorded. Epsilon has formulated development plans for all drilling locations associated with its PUDs at December 31, 2023. Under these plans, each PUD location will be drilled within five years from the date it was recorded. Estimates for PUDs are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty. The following tables set forth Epsilon’s net proved reserves at December 31, 2023 and 2022 and changes for each of the two years in the year ended December 31, 2023. Net proved reserves at December 31 are estimated by the Company’s independent petroleum engineers, DeGolyer and MacNaughton. ​ 71 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) NET PROVED RESERVE SUMMARY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ All reserves located in United States ​ ​ ​ Permian ​ ​ ​ ​ ​ ​ Pennsylvania Basin Oklahoma Total Natural Gas (MMcf) ​ ​ ​ ​ ​ ​ ​ ​ Net proved reserves at December 31, 2021 101,424 ​ - ​ 9,545 ​ 110,969 Revisions of previous estimates ​ (7,901) ​ - ​ (3,525) ​ (11,426) Production ​ (9,026) ​ - ​ (477) ​ (9,503) Net proved reserves at December 31, 2022 84,497 ​ - ​ 5,543 ​ 90,040 Revisions of previous estimates (14,831) ​ - ​ (1,515) ​ (16,346) Acquisitions ​ - ​ 481 ​ - ​ 481 Production ​ (7,906) ​ - ​ (354) ​ (8,260) Net proved reserves at December 31, 2023 ​ 61,760 ​ 481 ​ 3,674 ​ 65,915 Natural Gas Liquids (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ Net proved reserves at December 31, 2021 ​ - ​ - ​ 820 ​ 820 Revisions of previous estimates ​ - ​ - ​ (285) ​ (285) Production ​ - ​ - ​ (44) ​ (44) Net proved reserves at December 31, 2022 ​ - ​ - ​ 491 ​ 491 Revisions of previous estimates ​ - ​ - ​ (203) ​ (203) Acquisitions ​ - ​ 116 ​ - ​ 116 Production ​ - ​ - ​ (21) ​ (21) Net proved reserves at December 31, 2023 ​ - ​ 116 ​ 267 ​ 383 Oil and Condensate (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ Net proved reserves at December 31, 2021 ​ - ​ - ​ 305 ​ 305 Revisions of previous estimates ​ - - (62) (62) Production ​ - ​ - ​ (32) ​ (32) Net proved reserves at December 31, 2022 ​ - - 211 211 Revisions of previous estimates ​ - ​ - ​ (43) ​ (43) Acquisitions ​ - ​ 194 ​ - ​ 194 Production ​ - ​ - ​ (21) ​ (21) Net proved reserves at December 31, 2023 ​ - ​ 194 ​ 147 ​ 341 Total Company (MMcfe) ​ ​ ​ ​ ​ ​ ​ ​ Net proved reserves at December 31, 2021 ​ 101,424 ​ - ​ 16,295 ​ 117,719 Revisions of previous estimates (1)(2) ​ (7,901) - (5,604) (13,505) Production ​ (9,026) ​ - ​ (933) ​ (9,959) Net proved reserves at December 31, 2022 ​ 84,497 - 9,758 94,255 Revisions of previous estimates (3)(4) ​ (14,831) ​ - ​ (2,991) ​ (17,822) Acquisitions ​ - ​ 2,341 ​ - ​ 2,341 Production ​ (7,906) ​ - ​ (606) ​ (8,512) Net proved reserves at December 31, 2023 ​ 61,760 ​ 2,341 ​ 6,161 ​ 70,262 ​ ​ ​ 72 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ All reserves located in United States ​ ​ ​ Permian ​ ​ ​ ​ ​ ​ Pennsylvania Basin Oklahoma Total Proved developed reserves: ​ ​ ​ ​ ​ ​ ​ ​ Natural Gas (MMcf) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ 70,102 ​ - ​ 2,124 ​ 72,226 At December 31, 2022 ​ 76,302 ​ - ​ 2,664 ​ 78,966 At December 31, 2023 ​ 45,135 ​ 481 ​ 1,939 ​ 47,555 Natural Gas Liquids (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ - ​ - ​ 157 ​ 157 At December 31, 2022 ​ - ​ - ​ 198 ​ 198 At December 31, 2023 ​ - ​ 116 ​ 133 ​ 249 Oil and condensate (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ - ​ - ​ 66 ​ 66 At December 31, 2022 ​ - ​ - ​ 107 ​ 107 At December 31, 2023 ​ - ​ 194 ​ 78 ​ 272 Total proved developed reserves (MMcfe) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ 70,102 ​ - ​ 3,462 ​ 73,564 At December 31, 2022 ​ 76,302 ​ - ​ 4,494 ​ 80,796 At December 31, 2023 ​ 45,135 ​ 2,341 ​ 3,205 ​ 50,681 ​ ​ ​ ​ ​ ​ ​ ​ ​ Proved undeveloped reserves: ​ ​ ​ ​ ​ ​ ​ ​ Natural Gas (MMcf) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ 31,322 ​ - ​ 7,421 ​ 38,743 At December 31, 2022 ​ 8,195 ​ - ​ 2,879 ​ 11,074 At December 31, 2023 ​ 16,625 ​ - ​ 1,736 ​ 18,361 Natural Gas Liquids (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ - ​ - ​ 663 ​ 663 At December 31, 2022 ​ - ​ - ​ 293 ​ 293 At December 31, 2023 ​ - ​ - ​ 134 ​ 134 Oil and condensate (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ - ​ - ​ 239 ​ 239 At December 31, 2022 ​ - ​ - ​ 104 ​ 104 At December 31, 2023 ​ - ​ - ​ 69 ​ 69 Total proved undeveloped reserves (MMcfe) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ 31,322 ​ - ​ 12,833 ​ 44,155 At December 31, 2022 ​ 8,195 ​ - ​ 5,264 ​ 13,459 At December 31, 2023 ​ 16,625 ​ - ​ 2,956 ​ 19,581 ​ ​ ​ ​ ​ ​ ​ ​ ​ Total proved reserves: ​ ​ ​ ​ ​ ​ ​ ​ Natural Gas (MMcf) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ 101,424 ​ - ​ 9,545 ​ 110,969 At December 31, 2022 ​ 84,497 ​ - ​ 5,543 ​ 90,040 At December 31, 2023 ​ 61,760 ​ 481 ​ 3,675 ​ 65,916 Natural Gas Liquids (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ - ​ - ​ 820 ​ 820 At December 31, 2022 ​ - ​ - ​ 491 ​ 491 At December 31, 2023 ​ - ​ 116 ​ 267 ​ 383 Oil and condensate (MBbl) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ - ​ - ​ 305 ​ 305 At December 31, 2022 ​ - ​ - ​ 211 ​ 211 At December 31, 2023 ​ - ​ 194 ​ 147 ​ 341 Total proved reserves (MMcfe) ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ 101,424 ​ - ​ 16,295 ​ 117,719 At December 31, 2022 ​ 84,497 ​ - ​ 9,758 ​ 94,255 At December 31, 2023 ​ 61,760 ​ 2,341 ​ 6,161 ​ 70,262 ​ 73 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) (1) Revisions of previous estimates for Pennsylvania for 2022 include additions of 6,238 MMcf related to well performance and 4,759 MMcf related to commodity pricing, and reductions of 18,898 MMcf related to changes to previously adopted development plans. (2) Revisions of previous estimates for Oklahoma for 2022 include additions of 310 MMcfe related to commodity pricing, reductions of 4,353 MMcfe related to changes to previously adopted development plans and reductions of 1,561 MMcfe related to well performance. (3) Revisions of previous estimates for Pennsylvania for 2023 include reductions of 9,626 MMcf related to well performance, reductions of 21,830 MMcf related to commodity pricing, and additions of 16,625 MMcf related to changes in previously adopted development plans. (4) Revisions of previous estimates for Oklahoma for 2023 include reductions of 454 MMcfe related to commodity pricing, 1,760 MMcfe related to changes in previously adopted development plans, and 777 MMcfe related to well performance. Capitalized Costs Relating to Natural gas and oil Producing Activities The following table sets forth the capitalized costs relating to Epsilon’s crude oil and natural gas production and gathering activities at December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Proved properties $ 160,263,511 ​ $ 148,326,265 Unproved properties ​ 25,504,873 ​ ​ 18,169,157 Gathering system properties ​ ​ 42,738,273 ​ ​ 42,639,001 Total Oil & Gas Properties ​ ​ 228,506,657 ​ ​ 209,134,423 Accumulated depreciation, depletion, amortization and impairment ​ ​ (149,248,206) ​ (142,230,033) Net capitalized costs ​ $ 79,258,451 ​ $ 66,904,390 ​ Costs incurred for oil and natural gas property acquisition, exploration and development activities The following table summarizes costs incurred and capitalized in oil and natural gas properties related to acquisition, exploration and development activities. Property acquisition costs are those costs incurred to lease property, including both undeveloped leasehold and the purchase of reserves in place. Exploration costs include costs of identifying areas that may warrant examination and examining specific areas that are considered to have prospects containing oil and natural gas reserves, including costs of drilling exploratory wells, geological and geophysical costs and carrying costs on undeveloped properties. Development costs are incurred to obtain access to proved reserves, including the cost of drilling, as well as the costs to develop the gathering system. ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Oil and Natural Gas Activities: ​ ​ ​ ​ ​ Unproved acquisition costs ​ $ 7,335,716 ​ $ 310,211 Development costs ​ ​ 11,994,374 ​ ​ 6,426,037 Total costs incurred for oil and natural gas activities ​ ​ 19,330,090 ​ ​ 6,736,248 Gathering System development costs ​ ​ 99,272 ​ 163,915 Total costs incurred ​ $ 19,429,362 ​ $ 6,900,163 ​ Results of Operations for Natural Gas and Oil Producing Activities The following table sets forth results of operations for natural gas and oil producing activities for the years ended December 31, 2023 and 2022: 74 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Oil and gas producing activities: ​ ​ ​ ​ ​ Gas sales $ 14,864,214 ​ $ 56,948,734 Oil and other liquid sales ​ ​ 6,075,007 ​ ​ 4,928,463 Total revenues ​ ​ 20,939,221 ​ ​ 61,877,197 Lease operating costs ​ ​ (6,405,281) ​ ​ (7,128,631) Depreciation, depletion, amortization, accretion and impairment ​ ​ (6,638,882) ​ ​ (5,375,225) Income tax expense ​ ​ (2,569,725) ​ ​ (12,157,487) Results of operations from oil and gas producing activities ​ $ 5,325,333 ​ $ 37,215,854 ​ Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Natural gas and oil Reserves The following information has been developed utilizing procedures prescribed by the Extractive Activities—Natural Oil and Gas (Topic 932) of the ASC and based on natural gas reserves and production volumes estimated by our independent petroleum consultants, DeGolyer and MacNaughton. The commodity prices estimated below were based on a 12-month average of first-day-of-the-month commodity prices for the years 2023 and 2022. The following information may be useful for certain comparative purposes, but should not be solely relied upon in evaluating Epsilon or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of Epsilon. The future cash flows presented below are based on expense and cost rates in existence as of the date of the projections. It is expected that material revisions to some estimates of natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used. Estimated future income taxes are computed using current statutory income tax rates including consideration of the current tax basis of the properties and related carryforwards. The resulting tax-effected future net cash flows are reduced to present value amounts by applying a 10% annual discount factor. Management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable and possible reserves as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated. The following table sets forth the standardized measure of discounted future net cash flows from projected production of Epsilon’s gas reserves as of December 31, 2023 and 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Future cash inflows $ 152,124,830 ​ $ 529,886,325 Future production costs ​ (73,813,321) ​ ​ (119,404,233) Future development costs (1) ​ ​ (15,815,930) ​ ​ (21,171,395) Future income taxes (2) ​ ​ (11,581,004) ​ ​ (97,165,344) Future net cash flows (undiscounted) ​ ​ 50,914,575 ​ ​ 292,145,353 10% annual discount for estimated timing of cash flows ​ ​ (17,941,667) ​ ​ (146,368,246) Standardized measure of discounted future net cash flows ​ $ 32,972,908 ​ $ 145,777,107 (1) Costs associated with the abandonment of proved properties are included in future development costs. (2) Future income taxes for 2023 and 2022 were estimated using a combined federal and state statutory tax rate of approximately 26%. 75 EPSILON ENERGY LTD. Supplemental Information to Consolidated Financial Statements (Unaudited) Changes in Standardized Measure of Discounted Future Net Cash Flows The following table sets forth the changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year ended December 31, ​ 2023 2022 Beginning balance $ 145,777,107 ​ $ 77,708,130 Revenue less production and other costs ​ ​ (13,158,195) ​ ​ (53,224,969) Changes in price, net of production costs ​ ​ (156,373,808) ​ ​ 147,777,736 Development costs incurred ​ ​ 10,011,508 ​ ​ 10,396,380 Net changes in future development costs ​ ​ (5,088,346) ​ ​ 5,054,884 Revisions of previous quantity estimates ​ ​ (531,514) ​ ​ (31,515,746) Accretion of discount ​ 14,271,185 ​ ​ 9,790,852 Net change in income taxes ​ ​ 39,799,369 ​ ​ (17,827,596) Timing differences and other technical revisions ​ ​ (1,734,398) ​ ​ (2,382,564) Ending balance ​ $ 32,972,908 ​ $ 145,777,107 ​ ​ ​ 76 ​ ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ​