Price | 3.78 | EPS | 0 | |
Shares | 27 | P/E | 16 | |
MCap | 104 | P/FCF | 9 | |
Net Debt | -19 | EBIT | 10 | |
TEV | 85 | TEV/EBIT | 9 | TTM 2019-09-30, in MM, except price, ratios |
10-Q | 2020-09-30 | Filed 2020-11-10 |
10-Q | 2020-06-30 | Filed 2020-08-13 |
10-Q | 2020-03-31 | Filed 2020-05-13 |
10-K | 2019-12-31 | Filed 2020-03-18 |
10-Q | 2019-09-30 | Filed 2019-11-13 |
10-Q | 2019-06-30 | Filed 2019-08-16 |
10-Q | 2019-03-31 | Filed 2019-05-14 |
10-K | 2018-12-31 | Filed 2019-03-29 |
8-K | 2021-01-29 | Officers, Amend Bylaw, Regulation FD, Exhibits |
8-K | 2020-09-01 | |
8-K | 2020-07-22 | |
8-K | 2020-07-22 | |
8-K | 2020-07-07 | |
8-K | 2020-02-27 | |
8-K | 2019-06-19 | |
8-K | 2019-05-20 |
Part I - Financial Information |
Item 1. Financial Statements |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
Item 4. Controls and Procedures |
Part II Other Information |
Item 1. Legal Proceedings |
Item 1A. Risk Factors |
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds |
Item 3. Defaults Upon Senior Securities |
Item 4. Mine Safety Disclosures |
Item 5. Other Information |
Item 6. - Exhibits |
EX-3.1 | epsn-20200930ex318489ef0.htm |
EX-31.1 | epsn-20200930ex31115dcf3.htm |
EX-31.2 | epsn-20200930ex31222d3ee.htm |
EX-32.1 | epsn-20200930ex321471fd9.htm |
EX-32.2 | epsn-20200930ex322235967.htm |
Balance Sheet | Income Statement | Cash Flow |
---|---|---|
Assets, Equity
|
Rev, G Profit, Net Income
|
Ops, Inv, Fin
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-38770
EPSILON ENERGY LTD.
(Exact name of registrant as specified in its charter)
Alberta, Canada | | 98-1476367 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S Employer Identification No.) |
16945 Northchase Drive, Suite 1610
Houston, Texas 77060
(281) 670-0002
(Address of principal executive offices including zip code and
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Shares, no par value | “EPSN” | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ | Accelerated filer ◻ | Non-accelerated filer ⌧ |
Smaller reporting company ⌧ | Emerging growth company ⌧ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ◻ No ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ⌧
As of November 10, 2020, there were 23,859,136 Common Shares outstanding.
Contents |
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| 4 | ||
| 5 | ||
| 5 | ||
| 5 | ||
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income | | 6 | |
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity | | 7 | |
| 9 | ||
Notes to the Unaudited Condensed Consolidated Financial Statements | | 10 | |
| 10 | ||
| 11 | ||
| | 11 | |
| | 11 | |
| | 11 | |
| | 11 | |
| 12 | ||
| 13 | ||
| | 13 | |
| | 13 | |
| 13 | ||
| 15 | ||
| 18 | ||
| 20 | ||
| 20 | ||
| 21 | ||
| | 21 | |
| 21 | ||
| 22 | ||
| 25 | ||
| | 25 | |
| | 26 | |
| 27 | ||
| 27 | ||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | 28 | |
| | 28 | |
| | 28 | |
| | 31 | |
| | 31 | |
| | 32 | |
| | 33 | |
| Depletion, Depreciation, Amortization and Accretion (“DD&A”) | | 34 |
| | 35 | |
| | 35 | |
| | 35 |
| | 36 | |
| | 36 | |
| | 36 | |
| | 37 | |
| | 38 | |
| | 38 | |
| | 39 | |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | | 39 | |
| | 39 | |
| | 39 | |
| | 39 | |
| 39 | ||
| Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures | | 39 |
| | 40 | |
| 40 | ||
| 40 | ||
| 40 | ||
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS | | 41 | |
| 42 | ||
| 42 | ||
| 42 | ||
| 43 | ||
| 43 |
Certain statements contained in this report constitute forward-looking statements. The use of any of the words ‘‘anticipate,’’ ‘‘continue,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘may,’’ ‘‘will,’’ ‘‘project,’’ ‘‘should,’’ ‘‘believe,’’ and similar expressions and statements relating to matters that are not historical facts constitute ‘‘forward looking information’’ within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Such forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this report should not be unduly relied upon. These statements are made only as of the date of this report. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to natural gas and oil production rates, commodity prices for crude oil or natural gas, supply and demand for natural gas and oil; the estimated quantity of natural gas and oil reserves, including reserve life; future development and production costs, and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 2019, and those described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider carefully the statements under Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2019 and in the quarterly reports on Form 10-Q for the quarters ended June 30, 2020 and March 31, 2020, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements. Our Annual Report on Form 10-K for the year ended December 31, 2019 and quarterly reports on Form 10-Q for the quarters ended June 30, 2020 and March 31, 2020 are available on our website at www.epsilonenergyltd.com.
4
Unaudited Condensed Consolidated Balance Sheets
|
| September 30, |
| December 31, | ||
| | 2020 | | 2019 | ||
ASSETS | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 11,580,278 | | $ | 14,052,417 |
Accounts receivable, net of allowance for doubtful accounts of $819,000 at September 30, 2020 and nil at December 31, 2019 | | | 3,652,036 | | | 4,296,917 |
Fair value of derivatives | | | 20,258 | | | 1,999,802 |
Prepaid income taxes | | | 2,091,399 | | | 1,641,501 |
Other current assets | | | 511,483 | | | 433,687 |
Total current assets | | | 17,855,454 | | | 22,424,324 |
Non-current assets | | | | | | |
Property and equipment: | | | | | | |
Oil and gas properties, successful efforts method | | | | | | |
Proved properties | | | 133,138,412 | | | 130,819,256 |
Unproved properties | | | 21,448,546 | | | 21,047,512 |
Accumulated depletion, depreciation, amortization and impairment | | | (96,864,983) | | | (89,255,035) |
Total oil and gas properties, net | | | 57,721,975 | | | 62,611,733 |
Gathering system | | | 41,912,242 | | | 41,445,225 |
Accumulated depletion, depreciation, amortization and impairment | | | (31,697,749) | | | (29,961,690) |
Total gathering system, net | | | 10,214,493 | | | 11,483,535 |
Land | | | 637,464 | | | 375,314 |
Buildings and other property and equipment, net | | | 343,677 | | | 211,879 |
Total property and equipment, net | | | 68,917,609 | | | 74,682,461 |
Other assets: | | | | | | |
Restricted cash | | | 565,049 | | | 561,294 |
Prepaid drilling costs | | | 1,341 | | | 1,124 |
Total non-current assets | | | 69,483,999 | | | 75,244,879 |
Total assets | | $ | 87,339,453 | | $ | 97,669,203 |
| | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
Current liabilities | | | | | | |
Accounts payable trade | | $ | 1,638,763 | | $ | 2,828,495 |
Royalties payable | | | 1,046,899 | | | 1,306,922 |
Accrued capital expenditures | | | 95,237 | | | 627,356 |
Accrued gathering fees | | | 529,722 | | | 373,929 |
Other accrued liabilities | | | 1,427,489 | | | 858,188 |
Asset retirement obligation | | | 1,581,561 | | | 1,503,978 |
Total current liabilities | | | 6,319,671 | | | 7,498,868 |
Non-current liabilities | | | | | | |
Asset retirement obligation | | | 1,489,386 | | | 1,405,877 |
Deferred income taxes | | | 12,201,046 | | | 12,401,464 |
Total non-current liabilities | | | 13,690,432 | | | 13,807,341 |
Total liabilities | | | 20,010,103 | | | 21,306,209 |
Commitments and contingencies (Note 10) | | | | | | |
Shareholders' equity | | | | | | |
Common shares, no par value, unlimited shares authorized and 23,817,470 issued and outstanding at September 30, 2020 and 26,790,985 shares issued and outstanding at December 31, 2019. | | | 131,730,401 | | | 140,808,923 |
Additional paid-in capital | | | 7,614,593 | | | 7,029,488 |
Accumulated deficit | | | (81,834,413) | | | (81,285,895) |
Accumulated other comprehensive income | | | 9,818,769 | | | 9,810,478 |
Total shareholders' equity | | | 67,329,350 | | | 76,362,994 |
Total liabilities and shareholders' equity | | $ | 87,339,453 | | $ | 97,669,203 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
5
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
| | Three months ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Revenues from contracts with customers: | | | | | | | | | | | | |
Gas, oil, NGLs and condensate revenue | | $ | 3,590,706 | | $ | 2,999,581 | | $ | 11,716,897 | | $ | 13,005,722 |
Gas gathering and compression revenue | | | 2,219,905 | | | 2,219,613 | | | 6,800,347 | | | 6,923,058 |
Total revenue | | | 5,810,611 | | | 5,219,194 | | | 18,517,244 | | | 19,928,780 |
| | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | |
Lease operating expenses | | | 2,147,795 | | | 1,548,902 | | | 6,229,682 | | | 4,851,090 |
Gathering system operating expenses | | | 43,711 | | | 461,036 | | | 221,191 | | | 1,012,709 |
Development geological and geophysical expenses | | | 2,693 | | | — | | | 7,595 | | | 83,748 |
Depletion, depreciation, amortization, and accretion | | | 2,769,193 | | | 1,851,466 | | | 7,761,339 | | | 5,630,368 |
Impairment of proved properties | | | — | | | — | | | 1,760,000 | | | — |
Gain on sale of property | | | — | | | (445,173) | | | — | | | (1,375,000) |
Bad debt expense | | | — | | | — | | | 819,000 | | | — |
General and administrative expenses: | | | | | | | | | | | | |
Stock based compensation expense | | | 239,134 | | | 133,720 | | | 585,105 | | | 401,161 |
Other general and administrative expenses | | | 1,330,604 | | | 952,503 | | | 3,575,445 | | | 3,213,371 |
Total operating costs and expenses | | | 6,533,130 | | | 4,502,454 | | | 20,959,357 | | | 13,817,447 |
Operating income (loss) | | | (722,519) | | | 716,740 | | | (2,442,113) | | | 6,111,333 |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 4,724 | | | 38,618 | | | 39,294 | | | 127,906 |
Interest expense | | | (28,629) | | | (29,416) | | | (84,952) | | | (86,035) |
Gain on derivative contracts | | | 419,879 | | | 1,270,494 | | | 2,055,548 | | | 3,494,727 |
Other income (expense) | | | — | | | 1 | | | (2,228) | | | 456 |
Other income, net | | | 395,974 | | | 1,279,697 | | | 2,007,662 | | | 3,537,054 |
| | | | | | | | | | | | |
Income (loss) before income tax expense | | | (326,545) | | | 1,996,437 | | | (434,451) | | | 9,648,387 |
Income tax expense (benefit) | | | (33,762) | | | 543,139 | | | 114,067 | | | 2,983,555 |
NET INCOME (LOSS) | | $ | (292,783) | | $ | 1,453,298 | | $ | (548,518) | | $ | 6,664,832 |
Currency translation adjustments | | | 2,273 | | | (900) | | | 8,291 | | | 10,944 |
NET COMPREHENSIVE INCOME (LOSS) | | $ | (290,510) | | $ | 1,452,398 | | $ | (540,227) | | $ | 6,675,776 |
| | | | | | | | | | | | |
Net income (loss) per share, basic | | $ | (0.01) | | $ | 0.05 | | $ | (0.02) | | $ | 0.24 |
Net income (loss) per share, diluted | | $ | (0.01) | | $ | 0.05 | | $ | (0.02) | | $ | 0.24 |
Weighted average number of shares outstanding, basic | | | 23,955,619 | | | 27,060,387 | | | 25,550,194 | | | 27,218,162 |
Weighted average number of shares outstanding, diluted | | | 23,955,619 | | | 27,094,391 | | | 25,550,194 | | | 27,240,117 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
6
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity
|
| |
| | |
| |
| | |
| |
| Accumulated |
| |
| | ||||
| | | | | | | | | | | | | | Other | | | | Total | ||||
| | Common Shares Issued | | Treasury Shares | | Additional | | Comprehensive | | Accumulated | | Shareholders' | ||||||||||
| | Shares | | Amount | | Shares | | Amount | | paid-in Capital | | Income | | Deficit | | Equity | ||||||
Balance at January 1, 2020 | | 26,790,985 | | $ | 140,808,923 | | — | | $ | — | | $ | 7,029,488 | | $ | 9,810,478 | | $ | (81,285,895) | | $ | 76,362,994 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 310,299 | | | 310,299 |
Stock-based compensation expenses | | — | | | — | | — | | | — | | | 173,919 | | | — | | | — | | | 173,919 |
Buyback of common shares | | — | | | — | | (488,029) | | | (1,499,586) | | | — | | | — | | | — | | | (1,499,586) |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | (114) | | | — | | | (114) |
Balance at March 31, 2020 | | 26,790,985 | | $ | 140,808,923 | | (488,029) | | $ | (1,499,586) | | $ | 7,203,407 | | $ | 9,810,364 | | $ | (80,975,596) | | $ | 75,347,512 |
Net loss | | — | | | — | | — | | | — | | | — | | | — | | | (566,034) | | | (566,034) |
Stock-based compensation expenses | | — | | | — | | — | | | — | | | 172,052 | | | — | | | — | | | 172,052 |
Buyback of common shares | | — | | | — | | (169,285) | | | (427,612) | | | — | | | — | | | — | | | (427,612) |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | 6,132 | | | — | | | 6,132 |
Balance at June 30, 2020 | | 26,790,985 | | $ | 140,808,923 | | (657,314) | | $ | (1,927,198) | | $ | 7,375,459 | | $ | 9,816,496 | | $ | (81,541,630) | | $ | 74,532,050 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | (292,783) | | | (292,783) |
Stock-based compensation expenses | | — | | | — | | — | | | — | | | 239,134 | | | — | | | — | | | 239,134 |
Retirement of treasury shares | | (657,314) | | | (1,927,198) | | 657,314 | | | 1,927,198 | | | — | | | — | | | — | | | — |
Shares retired through tender offer | | (2,337,034) | | | (7,151,324) | | — | | | — | | | — | | | — | | | — | | | (7,151,324) |
Vesting of shares of stock | | 20,833 | | | — | | — | | | — | | | — | | | — | | | — | | | — |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | 2,273 | | | — | | | 2,273 |
Balance at September 30, 2020 | | 23,817,470 | | $ | 131,730,401 | | — | | $ | — | | $ | 7,614,593 | | $ | 9,818,769 | | $ | (81,834,413) | | $ | 67,329,350 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
7
|
| |
| | |
| |
| | |
| |
| Accumulated |
| |
| | ||||
| | | | | | | | | | | | Other | | | | Total | ||||||
| | Common Shares Issued | | Treasury Shares | | Additional | | Comprehensive | | Accumulated | | Shareholders' | ||||||||||
| | Shares | | Amount | | Shares | | Amount | | paid-in Capital | | Income | | Deficit | | Equity | ||||||
Balance at January 1, 2019 | | 27,439,300 | | $ | 143,705,441 | | (26,953) | | $ | (94,418) | | $ | 6,519,028 | | $ | 9,797,930 | | $ | (89,983,894) | | $ | 69,944,087 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 1,373,676 | | | 1,373,676 |
Stock-based compensation expenses | | — | | | — | | — | | | — | | | 133,720 | | | — | | | — | | | 133,720 |
Retirement of treasury shares | | (26,953) | | | (94,418) | | 26,953 | | | 94,418 | | | — | | | — | | | — | | | — |
Buyback and retirement of common shares | | (57,100) | | | (248,381) | | — | | | — | | | — | | | — | | | — | | | (248,381) |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | 10,792 | | | — | | | 10,792 |
Balance at March 31, 2019 | | 27,355,247 | | $ | 143,362,642 | | — | | $ | — | | $ | 6,652,748 | | $ | 9,808,722 | | $ | (88,610,218) | | $ | 71,213,894 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 3,837,858 | | | 3,837,858 |
Stock-based compensation expenses | | — | | | — | | — | | | — | | | 133,721 | | | — | | | — | | | 133,721 |
Buyback of common shares | | — | | | — | | (237,189) | | | (985,264) | | | — | | | — | | | — | | | (985,264) |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | 1,052 | | | — | | | 1,052 |
Balance at June 30, 2019 | | 27,355,247 | | $ | 143,362,642 | | (237,189) | | $ | (985,264) | | $ | 6,786,469 | | $ | 9,809,774 | | $ | (84,772,360) | | $ | 74,201,261 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 1,453,298 | | | 1,453,298 |
Stock-based compensation expenses | | — | | | — | | — | | | — | | | 133,720 | | | — | | | — | | | 133,720 |
Exercise of stock options | | 25,000 | | | 54,250 | | — | | | — | | | — | | | — | | | — | | | 54,250 |
Buyback of common shares | | — | | | — | | (126,341) | | | (480,646) | | | — | | | — | | | — | | | (480,646) |
Other comprehensive loss | | — | | | — | | — | | | — | | | — | | | (900) | | | — | | | (900) |
Balance at September 30, 2019 | | 27,380,247 | | $ | 143,416,892 | | (363,530) | | $ | (1,465,910) | | $ | 6,920,189 | | $ | 9,808,874 | | $ | (83,319,062) | | $ | 75,360,983 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
8
Unaudited Condensed Consolidated Statements of Cash Flows
| | Nine months ended September 30, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | (548,518) | | $ | 6,664,832 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Depletion, depreciation, amortization, and accretion | | | 7,761,339 | | | 5,630,368 |
Impairment of proved properties | | | 1,760,000 | | | — |
Bad debt expense | | | 819,000 | | | — |
Gain on sale/disposal of properties | | | — | | | (1,375,000) |
Gain on derivative contracts | | | (2,055,548) | | | (3,494,727) |
Cash received from settlements of derivative contracts | | | 4,035,092 | | | 1,344,690 |
Stock-based compensation expense | | | 585,105 | | | 401,161 |
Deferred income tax expense (benefit) | | | (200,418) | | | 853,116 |
Changes in assets and liabilities: | | | | | | |
Accounts receivable | | | (174,119) | | | 1,869,411 |
Prepaid income taxes and other current assets | | | (527,694) | | | 19,321 |
Accounts payable, royalties payable and other accrued liabilities | | | 639,224 | | | (1,422,238) |
Income taxes payable | | | — | | | 1,338,225 |
Net cash provided by operating activities | | | 12,093,463 | | | 11,829,159 |
Cash flows from investing activities: | | | | | | |
Acquisition of unproved oil and gas properties | | | — | | | (596,500) |
Additions to unproved oil and gas properties | | | (401,034) | | | (919,873) |
Additions to proved oil and gas properties | | | (4,238,580) | | | (5,452,166) |
Additions to gathering system properties | | | (436,111) | | | (238,823) |
Additions to land, buildings and property and equipment | | | (415,674) | | | — |
Prepaid drilling costs | | | (217) | | | (1,739) |
Proceeds from sale of leases | | | — | | | 1,375,000 |
Net cash used in investing activities | | | (5,491,616) | | | (5,834,101) |
Cash flows from financing activities: | | | | | | |
Buyback of common shares | | | (9,078,522) | | | (1,714,291) |
Exercise of stock options | | | — | | | 54,250 |
Net cash used in financing activities | | | (9,078,522) | | | (1,660,041) |
Effect of currency rates on cash, cash equivalents and restricted cash | | | 8,291 | | | 10,944 |
Increase (decrease) in cash, cash equivalents and restricted cash | | | (2,468,384) | | | 4,345,961 |
Cash, cash equivalents and restricted cash, beginning of period | | | 14,613,711 | | | 14,959,518 |
Cash, cash equivalents and restricted cash, end of period | | $ | 12,145,327 | | $ | 19,305,479 |
| | | | | | |
Supplemental cash flow disclosures: | | | | | | |
Income taxes paid | | $ | 760,000 | | $ | 733,200 |
Interest paid | | $ | 84,952 | | $ | 89,817 |
| | | | | | |
Non-cash investing activities: | | | | | | |
Change in proved properties accrued in accounts payable and accrued liabilities | | $ | (1,926,910) | | $ | 1,129,972 |
Change in gathering system accrued in accounts payable and accrued liabilities | | $ | 30,906 | | $ | (1,142) |
Asset retirement obligation asset additions and adjustments | | $ | 7,487 | | $ | 9,997 |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
9
Epsilon Energy Ltd. (the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada on March 14, 2005. On October 24, 2007, the Company became a publicly traded entity trading on the Toronto Stock Exchange (“TSX”) in Canada. On February 14, 2019, Epsilon’s registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission and on February 19, 2019, the Company began trading in the United States on the NASDAQ Global Market under the trading symbol “EPSN.” The Company is engaged in the acquisition, development, gathering and production of primarily natural gas reserves in the United States.
Recent Developments
The significant demand declines caused by the global response to the coronavirus 2019 pandemic (“COVID-19”) as well as the actions taken by a number of global oil producers has contributed to steep declines in the demand and pricing for oil, natural gas and NGLs, negatively impacting U.S. producers. The commodity price environment is expected to remain depressed based on over-supply, decreased demand and a drastic global economic downturn. While Epsilon did not incur significant disruptions to operations during the nine months ended September 30, 2020 as a result of the COVID-19 pandemic, the Company did need to recognize an impairment on its legacy Oklahoma producing assets due to the historically low commodity prices. The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. As such, the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations is uncertain. Management is actively monitoring the impact of the COVID-19 pandemic on the Company's financial condition, liquidity, operations, suppliers, industry and ability to obtain financing in future reporting periods. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is currently not able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the future. However, if the pandemic and the low oil and gas price environment continue, it may have a material adverse effect on the Company’s operating cash flows, liquidity, and future development plans.
The federal government has passed a series of relief and stimulus packages, including the CARES Act, for the country, but Epsilon has not and does not anticipate that it will apply for assistance under such programs. Accordingly, these programs have no effect on Epsilon’s financial statements.
On June 28, 2020, Chesapeake Energy Corporation (“CHK”) filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code (“Petition”). Chesapeake Energy Marketing, Inc. is one of the Anchor Shippers under the Anchor Ship Gas Gathering Agreement (“ASGGA”) for the Auburn GGS with a 43.8750% voting percentage. The Williams Companies Inc. (“Williams”), including its subsidiary Appalachia Midstream Services, L.L.C. (“AMS”), is listed in the petition as a top 30 creditor of CHK, with an amount due by CHK under the ASGGA. On June 28, 2020 unpaid fees attributable to CHK for the ASGGA for May and June 2020 gathering fees were $1.1 million and $1.3 million respectively. As of September 30, 2020, Epsilon has recorded an allowance for doubtful accounts for the Company’s 35% share of these payments for a total bad debt expense of $0.8 million. Epsilon is a 35% owner in the ASGGA. Whether and when these pre-petition amounts are paid depends on how the bankruptcy proceeding unfolds related to the ASGGA. Pre-petition amounts are handled differently than post-petition amounts (amounts for services related to CHK’s production after June 28, 2020). The general rule post-petition is that, if CHK wants to receive the continued provision of services under the ASGGA, Williams is required to continue to perform under the ASGGA provided that Williams is paid for such performance. Currently, CHK continues to produce into the gathering system, and drill and complete wells in the areas covered by the ASGGA, as such, no further provision for amounts post-petition was required. In addition, one well that we have interest in began production in October 2020, and another is scheduled to begin in November.
Accordingly, the Company is unable to predict the impact that the COVID-19 pandemic and the CHK bankruptcy will have on it, including our financial position, operating results, liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties.
10
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s consolidated financial statements as of and for the years ended December 31, 2019 and 2018. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year.
The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Dewey Energy GP, LLC, Dewey Energy Holdings, LLC, Epsilon Operating, LLC, and Altolisa Holdings, LLC. With regard to the gathering system, in which Epsilon owns an undivided interest in the asset, proportionate consolidation accounting is used. All inter-company transactions have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved natural gas and oil reserves and related cash flow estimates used in impairment tests of natural gas and oil, and gathering system properties, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates.
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 March 2020, the FASB issued ASU No. 2020-04 - Reference Rate Reform (Topic 848), codified as ASC 848 (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates (“IBORs”) to alternative reference rates. ASC 848 applies only to contracts, hedging relationships, and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The guidance may be applied upon issuance of ASC 848 through December 31, 2022. The Company is currently assessing the impact of adopting this new guidance.
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact of adopting this new guidance.
11
In June 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and must be applied retrospectively. Early adoption is permitted. Epsilon will adopt ASU 2016-13 as of January 1, 2023.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (ASU 2016-02), which significantly changes accounting for leases by requiring that lessees recognize a right of use asset and a related lease liability representing the obligation to make lease payments, for all lease transactions with terms greater than one year. Additional disclosures about an entity’s lease transactions will also be required. ASU 2016-02 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. In July, the FASB voted to extend the adoption date by one year for private and non-profit companies, and thus emerging growth companies as well. As an emerging growth company, Epsilon plans to defer adoption of ASU 2016-02 until the fiscal year beginning after December 15, 2021. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. Epsilon is reviewing the provisions of ASU 2016-02 and anticipates the addition of an insignificant asset and related liability associated with our office lease beginning in January 2022.
3. Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash on hand and short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Restricted cash consists of amounts deposited to back bonds or letters of credit for potential well liabilities. The Company presents restricted cash with cash and cash equivalents in the Consolidated Statements of Cash Flows. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of September 30, 2020 and 2019:
|
| September 30, |
| September 30, | ||
| | 2020 | | 2019 | ||
Cash and cash equivalents | | $ | 11,580,278 | | $ | 18,746,426 |
Restricted cash included in other assets | | | 565,049 | | | 559,053 |
Cash, cash equivalents and restricted cash in the statement of cash flows | | $ | 12,145,327 | | $ | 19,305,479 |
12
The following table summarizes the Company’s property and equipment as at September 30, 2020 and December 31, 2019:
|
| September 30, |
| December 31, | ||
| | 2020 | | 2019 | ||
Property and equipment: | | | | | | |
Oil and gas properties, successful efforts method | | | | | | |
Proved properties | | $ | 133,138,412 | | $ | 130,819,256 |
Unproved properties | | | 21,448,546 | | | 21,047,512 |
Accumulated depletion, depreciation, amortization and impairment | | | (96,864,983) | | | (89,255,035) |
Total oil and gas properties, net | | | 57,721,975 | | | 62,611,733 |
Gathering system | | | 41,912,242 | | | 41,445,225 |
Accumulated depletion, depreciation, amortization and impairment | | | (31,697,749) | | | (29,961,690) |
Total gathering system, net | | | 10,214,493 | | | 11,483,535 |
Land | | | 637,464 | | | 375,314 |
Buildings and other property and equipment, net | | | 343,677 | | | 211,879 |
Total property and equipment, net | | $ | 68,917,609 | | $ | 74,682,461 |
Property Additions and Acquisitions
No acquisitions were made during the nine months ended September 30, 2020. During the year ended December 31, 2019, the Company acquired additional acres in the Anadarko Basin for $596,500.
Property Sale
In June 2019, the Company completed the first part of a sale of undeveloped, stranded leases in Pennsylvania. At that time, the Company received $1.0 million. The sale was completed in July 2019 with a final payment of $0.4 million for a total of $1.4 million received for the stranded leases. No subsequent sales have occurred.
Epsilon performs a quantitative impairment test quarterly or whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the published NYMEX forward prices, timing, methods and other assumptions consistent with historical periods. When indicators of impairment are present, tests require that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the natural gas properties to their estimated fair values is required. This is determined based on discounted cash flow techniques using significant assumptions including projected revenues, future commodity prices, and a market-specific weighted average cost of capital which are affected by expectations about future market and economic conditions.
During the three months ended March 31, 2020, Epsilon recognized certain indicators of impairments specific to our Oklahoma assets related to historically low oil and NGL prices and determined that the carrying value of those assets was not recoverable. As a result of this assessment, a $1.76 million impairment was assessed on the Company’s Oklahoma assets at March 31, 2020. No further impairment was required at September 30, 2020 and no impairment was required as of December 31, 2019.
Effective July 30, 2013, Epsilon Energy USA Inc., a wholly owned subsidiary of the Company, executed a three-year senior secured revolving credit facility with a bank (‘‘Credit Facility’’) for a total commitment of up to $100 million.
13
Upon each advance, interest is charged at the rate of LIBOR plus an ‘‘applicable margin’’. The applicable margin ranges from 2.75 - 3.75% and is based on the percent of the line of credit utilized.
The terms “Borrowing Base” and “Mortgaged Properties” include the Company’s gathering system assets in addition to the natural gas and oil properties. The “Required Reserve Value” is the lesser of 90% of the recognized value of all proved natural gas and oil properties or 150% of the then current borrowing base.
On January 7, 2019, the maturity date of the Credit Facility was extended to March 1, 2022 and the borrowing base was increased from $13.5 million to $23 million. The borrowing base is subject to twice per annum redetermination by the lenders based on, among other things, their evaluation of the Company’s natural gas reserves. Additionally, the Company is required to maintain acceptable commodity hedging agreements covering at least 25% of projected production of natural gas for the succeeding calendar year, along with 50% for the current calendar year.
On August 14, 2019 the commodity hedging requirements were updated. Currently, when the Company’s utilization exceeds 25%, the Company must have in place acceptable commodity hedging agreements covering at least 75% of projected production for the first full twelve months after such occurrence and 50% of projected production of natural gas for the succeeding nine months.
On February 11, 2020 the borrowing base was reaffirmed at $23 million and hedging requirements remained unchanged.
The lender under the Credit Facility has a first priority security interest in the tangible and intangible assets, including the gathering system, of Epsilon Energy USA, Inc. to secure any outstanding amounts under the agreement. Under the terms of the agreement, the Company must maintain the following covenants:
● Interest coverage ratio greater than 3 based on income adjusted for interest, taxes and non-cash amounts.
● Current ratio, adjusted for line of credit amounts used and available and non-cash amounts, greater than 1.
● Leverage ratio less than 3.5 based on income adjusted for interest, taxes and non-cash amounts.
The Company was in compliance with the financial covenants of the Credit Facility as of September 30, 2020 and December 31, 2019 and expects to be in compliance with the financial covenants for the next 12 months.
A commitment fee of 0.50% is assessed quarterly on the daily average unused borrowing base on the Credit Facility.
|
| Balance at |
| Balance at |
| |
| | ||||
| | September 30, |
| December 31, | | Current | | Interest Rate | ||||
|
| 2020 | | 2019 |
| Borrowing Base |
| 3 mo. | ||||
Revolving line of credit | | $ | — | | $ | — | | $ | 23,000,000 | | | LIBOR + 2.75% (1) |
(1) | At September 30, 2020, the weighted average interest rate was 2.98%. |
14
(a)Authorized shares
The Company is authorized to issue an unlimited number of Common Shares with no par value and an unlimited number of Preferred Shares with no par value.
(b)Purchases of Equity Shares
Normal Course Issuer Bid
Prior to moving the Company listing from the TSX to the NASDAQ, and prior to the purchase of the equity shares on the NASDAQ shown below, the Company purchased shares through a normal-course issuer bid (“NCIB”) program with the TSX, which expired February 28, 2019. On the TSX the Company repurchased and retired 57,100 shares of common stock through the year ended December 31, 2019. The repurchased stock had an average price of $4.26 per share. The average share price (converted to US$ using a rate of Cdn$1.33 to US$1) on the TSX from January 1, 2019 through the last day of trading on the TSX, March 15, 2019, was $4.22.
Commencing on May 20, 2019, the Company entered into a share repurchase program on the NASDAQ conducted in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934. The Company was authorized to repurchase up to 1,367,762 of its outstanding common shares, representing 5% of the outstanding common shares of Epsilon as of May 20, 2019, for an aggregate purchase price of not more than $5.0 million. The program ended on May 19, 2020, but Epsilon’s final repurchase under this program occurred on May 8, 2020.
Repurchases were made at management’s discretion from time to time through the facilities of the NASDAQ Global Market. The price paid for the common shares was, subject to applicable securities laws, the prevailing market price of such common shares on the NASDAQ Global Market at the time of such purchase. The Company funded the purchases out of available cash and did not incur debt to fund the share repurchase program.
Substantial Issuer Bid/Issuer Tender Offer
On May 14, 2020, the Company’s Board of Directors announced its intention to commence a substantial issuer bid/issuer tender offer to purchase for cash up to an aggregate of approximately $6.2 million of its common shares. In May 2020, upon the terms and subject to the conditions described in the Offer to Purchase dated May 19, 2020, as amended, the Company offered to repurchase up to 2,000,000 of its common shares for $3.06 per share, excluding taxes and interest, for a total cost of approximately $6.1 million, excluding expenses of the tender offer. As permitted under Rule 13e-4(f) and Rule 14e-1(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as stated in its Offer to Purchase, Epsilon was permitted to take up and pay for 2,000,000 Common Shares plus 2% of its issued and outstanding Common Shares, or an aggregate total of up to 2,522,673 Common Shares. The tender offer expired on June 30, 2020, and on July 6, 2020 the Company announced that it accepted 2,337,034 shares for repurchase under the terms of the Offer to Purchase for an aggregate consideration of $7,151,324, or $3.06 per share, excluding fees and expenses. The Company canceled all common shares taken up and paid for under the tender offer. The Company funded the repurchases under the tender offer with cash on hand. As of November 10, 2020, the Company has 23,859,136 shares issued and outstanding.
15
The following table contains activity relating to our acquisition of equity securities during the nine months ended September 30, 2020:
| | |
| | | Total number | | Maximum number | |||
| | | | | | of shares | | of shares that | |||
| | | | | | purchased as | | may yet be | |||
| | Total number | | Average price | | part of publicly | | purchased under | |||
| | of shares | | paid per | | announced plans | | the plans or | |||
|
| purchased | | share |
| or programs (4) |
| programs (5) | |||
Beginning of normal-course issuer bid, May 20, 2019 | | | | | | | | | | | 1,367,762 |
Shares purchased through December 31, 2019 (1) (2) | | 696,096 | | $ | 3.72 | | | | | | |
January 2020 (2) | | 102,051 | | $ | 2.95 | | | | | | |
February 2020 (2) | | 261,519 | | $ | 3.11 | | | | | | |
March 2020 (2) | | 124,459 | | $ | 2.98 | | | | | | |
April 2020 (2) | | 156,585 | | $ | 2.48 | | | | | | |
May 2020 (2) | | 12,700 | | $ | 2.91 | | | | | | |
July 2020 (3) | | 2,337,034 | | $ | 3.06 | | | 2,337,034 | | | |
Total as of September 30, 2020 | | 3,690,444 | | $ | 3.16 | | | 2,337,034 | | | — |
(1) | Shares purchased through December 31, 2019 were cancelled prior to the year ended December 31, 2019. |
(2) | Epsilon repurchased these shares under its share repurchase program that commenced on May 20, 2019, as described above. |
(3) | Epsilon repurchased these shares under its substantial issuer bid/issuer tender offer dated May 19, 2020, as described above. |
(4) | The Company announced its intention to commence a substantial issuer bid/issuer tender offer on May 14, 2020, and the substantial issuer bid/issuer tender offer commenced May 19, 2020, as described above. |
(5) | The normal-course issuer bid expired on May 19, 2020, and the substantial issuer bid/issuer tender offer expired on June 30, 2020. |
(c)Equity Incentive Plan
Epsilon’s board of directors (the “Board”) adopted the 2020 Equity Incentive Plan (the “2020 Plan”) on July 22, subject to approval by Epsilon’s shareholders at Epsilon’s 2020 Annual General and Special Meeting of shareholders, which occurred on September 1, 2020 (the “Meeting”). Shareholders approved the 2020 Plan at the Meeting. Following Epsilon’s listing on the NASDAQ Global Market, the Board determined that it is in the best interest of the shareholders to approve a new incentive plan that is compliant with U.S. public company equity plan rules and practices that would replace Epsilon’s Amended and Restated 2017 Stock Option Plan (including its predecessors) and the Share Compensation Plan (collectively referred to as the “Predecessor Plans”). No further awards will be granted under the Predecessor Plans.
The 2020 Plan provides for incentive compensation in the form of stock options, stock appreciation rights, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards. Under the 2020 Plan, Epsilon will be authorized to issue up to 2,000,000 Common Shares. As of September 30, 2020, the Company granted, after the Compensation Committee approved the terms, target formulas, and peer group applicable to the performance incentive awards, and the shareholders approved the 2020 Plan at the Meeting on September 1, 2020, 125,000 awards to Mr. Raleigh, leaving 1,875,000 shares available to be granted under the 2020 Plan. No shares subject to awards currently outstanding under the Predecessor Plans that expire or are forfeited will become available for issuance under the 2020 Plan.
16
Restricted and Performance Stock Units
For the nine months ended September 30, 2020, 20,833 performance-based, restricted shares were awarded to Michael Raleigh, the Company’s chief executive officer, based on the approval by the Company’s independent compensation committee. Additionally, Mr. Raleigh was granted 104,167 Performance Stock Units (“PSU”) that will potentially vest over the next 3 years, with the potential to add another 125,000 bonus shares. These shares are based on certain terms, target formulas, and relative peer group performance, and Mr. Raleigh’s continued employment. Compensation related to these PSUs was immaterial for the three months ended September 30, 2020, and therefore was not recognized..
For the year ended December 31, 2019, 184,500 common shares of Restricted Stock were awarded to the Company’s officers, employees, and board of directors. These shares vest over a three-year period, with one-third of the shares being issued per period on the anniversary of the award resolution. The vesting of the shares is contingent on the individuals’ continued employment or service. The Company determined the fair value of the granted Restricted Stock based on the market price of the common shares of the Company on the date of grant.
Stock compensation expense for the granted Restricted Stock is recognized over the vesting period. Stock compensation expense recognized during the three and nine months ended September 30, 2020 was $239,134 and $583,238, respectively (for the three and nine months ended September 30, 2019, $127,419 and $382,258, respectively).
At September 30, 2020, the Company had unrecognized stock based compensation related to these shares of $793,439 to be recognized over a weighted average period of 1.02 years (at December 31, 2019: $1,309,594 over 1.34 years).
The following table summarizes Restricted Stock activity for the nine months ended September 30, 2020, and the year ended December 31, 2019:
| | Nine months ended | | Year ended | ||||
| | September 30, 2020 | | December 31, 2019 | ||||
| | | | Weighted | | | | Weighted |
| | Number of | | Average | | Number of | | Average |
| | Shares | | Remaining Life | | Shares | | Remaining Life |
|
| Outstanding |
| (years) |
| Outstanding |
| (years) |
Balance non-vested Restricted Stock at beginning of period | | 346,499 | | 1.67 | | 282,833 | | 2.56 |
Granted | | 20,833 | | — | | 184,500 | | 3.00 |
Vested | | (20,833) | | — | | (106,834) | | — |
Forfeited | | — | | — | | (14,000) | | 2.64 |
Balance non-vested Restricted Stock at end of period | | 346,499 | | 0.92 | | 346,499 | | 1.67 |
Stock Options
Through September 30, 2020, the Company had outstanding stock options covering 245,000 Common Shares at an overall average exercise price of $5.27 per Common Share to directors, officers, and employees of the Company and its subsidiaries. These 245,000 options have a weighted average expected remaining term of approximately 2.5 years.
17
The following table summarizes stock option activity for the nine months ended September 30, 2020 and the year ended December 31, 2019:
| | | | | | | | | | | |
| | Nine months ended | | Year ended | |||||||
| | September 30, 2020 | | December 31, 2019 | |||||||
| | | | Weighted | | | | Weighted | |||
| | Number of | | Average | | Number of | | Average | |||
| | Options | | Exercise | | Options | | Exercise | |||
Exercise price in US$ |
| Outstanding |
| Price (1) |
| Outstanding |
| Price (1) | |||
Balance at beginning of period | | 245,000 | | $ | 5.27 | | | 290,750 | | $ | 5.02 |
Exercised | | — | | | | | | (25,000) | | | 2.17 |
Expired/Forfeited | | — | | | | | | (20,750) | | | 5.37 |
Balance at period-end | | 245,000 | | $ | 5.27 | | | 245,000 | | $ | 5.27 |
| | | | | | | | | | | |
Exercisable at period-end | | 245,000 | | $ | 5.27 | | | 206,670 | | $ | 5.32 |
(1) | Exercise price has been converted to US$ using the rate of Cdn$1.33 to US$1, the rate on March 15, 2019, the date Epsilon Energy, Ltd was delisted from the TSX. |
At September 30, 2020, using the Black Scholes model, the Company had unrecognized stock based compensation, related to these options, of nil (at December 31, 2019: $1,867 over 0.08 years). The aggregate intrinsic value at September 30, 2020 was nil (at December 31, 2019: nil). For the three and nine months ended September 30, 2020, nil and $1,867, respectively, of stock compensation expense, related to these options, was recognized (for the three and nine months ended September 30, 2019, $6,301 and $18,903, respectively).
During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company awarded no stock options.
Revenues are comprised primarily of sales of natural gas along with the revenue generated from the Company’s ownership interest in the gas gathering system in the Auburn field in Northeastern Pennsylvania. Also included to a much lesser degree is natural gas, crude oil and NGLs from Oklahoma.
Overall, product sales revenue generally is recorded in the month when contractual delivery obligations are satisfied, which occurs when control is transferred to the Company’s customers at delivery based on contractual terms and conditions. In addition, gathering and compression revenue generally is recorded in the month when contractual service obligations are satisfied, which occurs as control of those services is transferred to the Company’s customers.
The following table details revenue for the three and nine months ended September 30, 2020 and 2019.
|
| Three months ended September 30, | | Nine Months Ended September 30, | ||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Operating revenue | | | | | | | | | | | | |
Natural gas | | $ | 3,573,908 | | $ | 2,933,695 | | $ | 11,470,012 | | $ | 12,698,643 |
Natural gas liquids | | | 14,843 | | | 23,905 | | | 56,705 | | | 88,256 |
Oil and condensate | | | 1,955 | | | 41,981 | | | 190,180 | | | 218,823 |
Gathering and compression fees | | | 2,219,905 | | | 2,219,613 | | | 6,800,347 | | | 6,923,058 |
Total operating revenue | | $ | 5,810,611 | | $ | 5,219,194 | | $ | 18,517,244 | | $ | 19,928,780 |
18
Product Sales Revenue
The Company enters into contracts with third party purchasers to sell its natural gas, oil, NGLs and condensate production. Under these product sales arrangements, the sale of each unit of product represents a distinct performance obligation. Product sales revenue is recognized at the point in time that control of the product transfers to the purchaser based on contractual terms which reflect prevailing commodity market prices. To the extent that marketing costs are incurred by the Company prior to the transfer of control of the product, those costs are included in lease operating expenses on the Company’s consolidated statements of operations.
Settlement statements for product sales, and the related cash consideration, are received from the purchaser within 30 days. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the natural gas, oil, NGLs, or condensate. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received.
Gas Gathering and Compression Revenue
The Company also provides natural gas gathering and compression services through its ownership interest in the gas gathering system in the Auburn field. For the provision of gas gathering and compression services, the Company collects its share of the gathering and compression fees per unit of gas serviced and recognizes gathering revenue over time using an output method based on units of gas gathered.
The settlement statement from the operator of the Auburn Gas Gathering System is received two months after transmission and compression has occurred. As a result, the Company must estimate the amount of production that was transmitted and compressed within the system. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts on a case by case basis once there is evidence that collection is not probable. Due to the bankruptcy filed by Chesapeake Energy Corporation (“CHK”) on June 28, 2020, the Company recorded an allowance for possible uncollectable fees. Unpaid fees attributable to CHK for May and June 2020 gathering system services were $1.1 million and $1.3 million respectively. As of September 30, 2020, Epsilon has recorded an allowance for doubtful accounts for the Company’s 35% share of these payments for a total bad debt expense of $0.8 million. Additional amounts of bad debt expense are not needed as CHK is currently paying all post-petition amounts.
The following table details accounts receivable net of allowance for doubtful accounts as at September 30, 2020 and December 31, 2019.
|
| September 30, |
| December 31, | ||
| | 2020 | | 2019 | ||
Accounts receivable | | | | | | |
Natural gas and oil sales | | $ | 1,792,828 | | $ | 2,293,044 |
Joint interest billing | | | 61,556 | | |