Company Quick10K Filing
Epsilon Energy
Price3.78 EPS0
Shares27 P/E16
MCap104 P/FCF9
Net Debt-19 EBIT10
TEV85 TEV/EBIT9
TTM 2019-09-30, in MM, except price, ratios
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 2020-02-27 Other Events
8-K 2019-06-19 Shareholder Vote, Exhibits
8-K 2019-05-20 Officers, Exhibits

EPSN 10Q Quarterly Report

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-31.1 epsn-20200331ex311cb127f.htm
EX-31.2 epsn-20200331ex3124048bc.htm
EX-32.1 epsn-20200331ex321dca0b7.htm
EX-32.2 epsn-20200331ex322764fb6.htm

Epsilon Energy Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1008060402002018201820192020
Assets, Equity
10.08.06.04.02.00.02018201820192020
Rev, G Profit, Net Income
10.07.24.41.5-1.3-4.12018201820192020
Ops, Inv, Fin

10-Q 1 epsn-20200331x10q.htm 10-Q epsn_Current_Folio_10Q

 

 

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 March 31, 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 161095

Houston, Texas 77060

(281) 670‑0002

(Address of principal executive offices including zip code and

telephone number, including area code)

16701 Greenspoint Park Drive, Suite 195

Houston, Texas 77060

(281) 670‑0002

(former address)

 

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 March 31, 2020 there were 26,302,956 Common Shares outstanding.

 

 

 

 

 

Table of Contents

 

 

 

 

 

Contents

    

 

 

 

 

FORWARD-LOOKING STATEMENTS 

 

4

PART I-FINANCIAL INFORMATION 

 

5

ITEM 1. FINANCIAL STATEMENTS 

 

5

Unaudited Condensed Consolidated Balance Sheets 

 

5

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income 

 

6

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity 

 

7

Unaudited Condensed Consolidated Statements of Cash Flows 

 

8

Notes to the Unaudited Condensed Consolidated Financial Statements 

 

9

1. 

Description of Business

 

9

2. 

Basis of Preparation

 

9

 

Interim Financial Statements

 

9

 

Principles of Consolidation

 

9

 

Use of Estimates

 

9

 

Recently Issued Accounting Standards

 

10

3. 

Cash, Cash Equivalents, and Restricted Cash

 

11

4. 

Property and Equipment

 

11

 

Property Additions and Acquisitions

 

11

 

Property Impairment

 

11

5. 

Revolving Line of Credit

 

12

6. 

Shareholders’ Equity

 

13

7. 

Revenue Recognition

 

15

8. 

Accumulated Other Comprehensive Income (Loss)

 

16

9. 

Income Taxes

 

16

10. 

Commitments and Contingencies

 

17

 

Litigation

 

17

11. 

Net Income Per Share

 

17

12. 

Operating Segments

 

18

13. 

Risk Management Activities

 

20

 

Commodity Price Risks

 

20

 

Commodity Derivative Contracts

 

20

14. 

Asset Retirement Obligations

 

21

15. 

Fair Value Measurements

 

22

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

23

 

Overview

 

23

 

Business Strategy

 

23

 

Operational Highlights

 

25

 

Non-GAAP Financial Measures-Adjusted EBITDA

 

25

 

Net Operating Revenues

 

26

 

Operating Costs

 

27

 

Depletion, Depreciation, Amortization and Accretion (“DD&A”)

 

28

 

General and Administrative

 

28

 

Interest Expense

 

29

 

Net Gain (Loss) on Commodity Contracts

 

29

 

Miscellaneous Income (Expense)

 

29

 

Capital Resources and Liquidity

 

29

 

Cash Flow

 

29

 

Credit Agreement

 

30

 

Derivative Transactions

 

31

 

Contractual Obligations

 

31

 

Off-Balance Sheet Arrangements

 

32

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

32

 

Gathering System Revenue Risk

 

32

 

Interest Rate Risk

 

32

 

Commodity Contracts

 

32

ITEM 4. CONTROLS AND PROCEDURES 

 

32

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

32

 

Changes in Internal Control Over Financial Reporting

 

33

PART II OTHER INFORMATION 

 

33

ITEM 1. LEGAL PROCEEDINGS 

 

33

ITEM 1A. RISK FACTORS 

 

33

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS 

 

34

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

34

ITEM 4. MINE SAFETY DISCLOSURES 

 

34

ITEM 5. OTHER INFORMATION 

 

35

ITEM 6. EXHIBITS 

 

36

SIGNATURES 

 

36

 

 

 

 

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report constitute forward-looking statements. The use of any of the words ‘‘anticipate,’’ ‘‘continue,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘may,’’ ‘‘will,’’ ‘‘project,’’ ‘‘should,’’ ‘‘believe,’’ and similar expressions and statements relating to matters that are not historical facts constitute ‘‘forward looking information’’ within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Such forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this report should not be unduly relied upon. These statements are made only as of the date of this report. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to natural gas and oil production rates, commodity prices for crude oil or natural gas, supply and demand for natural gas and oil; the estimated quantity of natural gas and oil reserves, including reserve life; future development and production costs, and statements expressing general views about future operating results — are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended December 31, 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 this quarterly report on Form 10-Q for the quarter ended 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 is available on our website at www.epsilonenergyltd.com.

 

 

4

PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,410,599

 

$

14,052,417

Accounts receivable

 

 

3,766,761

 

 

4,296,917

Fair value of derivatives

 

 

2,374,878

 

 

1,999,802

Prepaid income taxes

 

 

1,250,912

 

 

1,641,501

Other current assets

 

 

345,736

 

 

433,687

Total current assets

 

 

23,148,886

 

 

22,424,324

Non-current assets

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

 

Oil and gas properties, successful efforts method

 

 

 

 

 

 

Proved properties

 

 

131,965,089

 

 

130,819,256

Unproved properties

 

 

21,109,490

 

 

21,047,512

Accumulated depletion, depreciation, amortization and impairment

 

 

(92,842,748)

 

 

(89,255,035)

Total oil and gas properties, net

 

 

60,231,831

 

 

62,611,733

Gathering system

 

 

41,525,671

 

 

41,445,225

Accumulated depletion, depreciation, amortization and impairment

 

 

(30,493,041)

 

 

(29,961,690)

Total gathering system, net

 

 

11,032,630

 

 

11,483,535

Land

 

 

375,314

 

 

375,314

Buildings and other property and equipment, net

 

 

352,302

 

 

211,879

Total property and equipment, net

 

 

71,992,077

 

 

74,682,461

Other assets:

 

 

 

 

 

 

Restricted cash

 

 

562,647

 

 

561,294

Prepaid drilling costs

 

 

880

 

 

1,124

Total non-current assets

 

 

72,555,604

 

 

75,244,879

Total assets

 

$

95,704,490

 

$

97,669,203

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable trade

 

$

2,820,603

 

$

2,828,495

Royalties payable

 

 

1,102,167

 

 

1,306,922

Accrued capital expenditures

 

 

93,930

 

 

627,356

Accrued gathering fees

 

 

476,448

 

 

373,929

Other accrued liabilities

 

 

567,958

 

 

858,188

Asset retirement obligation

 

 

1,529,313

 

 

1,503,978

Total current liabilities

 

 

6,590,419

 

 

7,498,868

Non-current liabilities

 

 

 

 

 

 

Asset retirement obligation

 

 

1,434,573

 

 

1,405,877

Deferred income taxes

 

 

12,331,986

 

 

12,401,464

Total non-current liabilities

 

 

13,766,559

 

 

13,807,341

Total liabilities

 

 

20,356,978

 

 

21,306,209

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

Common shares, no par value, unlimited shares authorized and 26,790,985 issued and 26,302,956 shares outstanding at March 31, 2020 and 26,790,985 shares issued and outstanding at December 31, 2019.

 

 

140,808,923

 

 

140,808,923

Treasury shares, 488,029 at March 31, 2020

 

 

(1,499,586)

 

 

 —

Additional paid-in capital

 

 

7,203,407

 

 

7,029,488

Accumulated deficit

 

 

(80,975,596)

 

 

(81,285,895)

Accumulated other comprehensive income

 

 

9,810,364

 

 

9,810,478

Total shareholders' equity

 

 

75,347,512

 

 

76,362,994

Total liabilities and shareholders' equity

 

$

95,704,490

 

$

97,669,203

 

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

 

5

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2020

    

2019

Revenues from contracts with customers:

 

 

 

 

 

 

Gas, oil, NGLs and condensate revenue

 

$

4,111,144

 

$

5,507,663

Gas gathering and compression revenue

 

 

2,316,702

 

 

2,438,351

Total revenue

 

 

6,427,846

 

 

7,946,014

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

Lease operating expenses

 

 

2,047,767

 

 

1,718,293

Gathering system operating expenses

 

 

97,778

 

 

312,787

Development geological and geophysical expenses

 

 

2,629

 

 

 —

Depletion, depreciation, amortization, and accretion

 

 

2,414,376

 

 

1,825,731

Impairment of proved properties

 

 

1,760,000

 

 

 —

General and administrative expenses:

 

 

 

 

 

 

Stock based compensation expense

 

 

173,919

 

 

133,720

Other general and administrative expenses

 

 

1,008,113

 

 

1,339,562

Total operating costs and expenses

 

 

7,504,582

 

 

5,330,093

Operating income

 

 

(1,076,736)

 

 

2,615,921

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

21,529

 

 

42,691

Interest expense

 

 

(28,006)

 

 

(27,609)

Gain (loss) on derivative contracts

 

 

1,721,018

 

 

(510,754)

Other income (expense)

 

 

(2,225)

 

 

23

Other income (expense), net

 

 

1,712,316

 

 

(495,649)

 

 

 

 

 

 

 

Income before income tax expense

 

 

635,580

 

 

2,120,272

Income tax expense

 

 

325,281

 

 

746,596

NET INCOME

 

$

310,299

 

$

1,373,676

Currency translation adjustments

 

 

(114)

 

 

10,792

NET COMPREHENSIVE INCOME

 

$

310,185

 

$

1,384,468

 

 

 

 

 

 

 

Net income per share, basic

 

$

0.01

 

$

0.05

Net income per share, diluted

 

$

0.01

 

$

0.05

Weighted average number of shares outstanding, basic

 

 

26,565,084

 

 

27,392,755

Weighted average number of shares outstanding, diluted

 

 

26,565,084

 

 

27,408,374

 

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

 

6

 

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

    

 

 

    

 

    

Accumulated

    

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

Total

 

 

Common Shares Issued

 

Treasury Shares

 

Additional

 

Comprehensive

 

Accumulated

 

Shareholders'

 

 

Shares

 

Amount

 

Shares

 

Amount

 

paid-in Capital

 

Income

 

Deficit

 

Equity

Balance at December 31, 2019

 

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 income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

    

 

 

    

 

    

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, 2018

 

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 loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

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

 

 

 

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

 

7

 

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2020

    

2019

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

310,299

 

$

1,373,676

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depletion, depreciation, amortization, and accretion

 

 

2,414,376

 

 

1,825,731

Impairment of proved properties

 

 

1,760,000

 

 

 —

(Gain) loss on derivative contracts

 

 

(1,721,018)

 

 

510,754

Cash received from (paid for) settlements of derivative contracts

 

 

1,345,942

 

 

(184,244)

Stock-based compensation expense

 

 

173,919

 

 

133,720

Deferred income tax expense (benefit)

 

 

(69,478)

 

 

746,596

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

530,156

 

 

1,060,359

Prepaid income taxes and other current assets

 

 

478,540

 

 

(754,996)

Accounts payable, royalties payable and other accrued liabilities

 

 

(9,215)

 

 

(772,879)

Net cash provided by operating activities

 

 

5,213,521

 

 

3,938,717

Cash flows from investing activities:

 

 

 

 

 

 

Acquisition of unproved oil and gas properties

 

 

 —

 

 

(596,500)

Additions to unproved oil and gas properties

 

 

(61,978)

 

 

(262,107)

Additions to proved oil and gas properties

 

 

(2,045,440)

 

 

(586,815)

Additions to gathering system properties

 

 

(101,472)

 

 

(65,296)

Additions to land, buildings and property and equipment

 

 

(145,640)

 

 

 —

Prepaid drilling costs

 

 

244

 

 

 —

Net cash used in investing activities

 

 

(2,354,286)

 

 

(1,510,718)

Cash flows from financing activities:

 

 

 

 

 

 

Buyback of common shares

 

 

(1,499,586)

 

 

(248,381)

Net cash used in financing activities

 

 

(1,499,586)

 

 

(248,381)

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

 

 

(114)

 

 

10,792

Increase in cash, cash equivalents and restricted cash

 

 

1,359,535

 

 

2,190,410

Cash, cash equivalents and restricted cash, beginning of period

 

 

14,613,711

 

 

14,959,518

Cash, cash equivalents and restricted cash, end of period

 

$

15,973,246

 

$

17,149,928

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

Income taxes paid

 

$

 —

 

$

580,000

Interest paid

 

$

28,006

 

$

31,391

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

Change in proved properties accrued in accounts payable and accrued liabilities

 

$

(903,544)

 

$

741,406

Change in gathering system accrued in accounts payable and accrued liabilities

 

$

(21,026)

 

$

(40,187)

Asset retirement obligation asset additions and adjustments

 

$

3,937

 

$

 2

 

 

 

The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements

 

8

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

1.    Description of Business

Epsilon Energy Ltd. (the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada on March 14, 2005. On October 24, 2007, the Company became a publicly traded entity trading on the Toronto Stock Exchange (“TSX”) in Canada. On February 14, 2019, Epsilon’s registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission and on February 19, 2019, the Company began trading in the United States on the NASDAQ Global Market under the trading symbol “EPSN.” Effective as of the close of trading on March 15, 2019, Epsilon voluntarily delisted its common shares from the TSX. The Company is engaged in the acquisition, development, gathering and production of primarily natural gas reserves in the United States.

Recent Developments

 

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 potential global economic recession. While Epsilon did not incur significant disruptions to operations during the three months ended March 31, 2020 as a result of the COVID-19 pandemic, the Company did need to recognize an impairment on its legacy Oklahoma producing assets due to the historically low commodity prices. Additionally, the Company is unable to predict the impact that the COVID-19 pandemic will have on it, including our financial position, operating results, liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties.

 

The federal government has passed a series of relief and stimulus packages, including the CAREs Act, for the country but Epsilon has not and will not need to avail itself of them and as such, these programs have no effect on Epsilon’s financial statements.

 

2.    Basis of Preparation

Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments which are, in the opinion of management, necessary for a fair 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.

Principles of Consolidation

 

The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Dewey Energy GP, LLC, and Dewey Energy 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

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

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.

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

 

 

10

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

3. Cash,  Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash on hand and short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Restricted cash consists of amounts deposited to back bonds or letters of credit for potential well liabilities. The Company presents restricted cash with cash and cash equivalents in the Consolidated Statements of Cash Flows. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets to the total of the amounts in the Consolidated Statements of Cash Flows as of March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

Cash and cash equivalents

 

$

15,410,599

 

$

14,052,417

Restricted cash included in other assets

 

 

562,647

 

 

561,294

Cash, cash equivalents and restricted cash in the statement of cash flows

 

$

15,973,246

 

$

14,613,711

 

 

 

 

 

 

 

 

 

4.     Property and Equipment

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

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

Property and equipment:

 

 

 

 

 

 

Oil and gas properties, successful efforts method

 

 

 

 

 

 

Proved properties

 

$

131,965,089

 

$

130,819,256

Unproved properties

 

 

21,109,490

 

 

21,047,512

Accumulated depletion, depreciation, amortization and impairment

 

 

(92,842,748)

 

 

(89,255,035)

Total oil and gas properties, net

 

 

60,231,831

 

 

62,611,733

Gathering system

 

 

41,525,671

 

 

41,445,225

Accumulated depletion, depreciation, amortization and impairment

 

 

(30,493,041)

 

 

(29,961,690)

Total gathering system, net

 

 

11,032,630

 

 

11,483,535

Land

 

 

375,314

 

 

375,314

Buildings and other property and equipment, net

 

 

352,302

 

 

211,879

Total property and equipment, net

 

$

71,992,077

 

$

74,682,461

 

Property Additions and Acquisitions

 

No acquisitions were made during the three months ended March 31, 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.

 

Property Impairment

 

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

11

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

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, which 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, based on the current indicators. As a result of this assessment, a $1.76 million impairment was assessed on the Company’s Oklahoma assets at March 31, 2020. No impairment was required as of December 31, 2019.

 

 

5.    Revolving Line of Credit

Effective July 30, 2013, Epsilon Energy USA Inc., a wholly owned subsidiary of the Company, executed a three-year senior secured revolving credit facility with a bank (‘‘Credit Facility’’) for a total commitment of up to $100 million. Upon each advance, interest is charged at the rate of LIBOR plus an ‘‘applicable margin’’. The applicable margin ranges from 2.75 - 3.75% and is based on the percent of the line of credit utilized.

The terms “Borrowing Base” and “Mortgaged Properties” include the Company’s gathering system assets in addition to the natural gas and oil properties. The “Required Reserve Value” is the lesser of 90% of the recognized value of all proved natural gas and oil properties or 150% of the then current borrowing base.

On January 7, 2019, the maturity date of the Credit Facility was extended to March 1, 2022 and the borrowing base was increased from $13.5 million to $23 million. The borrowing base is subject to 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 the 50% for the current calendar year.

On August 14, 2019 the borrowing base was reaffirmed at $23 million. Additionally, the commodity hedging requirements were updated. Currently, when the Company’s utilization exceeds 25%, the Company must have in place acceptable commodity hedging agreements covering at least 75% of projected production for the first full twelve months after such occurrence and 50% of projected production of natural gas for the succeeding six months.

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

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.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

The Company was in compliance with the financial covenants of the Credit Facility as of March 31, 2020 and December 31, 2019 and Epsilon 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

    

 

    

 

 

 

March 31, 

    

December 31, 

 

Current

 

Interest Rate

 

    

2020

 

2019

    

Borrowing Base

    

3 mo.

Revolving line of credit

 

$

 —

 

$

 —

 

$

23,000,000

 

 

LIBOR + 2.75% (1)


(1)

At March 31, 2020, the weighted average interest rate was 4.2%.

 

 

 

6.    Shareholders’ Equity

(a)Authorized shares

The Company is authorized to issue an unlimited number of Common Shares with no par value and an unlimited number of Preferred Shares with no par value.

(b)Purchases of Equity Shares

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

Repurchases may be made at management’s discretion from time to time through the facilities of the NASDAQ Global Market. The price paid for the common shares will be, subject to applicable securities laws, the prevailing market price of such common shares on the NASDAQ Global Market at the time of such purchase. The Company intends to fund the purchase out of available cash and does not expect to incur debt to fund the share repurchase program.

13

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

The following table contains information about our acquisition of equity securities during the three months ended March 31, 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

    

programs

Beginning balance at May 20, 2019

 

 

 

 

 

 

 

 

 

 

1,367,762

Shares purchased thru December 31, 2019

 

696,096

 

$

3.72

 

 

 

 

 

 

January 2020

 

102,051

 

$

2.95

 

 

 

 

 

 

February 2020

 

261,519

 

$

3.11

 

 

 

 

 

 

March 2020

 

124,459

 

$

2.98

 

 

 

 

 

 

Total as of March 31, 2020

 

1,184,125

 

$

3.44

 

 

1,184,125

 

 

183,637

 

(c)Stock Options

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

Through March 31, 2020,  the Company had outstanding stock options covering 245,000 Common Shares at an overall average exercise price of $5.27 per Common Share to directors, officers, and employees of the Company and its subsidiaries. A maximum amount of 755,000 Common Shares is available for future issuances.

The following table summarizes stock option activity for the three months ended March 31, 2020 and the year ended December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Year ended

 

 

March 31, 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 March 31, 2020, using the Black Scholes model, the Company had unrecognized stock based compensation,  of nil (at December 31, 2019:  $1,867 over 0.08 years). The aggregate intrinsic value at March 31, 2020 was nil (at December 31, 2019:  nil). For the three months ended March 31, 2020, $1,867 of stock compensation expense was recognized (for the three months ended March 31, 2019,  $6,301).

During the three months ended March 31, 2020 and the year ended December 31, 2019,  the Company awarded no stock options.

14

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

(d)Share Compensation Plan

A Share Compensation Plan (the “Plan”) was adopted by the Board on April 13, 2017 and approved by the shareholders at the Annual General Meeting in April 2017. The Plan provides that designated participants may, as determined by the Board, be issued Common Shares in an amount up to 100% of the participant’s compensation paid by the Company in consideration of the participant’s service for the current year divided by the market price of the Common Shares on the NASDAQ at the date of issuance of the Common Shares in the current year.

For the three months ended March 31, 2020, no shares of Restricted Stock were awarded. 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 months ended March 31, 2020 was $172,052 (for the three months ended March 31, 2019, $127,419). 

At March 31, 2020, the Company had unrecognized stock based compensation related to these shares of $1,137,542 to be recognized over a weighted average period of 1.17 years (at December 31, 2019:  $1,309,594 over 1.34 years).

The following table summarizes Restricted Stock activity for the three months ended March 31, 2020, and the year ended December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Year ended

 

 

March 31, 2020

 

December 31, 2019

 

 

 

 

Weighted

 

 

 

Weighted

 

 

Number of

 

Average

 

Number of

 

Average

 

 

Shares