Epsilon Energy Ltd. [EPSN] Filings

10-Q 1 epsn-20240630x10q.htm 10-Q

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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 June 30, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-38770

EPSILON ENERGY LTD.

(Exact name of registrant as specified in its charter)


Alberta, Canada		98-1476367
(State or other jurisdiction of incorporation or organization)		(I.R.S Employer Identification No.)

500 Dallas Street, Suite 1250

Houston, Texas 77002

(281) 670-0002

(Address of principal executive offices including zip code and

telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Shares, no par value	EPSN	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ◻	Accelerated filer ◻	Non-accelerated filer ⌧	Smaller reporting company ☒	Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes ☐ No ⌧

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ⌧

As of August 13, 2024, there were 21,963,019 Common Shares outstanding.

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Contents

FORWARD-LOOKING STATEMENTS		4
PART I-FINANCIAL INFORMATION		5
ITEM 1. FINANCIAL STATEMENTS		5
Unaudited Condensed Consolidated Balance Sheets		5
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)		6
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity		7
Unaudited Condensed Consolidated Statements of Cash Flows		9
Notes to the Unaudited Condensed Consolidated Financial Statements
1.	Description of Business	10
2.	Basis of Preparation	10
	Interim Financial Statements	10
	Principles of Consolidation	10
	Use of Estimates	10
	Recently Issued Accounting Standards	10
3.	Cash, Cash Equivalents, and Restricted Cash	12
4.	Short Term Investments	12
5.	Property and Equipment	13
	Property Impairment	13
6.	Revolving Line of Credit	13
7.	Shareholders’ Equity	14
8.	Revenue Recognition	17
9.	Income Taxes	18
10.	Commitments and Contingencies	18
11.	Leases	19
12.	Net Income Per Share	19
13.	Operating Segments	20
14.	Commodity Risk Management Activities	23
	Commodity Price Risks	23
	Commodity Derivative Contracts	23
15.	Asset Retirement Obligations	24
16.	Fair Value Measurements	24
17.	Current Expected Credit Loss	25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		26
	Overview	26
	Business Strategy	26
	Operational Highlights	27
	Non-GAAP Financial Measures-Adjusted EBITDA	28
	Net Operating Revenues	29
	Operating Costs	30
	Depletion, Depreciation, Amortization and Accretion	30
	General and Administrative	31
	Interest Income	31
	Interest Expense	31
	Loss on Derivative Contracts	32

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	Capital Resources and Liquidity	32
	Cash Flow	32
	Credit Agreement	32
	Repurchase Transactions	33
	Derivative Transactions	33
	Contractual Obligations	34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		34
	Gathering System Revenue Risk	34
	Interest Rate Risk	34
	Derivative Contracts	35
ITEM 4. CONTROLS AND PROCEDURES		35
	Disclosure Controls and Procedures	35
	Changes in Internal Control Over Financial Reporting	35
	Inherent Limitations on Effectiveness of Controls	35
PART II OTHER INFORMATION		35
ITEM 1. LEGAL PROCEEDINGS		35
ITEM 1A. RISK FACTORS		35
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS		36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		36
ITEM 4. MINE SAFETY DISCLOSURES		36
ITEM 5. OTHER INFORMATION		36
ITEM 6. EXHIBITS		37
SIGNATURES		37

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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, 2023, 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, 2023. Our Annual Report on Form 10-K for the year ended December 31, 2023 is available on our website at www.epsilonenergyltd.com.

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PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Balance Sheets


	June 30,		December 31,
	2024		2023
ASSETS
Current assets
Cash and cash equivalents	$	8,581,484	$	13,403,628
Accounts receivable		4,944,664		6,015,448
Short term investments		—		18,775,106
Fair value of derivatives		403,992		1,219,025
Prepaid income taxes		632,531		952,301
Other current assets		414,736		763,288
Total current assets		14,977,407		41,128,796
Non-current assets
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties		185,238,373		160,263,511
Unproved properties		28,498,028		25,504,873
Accumulated depletion, depreciation, amortization and impairment		(117,604,188)		(113,708,210)
Total oil and gas properties, net		96,132,213		72,060,174
Gathering system		42,854,372		42,738,273
Accumulated depletion, depreciation, amortization and impairment		(35,957,863)		(35,539,996)
Total gathering system, net		6,896,509		7,198,277
Land		637,764		637,764
Buildings and other property and equipment, net		281,444		291,807
Total property and equipment, net		103,947,930		80,188,022
Other assets:
Operating lease right-of-use assets, long term		392,792		441,987
Restricted cash		900,000		470,000
Prepaid drilling costs		926,827		1,813,808
Total non-current assets		106,167,549		82,913,817
Total assets	$	121,144,956	$	124,042,613

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable trade	$	2,386,055	$	3,236,871
Gathering fees payable		971,599		1,136,237
Royalties payable		1,196,239		1,422,898
Accrued capital expenditures		108,216		696,761
Accrued compensation		416,037		636,295
Other accrued liabilities		614,231		561,537
Fair value of derivatives		259,896		118,770
Operating lease liabilities		103,846		86,473
Total current liabilities		6,056,119		7,895,842
Non-current liabilities
Asset retirement obligations		3,528,208		3,502,952
Deferred income taxes		11,499,207		11,553,943
Operating lease liabilities, long term		415,805		476,911
Total non-current liabilities		15,443,220		15,533,806
Total liabilities		21,499,339		23,429,648
Commitments and contingencies (Note 10)
Shareholders' equity
Preferred shares, no par value, unlimited shares authorized, none issued or outstanding		—		—
Common shares, no par value, unlimited shares authorized and 21,921,850 shares issued and outstanding at June 30, 2024 and 22,222,722 issued and 22,151,848 shares outstanding at December 31, 2023		116,708,531		118,272,565
Treasury shares, at cost, 0 at June 30, 2024 and 70,874 at December 31, 2023		—		(360,326)
Additional paid-in capital		11,509,649		10,874,491
Accumulated deficit		(38,365,835)		(37,946,042)
Accumulated other comprehensive income		9,793,272		9,772,277
Total shareholders' equity		99,645,617		100,612,965
Total liabilities and shareholders' equity	$	121,144,956	$	124,042,613

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

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EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income


	Three months ended June 30,				Six months ended June 30,
	2024		2023		2024		2023
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue	$	5,863,370	$	4,298,072	$	11,914,415	$	11,267,653
Gas gathering and compression revenue		1,444,448		2,202,064		3,380,146		4,588,759
Total revenue		7,307,818		6,500,136		15,294,561		15,856,412

Operating costs and expenses:
Lease operating expenses		1,649,867		1,440,521		3,418,329		2,844,800
Gathering system operating expenses		649,967		570,934		1,202,537		1,222,275
Depletion, depreciation, amortization, and accretion		2,048,403		1,615,728		4,428,829		3,388,734
Loss (gain) on sale of oil and gas properties		—		1,449,871		—		1,449,871
General and administrative expenses:
Stock based compensation expense		313,589		179,748		635,158		359,496
Other general and administrative expenses		1,478,215		1,596,626		3,037,238		3,620,399
Total operating costs and expenses		6,140,041		6,853,428		12,722,091		12,885,575
Operating income (loss)		1,167,777		(353,292)		2,572,470		2,970,837

Other income (expense):
Interest income		108,943		433,201		375,215		923,963
Interest expense		(8,759)		(34,422)		(17,519)		(62,859)
(Loss) gain on derivative contracts		(94,891)		628,178		(195,617)		1,696,838
Other income, net		101,606		3,066		101,073		4,701
Other income, net		106,899		1,030,023		263,152		2,562,643

Net income before income tax expense		1,274,676		676,731		2,835,622		5,533,480
Income tax expense		459,016		246,142		513,066		1,573,064
NET INCOME	$	815,660	$	430,589	$	2,322,556	$	3,960,416
Currency translation adjustments		22,229		1,129		22,593		(1,471)
Unrealized gain (loss) on securities		3,011		(47,006)		(1,598)		(47,006)
NET COMPREHENSIVE INCOME	$	840,900	$	384,712	$	2,343,551	$	3,911,939

Net income per share, basic	$	0.04	$	0.02	$	0.11	$	0.17
Net income per share, diluted	$	0.04	$	0.02	$	0.11	$	0.17
Weighted average number of shares outstanding, basic		21,921,752		22,749,322		21,957,980		22,869,440
Weighted average number of shares outstanding, diluted		22,029,475		22,783,987		21,987,142		22,904,922

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

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EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity


									Accumulated
									Other				Total
	Common Shares Issued			Treasury Shares			Additional		Comprehensive		Accumulated		Shareholders'
	Shares	Amount		Shares	Amount		paid-in Capital		Income		Deficit		Equity
Balance at January 1, 2024	22,222,722	$	118,272,565	(70,874)	$	(360,326)	$	10,874,491	$	9,772,277	$	(37,946,042)	$	100,612,965
Net income	—		—	—		—		—		—		1,506,896		1,506,896
Dividends paid	—		—	—		—		—		—		(1,370,409)		(1,370,409)
Stock-based compensation expense	—		—	—		—		321,569		—		—		321,569
Buyback of common shares	—		—	(248,700)		(1,203,708)		—		—		—		(1,203,708)
Retirement of treasury shares	(319,574)		(1,564,034)	319,574		1,564,034		—		—		—		—
Vesting of shares of restricted stock	10,054		—	—		—		—		—		—		—
Other comprehensive loss	—		—	—		—		—		(4,245)		—		(4,245)
Balance at March 31, 2024	21,913,202	$	116,708,531	—	$	—	$	11,196,060	$	9,768,032	$	(37,809,555)	$	99,863,068
Net income	—		—	—		—		—		—		815,660		815,660
Dividends paid	—		—	—		—		—		—		(1,371,940)		(1,371,940)
Stock-based compensation expense	—		—	—		—		313,589		—		—		313,589
Vesting of shares of restricted stock	8,648		—	—		—		—		—		—		—
Other comprehensive loss	—		—	—		—		—		25,240		—		25,240
Balance at June 30, 2024	21,921,850	$	116,708,531	—	$	—		11,509,649	$	9,793,272	$	(38,365,835)	$	99,645,617

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

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									Accumulated
									Other				Total
	Common Shares Issued			Treasury Shares			Additional		Comprehensive		Accumulated		Shareholders'
	Shares	Amount		Shares	Amount		paid-in Capital		Income		Deficit		Equity
Balance at January 1, 2023	23,117,144	$	123,904,965	—	$	—	$	9,856,229	$	9,774,551	$	(39,290,540)	$	104,245,205
Net income	—		—	—		—		—		—		3,529,827		3,529,827
Dividends paid	—		—	—		—		—		—		(1,412,455)		(1,412,455)
Stock-based compensation expense	—		—	—		—		179,748		—		—		179,748
Buyback of common shares	—		—	(237,920)		(1,367,425)		—		—		—		(1,367,425)
Retirement of treasury shares	(190,700)		(1,115,306)	190,700		1,115,306		—		—		—		—
Other comprehensive income	—		—	—		—		—		(2,600)		—		(2,600)
Balance at March 31, 2023	22,926,444	$	122,789,659	(47,220)	$	(252,119)	$	10,035,977	$	9,771,951	$	(37,173,168)	$	105,172,300
Net income	—		—	—		—		—		—		430,589		430,589
Dividends paid	—		—	—		—		—		—		(1,416,147)		(1,416,147)
Stock-based compensation expense	—		—	—		—		179,748		—		—		179,748
Buyback of common shares	—		—	(325,055)		(1,687,350)		—		—		—		(1,687,350)
Retirement of treasury shares	(277,154)		(1,441,655)	277,154		1,441,655		—		—		—		—
Other comprehensive loss	—		—	—		—		—		(45,877)		—		(45,877)
Balance at June 30, 2023	22,649,290	$	121,348,004	(95,121)	$	(497,814)	$	10,215,725	$	9,726,074	$	(38,158,726)	$	102,633,263

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

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EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Cash Flows


	Six months ended June 30,
	2024		2023
Cash flows from operating activities:
Net income	$	2,322,556	$	3,960,416
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion		4,428,829		3,388,734
Accretion of discount on available for sale securities		(297,637)		(343,328)
Gain on available for sale securities		—		(47,659)
Loss on sale of oil and gas properties		—		1,449,871
Loss (gain) on derivative contracts		195,617		(1,696,838)
Settlement received on derivative contracts		760,542		1,632,858
Settlement of asset retirement obligation		(87,284)		—
Stock-based compensation expense		635,158		359,496
Deferred income tax (benefit) expense		(54,736)		230,327
Changes in assets and liabilities:
Accounts receivable		1,070,784		2,846,310
Prepaid income taxes		319,770		—
Other assets and liabilities		354,014		425,789
Accounts payable, royalties payable and other accrued liabilities		(572,099)		(1,910,674)
Income taxes payable		—		(93,575)
Net cash provided by operating activities		9,075,514		10,201,727
Cash flows from investing activities:
Additions to unproved oil and gas properties		(2,993,155)		(7,821,248)
Additions to proved oil and gas properties		(26,425,017)		(5,653,284)
Additions to gathering system properties		(70,236)		(30,264)
Additions to land, buildings and property and equipment		(13,912)		(47,933)
Purchases of short term investments - held to maturity		—		(32,812,974)
Purchases of short term investments - available for sale		(4,045,785)		—
Proceeds from sales and maturities of short term investments		23,116,930		6,352,473
Proceeds from sale of oil and gas properties		—		12,498
Prepaid drilling costs		886,981		—
Net cash used in investing activities		(9,544,194)		(40,000,732)
Cash flows from financing activities:
Buyback of common shares		(1,203,708)		(3,054,775)
Dividends paid		(2,742,349)		(2,828,602)
Debt issuance costs		—		(140,000)
Net cash used in financing activities		(3,946,057)		(6,023,377)
Effect of currency rates on cash, cash equivalents, and restricted cash		22,593		(1,471)
Decrease in cash, cash equivalents, and restricted cash		(4,392,144)		(35,823,853)
Cash, cash equivalents, and restricted cash, beginning of period		13,873,628		45,806,947
Cash, cash equivalents, and restricted cash, end of period	$	9,481,484	$	9,983,094

Supplemental cash flow disclosures:
Income taxes paid	$	131,392	$	1,432,000
Interest paid	$	—	$	80,075

Non-cash investing activities:
Change in proved properties accrued in accounts payable and accrued liabilities	$	(1,471,985)	$	72,999
Change in gathering system accrued in accounts payable and accrued liabilities	$	45,862	$	4,240
Asset retirement obligation asset additions and adjustments	$	21,831	$	4,640

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

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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, pursuant to the ABCA. Epsilon is a North American on-shore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. On February 14, 2019, Epsilon’s registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission and on February 19, 2019, we began trading in the United States on the NASDAQ Global Market under the trading symbol “EPSN.”

2. Basis of Preparation

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments which are, in the opinion of management, necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2023. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year.

Principles of Consolidation

The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Dewey Energy GP, LLC, Dewey Energy Holdings, LLC, Epsilon Operating, LLC, and Altolisa Holdings, LLC. With regard to the gathering system, in which Epsilon owns an undivided interest in the asset, proportionate consolidation accounting is used. All inter-company transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved natural gas and oil reserves and related cash flow estimates used in impairment tests of natural gas and oil, and gathering system properties, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates.

Recently Issued Accounting Standards

The Company, an emerging growth company (“EGC”), has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards which allows the Company to defer adoption of certain accounting standards until those standards would otherwise apply to private companies.

In June 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance removes all recognition thresholds and requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

Company expects to collect over the instrument’s contractual life. Epsilon adopted ASU 2016-13 as of January 1, 2023. There was no impact from the adoption of this ASU.

In 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which, for a limited period of time, adds ASC 848 to the Codification providing entities with certain practical expedients and exceptions from applying modification accounting if certain criteria are met. The amendments are designed to reduce operational challenges that entities will face in applying modification accounting to all contracts that will be revised due to reference rate reform. The guidance in ASC 848 was triggered by the pending discontinuation of certain benchmark reference rates and, in some cases, their replacement by new rates that are more observable or transaction-based and, therefore, less susceptible to manipulation, than certain interest-rate benchmark reference rates commonly used today, including the London Interbank Offered Rate (LIBOR). This process of reference rate reform will require entities to modify certain contracts by removing the discontinued rates and including new rates. Epsilon adopted ASU 2020-04 as of January 1, 2023. There was no impact from the adoption of this ASU.

In July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification (“ASC”) to primarily reflect the issuance of SEC Staff Accounting Bulletin No. 120. ASU No. 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120 (“SAB 120”), SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force (“EITF”) Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 amends the ASC for SEC updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 EITF Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 – General Revision of Regulation S-X; Income or Loss Applicable to Common Stock. SAB 120 provides guidance on the measurement and disclosure of share-based awards shortly before announcing material nonpublic information. These updates were immediately effective and did not have any impact on our condensed consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, to amend certain disclosure and presentation requirements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU required disclosure of incremental segment information, primarily through enhanced disclosures about significant segment expenses and amounts for each reportable segment on an annual and interim basis. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods with fiscal years beginning after December 15, 2024. The Company is currently assessing the potential effects of this standard.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to disclose disaggregated information about a reporting entity’s effective tax rate reconciliation, using both percentages and reporting currency amounts for specific standardized categories, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the potential effects of this standard.

In March 2024, the FASB issued ASU No. 2024-01, Compensation – Stock Compensation (Topic 718): Scope Applications of Profits Interest and Similar Awards (“ASU 2024-01”). The amendments in ASU 2024-01 improves its overall clarity and operability without changing the guidance and adding illustrative examples to determine whether profits interest award should be accounted for in accordance with Topic 718. The Company does not anticipate that these updates, once adopted, will have a material effect.

In March 2024, the FASB issued ASU No. 2024-02, Codification Improvements – Amendments to Remove References to the Concept Statements (“ASU 2024-02”). The amendments in ASU 2024-02 removes references to various FASB Concept Statements in the Accounting Standard Codifications to draw a distinction between authoritative and non-authoritative literature. The Company does not anticipate that these updates, once adopted, will have a material effect.

Table of Contents

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 June 30, 2024 and December, 31 2023:


	June 30,		December 31,
	2024		2023
Cash and cash equivalents	$	8,581,484	$	13,403,628
Restricted cash included in other assets		900,000		470,000
Cash, cash equivalents, and restricted cash in the statement of cash flows	$	9,481,484	$	13,873,628

During the six months ended June 30, 2024, the Company was in the process of transitioning financial institutions for its Letters of Credit (“LOCs”) tied to various bonds associated with Pennsylvania and New York operatorship. The transition caused a temporary increase in restricted cash until the new LOCs are deemed effective and until the previous LOCs can be canceled.

4. Short Term Investments

Short term investments are highly liquid investments with original maturities between three and twelve months. The Company’s short term investments consist of US Treasury Bills. These investments are classified as available-for-sale. Available-for-sale short term investments are reported at fair value in the Consolidated Balance Sheets. Unrealized gains and losses are excluded from earnings and are reported in accumulated other comprehensive income in the Consolidated Statements of Operations and Comprehensive Income.

The following table summarizes the available-for-sale short term investments as of June 30, 2024 and December 31, 2023.


	June 30, 2024						December 31, 2023
	Amortized		Unrealized		Fair		Amortized		Unrealized		Fair
	Cost		Losses		Value		Cost		Gains		Value
U.S. Treasury Bills	$	—	$	—	$	—	$	18,773,508	$	1,598	$	18,775,106

During the six months ended June 30, 2024, the Company sold securities with a carrying amount of $14,989,595 for total proceeds of $15,336,930. The realized gains on these sales were $347,335. An additional $7,780,000 of securities reached maturity with total realized gains of $234,248. The realized gains are included in other income in the consolidated Statements of Operations and Comprehensive Income. During the three months ended June 30, 2024, the Company sold securities with a carrying amount of $7,986,472 for total proceeds of $8,177,645. The realized gains on these sales were $191,173. An additional $