UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation or organization) | (I.R.S Employer Identification No.) |
(
(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 |
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.
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).
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 ◻ | 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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
As of May 9, 2023, there were
Table of Contents
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 31 | ||
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ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS | 33 | ||
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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, 2022, and those described from time to time in our future reports filed with the Securities and Exchange Commission. You should consider carefully the statements under Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2022. Our Annual Report on Form 10-K for the year ended December 31, 2022 is available on our website at www.epsilonenergyltd.com.
4
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Balance Sheets
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable | | | ||||
Short term investments | | | ||||
Fair value of derivatives | | | ||||
Prepaid income taxes | | | ||||
Other current assets | | | ||||
Operating lease right-of-use assets | — | | ||||
Total current assets | | | ||||
Non-current assets | ||||||
Property and equipment: | ||||||
Oil and gas properties, successful efforts method | ||||||
Proved properties | | | ||||
Unproved properties | | | ||||
Accumulated depletion, depreciation, amortization and impairment | ( | ( | ||||
Total oil and gas properties, net | | | ||||
Gathering system | | | ||||
Accumulated depletion, depreciation, amortization and impairment | ( | ( | ||||
Total gathering system, net | | | ||||
Land | | | ||||
Buildings and other property and equipment, net | | | ||||
Total property and equipment, net | | | ||||
Other assets: | ||||||
Operating lease right-of-use assets, long term | | | ||||
Restricted cash | | | ||||
Total non-current assets | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current liabilities | ||||||
Accounts payable trade | $ | | $ | | ||
Gathering fees payable | | | ||||
Royalties payable | | | ||||
Income taxes payable | | | ||||
Accrued capital expenditures | | | ||||
Accrued compensation | | | ||||
Other accrued liabilities | | | ||||
Operating lease liabilities | | | ||||
Total current liabilities | | | ||||
Non-current liabilities | ||||||
Asset retirement obligations | | | ||||
Deferred income taxes | | | ||||
Operating lease liabilities, long term | | | ||||
Total non-current liabilities | | | ||||
Total liabilities | | | ||||
Commitments and contingencies (Note 10) | ||||||
Shareholders' equity | ||||||
Preferred shares, | | | ||||
Common shares, | | | ||||
Treasury shares, at cost, | ( | | ||||
Additional paid-in capital | | | ||||
Accumulated deficit | ( | ( | ||||
Accumulated other comprehensive income | | | ||||
Total shareholders' equity | | | ||||
Total liabilities and shareholders' equity | $ | | $ | |
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, | ||||||
| 2023 |
| 2022 | |||
Revenues from contracts with customers: | ||||||
Gas, oil, NGL, and condensate revenue | $ | | $ | | ||
Gas gathering and compression revenue | | | ||||
Total revenue | | | ||||
Operating costs and expenses: | ||||||
Lease operating expenses | | | ||||
Gathering system operating expenses | | | ||||
Development geological and geophysical expenses | — | | ||||
Depletion, depreciation, amortization, and accretion | | | ||||
General and administrative expenses: | ||||||
Stock based compensation expense | | | ||||
Other general and administrative expenses | | | ||||
Total operating costs and expenses | | | ||||
Operating income | | | ||||
Other income (expense): | ||||||
Interest income | | | ||||
Interest expense | ( | ( | ||||
Gain (loss) on derivative contracts | | ( | ||||
Other income (expense) | | ( | ||||
Other income (expense), net | | ( | ||||
Net income before income tax expense | | | ||||
Income tax expense | | | ||||
NET INCOME | $ | | $ | | ||
Currency translation adjustments | ( | | ||||
NET COMPREHENSIVE INCOME | $ | | $ | | ||
Net income per share, basic | $ | | $ | | ||
Net income per share, diluted | $ | | $ | | ||
Weighted average number of shares outstanding, basic | | | ||||
Weighted average number of shares outstanding, diluted | | |
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
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| Accumulated |
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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 | | $ | | — | $ | — | $ | | $ | | $ | ( | $ | | ||||||||
Net income | — | — | — | — | — | — | | | ||||||||||||||
Dividends paid | — | — | — | — | — | — | ( | ( | ||||||||||||||
Stock-based compensation expense | — | — | — | — | | — | — | | ||||||||||||||
Buyback of common shares | — | — | ( | ( | — | — | — | ( | ||||||||||||||
Retirement of treasury shares | ( | ( | | | — | — | — | — | ||||||||||||||
Other comprehensive loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Balance at March 31, 2023 | | $ | | ( | $ | ( | $ | | $ | | $ | ( | $ | |
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| Accumulated |
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Other | Total | |||||||||||||||||||||
Common Shares Issued | Treasury Shares | Additional | Comprehensive | Accumulated | Shareholders' | |||||||||||||||||
Shares | Amount | Shares | Amount | paid-in Capital | Income | Deficit | Equity | |||||||||||||||
Balance at January 1, 2022 | | $ | | ( | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
Net income | — | — | — | — | — | — | | | ||||||||||||||
Dividends paid | — | — | — | — | — | — | ( | ( | ||||||||||||||
Stock-based compensation expense | — | — | — | — | | — | — | | ||||||||||||||
Exercise of stock options | | | — | — | — | — | — | | ||||||||||||||
Retirement of treasury shares | ( | ( | | | — | — | — | — | ||||||||||||||
Other comprehensive income | — | — | — | — | — | | — | | ||||||||||||||
Balance at March 31, 2022 | | $ | | — | $ | — | $ | | $ | | $ | ( | $ | |
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, | ||||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depletion, depreciation, amortization, and accretion | | | ||||
(Gain) loss on derivative contracts | ( | | ||||
Settlement received (paid) on derivative contracts | | ( | ||||
Settlement of asset retirement obligation | | ( | ||||
Stock-based compensation expense | | | ||||
Deferred income tax expense (benefit) | ( | | ||||
Changes in assets and liabilities: | ||||||
Accounts receivable | | ( | ||||
Other assets and liabilities | | | ||||
Accounts payable, royalties payable and other accrued liabilities | ( | | ||||
Income taxes payable | | | ||||
Net cash provided by operating activities | | | ||||
Cash flows from investing activities: | ||||||
Additions to unproved oil and gas properties | ( | ( | ||||
Additions to proved oil and gas properties | ( | ( | ||||
(Additions) disposals to gathering system properties | ( | | ||||
Additions to land, buildings and property and equipment | ( | | ||||
Purchases of short term investments | ( | | ||||
Net cash used in investing activities | ( | ( | ||||
Cash flows from financing activities: | ||||||
Buyback of common shares | ( | | ||||
Exercise of stock options | | | ||||
Dividends paid | ( | ( | ||||
Net cash used in financing activities | ( | ( | ||||
Effect of currency rates on cash, cash equivalents, and restricted cash | ( | | ||||
(Decrease) increase in cash, cash equivalents, and restricted cash | ( | | ||||
Cash, cash equivalents, and restricted cash, beginning of period | | | ||||
Cash, cash equivalents, and restricted cash, end of period | $ | | $ | | ||
Supplemental cash flow disclosures: | ||||||
Interest paid | $ | | $ | | ||
Non-cash investing activities: | ||||||
Change in proved properties accrued in accounts payable and accrued liabilities | $ | | $ | ( | ||
Change in gathering system accrued in accounts payable and accrued liabilities | $ | | $ | | ||
Asset retirement obligation asset additions and adjustments | $ | | $ | |
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
8
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Description of Business
Epsilon Energy Ltd. (the “Company” or “Epsilon” or “we”) was incorporated under the laws of the Province of Alberta, Canada on March 14, 2005. On October 24, 2007, the Company became a publicly traded entity trading on the Toronto Stock Exchange (“TSX”) in Canada. On February 14, 2019, Epsilon’s registration statement on Form 10 was declared effective by the United States Securities and Exchange Commission and on February 19, 2019, we began trading in the United States on the NASDAQ Global Market under the trading symbol “EPSN.” Effective as of the close of trading on March 15, 2019, Epsilon voluntarily delisted its common shares from the TSX. Epsilon is a North American on-shore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves.
2. Basis of Preparation
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the appropriate rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments which are, in the opinion of management, necessary for a fair statement of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2022. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year.
Principles of Consolidation
The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Epsilon Energy USA, Inc. and its wholly owned subsidiaries, Epsilon Midstream, LLC, Dewey Energy GP, LLC, Dewey Energy Holdings, LLC, Epsilon Operating, LLC, and Altolisa Holdings, LLC. With regard to the gathering system, in which Epsilon owns an undivided interest in the asset, proportionate consolidation accounting is used. All inter-company transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved natural gas and oil reserves and related cash flow estimates used in impairment tests of natural gas and oil, and gathering system properties, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates.
Reclassification
The consolidated financial statements for the prior periods include certain reclassifications that were made to conform to the current period presentation. Such reclassifications have no impact on previously reported consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Standards
The Company, an emerging growth company (“EGC”), has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
9
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
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 Company expects to collect over the instrument’s contractual life. Epsilon has adopted ASU 2016-13 as of January 1, 2023. There was no impact from the adoption of this ASU.
In 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which, for a limited period of time, adds ASC 848 to the Codification providing entities with certain practical expedients and exceptions from applying modification accounting if certain criteria are met. The amendments are designed to reduce operational challenges that entities will face in applying modification accounting to all contracts that will be revised due to reference rate reform. The guidance in ASC 848 was triggered by the pending discontinuation of certain benchmark reference rates and, in some cases, their replacement by new rates that are more observable or transaction-based and, therefore, less susceptible to manipulation, than certain interest-rate benchmark reference rates commonly used today, including the London Interbank Offered Rate (LIBOR). This process of reference rate reform will require entities to modify certain contracts by removing the discontinued rates and including new rates. Epsilon has adopted ASU 2020-04 as of January 1, 2023.
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, 2023 and December, 31 2022:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash included in other assets | | | ||||
Cash, cash equivalents, and restricted cash in the statement of cash flows | $ | | $ | |
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 Notes. These investments are classified as held-to-maturity and are carried at amortized cost with the intent to be held to maturity. Interest on these investments is presented as interest income in the Consolidated Statements of Operations and Comprehensive Income.
As of March 31, 2023, there was $
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
10
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
5. Property and Equipment
The following table summarizes the Company’s property and equipment as of March 31, 2023 and December 31, 2022:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Property and equipment: | ||||||
Oil and gas properties, successful efforts method | ||||||
Proved properties | $ | | $ | | ||
Unproved properties | | | ||||
Accumulated depletion, depreciation, amortization and impairment | ( | ( | ||||
Total oil and gas properties, net | | | ||||
Gathering system | | | ||||
Accumulated depletion, depreciation, amortization and impairment | ( | ( | ||||
Total gathering system, net | | | ||||
Land | | | ||||
Buildings and other property and equipment, net | | | ||||
Total property and equipment, net | $ | | $ | |
Property Impairment
We perform a quantitative impairment test whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the published NYMEX forward prices, timing, methods and other assumptions consistent with historical periods. When indicators of impairment are present, GAAP requires that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the natural gas properties to their estimated fair values is required. Additionally, if an exploratory well is determined not to have found proved reserves, the costs incurred, net of any salvage value, should be charged to expense.
During the three months ended March 31, 2023 and 2022,
6. Revolving Line of Credit
The Company has a senior secured credit facility which includes a total commitment of up to $
On February 10, 2023, Epsilon Energy USA entered into the Ninth Amendment of the Credit Agreement. The borrowing base was increased to $
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
11
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
The bank has a first priority security interest in the tangible and intangible assets 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 |
● | Current ratio greater than |
● | Leverage ratio less than |
We were in compliance with the financial covenants of the agreement as of March 31, 2023.
7. Shareholders’ Equity
(a)Authorized shares
The Company is authorized to issue an unlimited number of Common Shares with
(b)Purchases of Equity Shares
Normal Course Issuer Bid
On March 9, 2023, the Board of Directors authorized a new share repurchase program of up to
Commencing on March 8, 2022, we implemented a plan to repurchase our issued and outstanding common shares and to return capital to our shareholders. We used cash on hand to fund these repurchases. During the year ended December 31, 2022, we repurchased
Under the same plan, in 2023, we repurchased and retired
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
12
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table contains activity relating to our acquisition of equity securities during the three months ended March 31, 2023:
| Maximum number | |||||||
of shares | ||||||||
Total number | Average price | remaining to be | ||||||
of shares | paid per | purchased under | ||||||
| purchased | share |
| the program | ||||
Beginning of normal-course issuer bid, March 8, 2022 (1) | | |||||||
January 2023 | | $ | | |||||
February 2023 | | $ | | |||||
Total as of March 7, 2023 | | $ | | | ||||
Beginning of normal-course issuer bid, March 27, 2023 (2) | | |||||||
March 2023 | | $ | | |||||
Total as of March 31, 2023 | | $ | | |
(1) | Epsilon repurchased these shares under its 2022-2023 share repurchase program that commenced on March 8, 2022 and terminated on March 7, 2023, as described above. |
(2) | Epsilon repurchased these shares under its 2023-2024 share repurchase program that commenced on March 27, 2023, as described above. |
(c)Equity Incentive Plan
Epsilon’s board of directors (the “Board”) adopted the 2020 Equity Incentive Plan (the “2020 Plan”) on July 22, 2020 subject to approval by Epsilon’s shareholders at Epsilon’s 2020 Annual General and Special Meeting of Shareholders, which occurred on September 1, 2020 (the “Meeting”). Shareholders approved the 2020 Plan at the Meeting. Following Epsilon’s listing on the NASDAQ Global Market, the Board 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
Restricted Stock Awards
For the three months ended March 31, 2023,
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
13
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table summarizes Restricted Stock activity for the three months ended March 31, 2023, and the year ended December 31, 2022:
Three months ended | Year ended | |||||||
March 31, 2023 | December 31, 2022 | |||||||
Number of | Weighted | Number of | Weighted | |||||
Restricted | Average | Restricted | Average | |||||
Shares | Remaining Life | Shares | Remaining Life | |||||
| Outstanding |
| (years) |
| Outstanding |
| (years) | |
Balance non-vested Restricted Stock at beginning of period | | | ||||||
Granted | | — | | |||||
Vested | | — | ( | — | ||||
Balance non-vested Restricted Stock at end of period | | | ||||||
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, 2023 and 2022 was $
At March 31, 2023, the Company had unrecognized stock-based compensation related to these shares of $
Performance Share Unit Awards (“PSU”)
For the three months ended March 31, 2023,
● | The targets for the PSUs are based on (i) the relative total stockholder return (“TSR”) percentile ranking and (ii) the relative cash flow per debt adjusted share – growth (“CFDAS Growth”) percentile ranking of the Company, each as compared to the Company’s Performance Peer Group during the applicable |
● | Cash Flow per Debt Adjusted Share (“CFDAS”) is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) divided by the sum of the 1) the total debt plus the value of preferred stock minus cash and the amount of dividends paid for the year divided by the share price at the end of the year; and 2) the actual share count at year end. |
● | The vesting of each PSU Award will be based |
● | The recipient of the award must be employed with the Company at the time of vesting. |
The number of shares ultimately issued under these awards can range from
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
14
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table summarizes PSUs for the three months ended March 31, 2023 and the year ended December 31, 2022:
Three months ended | Year ended | |||||||
March 31, 2023 | December 31, 2022 | |||||||
Number of | Weighted | Number of | Weighted | |||||
Performance | Average | Performance | Average | |||||
Shares | Remaining Life | Shares | Remaining Life | |||||
| Outstanding |
| (years) |
| Outstanding |
| (years) | |
Balance non-vested PSUs at beginning of period | | | ||||||
Vested | — | — | ( | — | ||||
Balance non-vested PSUs at end of period | | |
Stock compensation expense for the granted PSUs is recognized over the vesting period. Stock compensation expense recognized during the three months ended March 31, 2023 and 2022 related to PSUs was $
At March 31, 2023, the Company had unrecognized stock-based compensation related to these shares of $
Stock Options
As of March 31, 2023, the Company had outstanding stock options covering
The following table summarizes stock option activity for the three months ended March 31, 2023 and the year ended December 31, 2022:
Three months ended | Year ended | ||||||||||
March 31, 2023 | December 31, 2022 | ||||||||||
Weighted | Weighted | ||||||||||
Number of | Average | Number of | Average | ||||||||
Options | Exercise | Options | Exercise | ||||||||
Exercise price in US$ |
| Outstanding |
| Price |
| Outstanding |
| Price (1) | |||
Balance at beginning of period | | $ | | | $ | | |||||
Exercised | — | $ | — | ( | $ | | |||||
Expired/Forfeited | — | $ | — | ( | $ | | |||||
Balance at period-end | | $ | | | $ | | |||||
Exercisable at period-end | | $ | | | $ | |
At March 31, 2023, the Company had unrecognized stock-based compensation, related to these options, of
During the three months ended March 31, 2023 and the year ended December 31, 2022, the Company awarded
(d) Dividends
On March 3, 2023, the Board declared quarterly dividends of $
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
15
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
8. Revenue Recognition
Revenues are comprised of sales of natural gas, oil and NGLs, along with the revenue generated from the Company’s ownership interest in the gas gathering system in the Auburn field in Northeastern Pennsylvania.
Overall, product sales revenue generally is recorded in the month when contractual delivery obligations are satisfied, which occurs when control is transferred to the Company’s customers at delivery points based on contractual terms and conditions. In addition, gathering and compression revenue generally is recorded in the month when contractual service obligations are satisfied, which occurs as control of those services is transferred to the Company’s customers.
The following table details revenue for the three months ended March 31, 2023 and 2022.
Three Months Ended March 31, | ||||||
| 2023 |
| 2022 | |||
Operating revenue | ||||||
Natural gas | $ | | $ | | ||
Natural gas liquids | | | ||||
Oil and condensate | | | ||||
Gathering and compression fees | | | ||||
Total operating revenue | $ | | $ | |
Product Sales Revenue
The Company enters into contracts with third party purchasers to sell its natural gas, oil, NGLs and condensate production. Under these product sales arrangements, the sale of each unit of product represents a distinct performance obligation. Product sales revenue is recognized at the point in time that control of the product transfers to the purchaser based on contractual terms which reflect prevailing commodity market prices. To the extent that marketing costs are incurred by the Company prior to the transfer of control of the product, those costs are included in lease operating expenses on the Company’s consolidated statements of operations.
Settlement statements for product sales, and the related cash consideration, are generally received from the purchaser within 30 days. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the natural gas, oil, NGLs, or condensate. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received.
Gas Gathering and Compression Revenue
The Company also provides natural gas gathering and compression services through its ownership interest in the gas gathering system in the Auburn field. For the provision of gas gathering and compression services, the Company collects its share of the gathering and compression fees per unit of gas serviced and recognizes gathering revenue over time using an output method based on units of gas gathered.
The settlement statement from the operator of the Auburn GGS is received two months after gathering and compression has occurred. As a result, the Company must estimate the amount of production that was gathered and compressed within the system. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying consolidated balance sheets until payment is received.
Allowance for Credit Losses
The Company records an allowance for credit losses on a case-by-case basis once there is evidence that collection is not probable. For the three months ended March 31, 2023, there were
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
16
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table details accounts receivable as of March 31, 2023 and December 31, 2022.
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Accounts receivable | ||||||
Natural gas and oil sales | $ | | $ | | ||
Joint interest billing | | | ||||
Gathering and compression fees | | | ||||
Other | | | ||||
Total accounts receivable | $ | | $ | |
9. Income Taxes
Income tax provisions for the three months ended March 31, 2023 and 2022 are as follows:
Three months ended March 31, | ||||||
| 2023 |
| 2022 | |||
Current: | ||||||
Federal | $ | | $ | | ||
State | | | ||||
Total current income tax expense | | | ||||
Deferred: | ||||||
Federal | ( | | ||||
State | | | ||||
Total deferred tax expense | ( | | ||||
Income tax expense | $ | | $ | |
The Company files federal income tax returns in the United States and Canada, and various returns in state and local jurisdictions.
The Company believes it has no uncertain income tax positions. The Company's tax returns are open to audit under the statute of limitations for the years ending December 31, 2019 through December 31, 2022. To the extent we utilize net operating losses generated in earlier years, such earlier years may also be subject to audit.
Our effective tax rate will typically differ from the statutory federal rate primarily as a result of state income taxes and the valuation allowance against the Canadian net operating loss. The effective tax rate for the three months ended March 31, 2023 was higher than the statutory federal rate as a result of the state income taxes and the valuation allowance against the Canadian net operating loss.
10. Commitments and Contingencies
The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of March 31, 2023, the Company had commitments of $
Litigation
On March 10, 2021, Epsilon filed a complaint against Chesapeake Appalachia, LLC (“Chesapeake”) in the United States District Court for the Middle District of Pennsylvania, Scranton, Pennsylvania (“Middle District”). Epsilon claims that Chesapeake has breached a settlement agreement and several operating agreements (“JOAs”) to which Epsilon and Chesapeake are parties. Epsilon asserts that Chesapeake has failed to cooperate with Epsilon’s efforts to develop resources in the Auburn Development, located in Northeast Pennsylvania, as required under both the settlement agreement and JOAs.
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements
17
Epsilon Energy Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
Epsilon requested a preliminary injunction but was unsuccessful in obtaining that injunction. Epsilon filed a motion to amend its original Complaint. Chesapeake opposed. The Court ruled in Epsilon’s favor and allowed Epsilon’s amendment. Chesapeake moved to dismiss the amended Complaint. The Court granted the motion to dismiss without prejudice to Epsilon’s right to file a new lawsuit based on new proposals made after the Court’s decision. Epsilon filed a motion for reconsideration of that decision, but the court denied the motion for reconsideration on January 18, 2022.
Epsilon filed a notice of appeal on February 15, 2022 challenging both the motion to dismiss and motion for reconsideration decisions. Chesapeake filed a cross-appeal on March 1, 2022. A briefing schedule was set and briefing closed October 14, 2022. Oral argument was held in January 2023. A decision on the appeal is not expected until mid-2023.
Epsilon re-filed a complaint against Chesapeake in the Middle District on May 9, 2022. Epsilon generally asserts similar claims as in the previous suit, pursuing declaratory judgment claims regarding Chesapeake’s obligation to Epsilon to cooperate with Epsilon’s efforts in the Auburn Development and regarding Chesapeake’s obstruction of Epsilon’s efforts with the Pennsylvania Department of Environmental Protection permitting process but not based on specific well proposals. Chesapeake filed a motion to stay pending a decision on the Third Circuit appeal, which was granted. The matter is stayed pending a decision from the Third Circuit.
11. Leases
Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of March 31, 2023 summarized in the following table: