# Epsilon Energy Ltd.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Epsilon Energy Ltd.](/companies/epsn.md) (CIK 1726126)
- Form: 10-Q
- Filed: 2023-05-11
- Accepted by EDGAR: May 10, 2023, 21:59 ET
- Period: 2023-03-31
- Accession: 0001558370-23-009240
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1726126/000155837023009240/epsn-20230331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1726126/000155837023009240/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $9.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $3.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $28.4k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $1.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $3.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 23,027,684 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $7.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $1.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-03-31 | $19.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $56.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $124.8m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $5.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $19.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $105.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,533 characters.

*The following discussion is intended to assist in the understanding of trends and significant changes in or results of operations and the financial condition of Epsilon Energy Ltd. and its subsidiaries for the periods presented. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto presented in this report, including the unaudited condensed consolidated financial statements as of March 31, 2023 and 2022 and for the three months then ended together with accompanying notes, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs, and expected performance. Actual results and the timing of events may differ materially from those contained in these forward- looking statements due to a number of factors. See “Part II. Item 1A. Risk Factors” and “Forward-Looking Statements.”*

### Overview

Epsilon Energy Ltd. (the “Company”) is a North American onshore focused independent natural gas and oil company engaged in the acquisition, development, gathering and production of natural gas and oil reserves. Our areas of operations are the Marcellus shale section of the Appalachian basin in Pennsylvania and the NW Anadarko basin in Oklahoma. In Pennsylvania, we hold 5,098 net acres producing 25 MMcf/d net to our revenue interest. In Oklahoma, we hold 7,228 net acres producing 2.7 MMcfe/d net to our revenue interest.

In Pennsylvania, the Company owns a 35% interest in the 52 mile Auburn Gas Gathering System (“Auburn GGS") which is operated by a subsidiary of Williams Partners, LP.

Our common shares trade on the NASDAQ Global Market under the ticker symbol “EPSN.”

### Business Strategy

The Company is focused on high rate of return capital investments in onshore North American natural gas and oil basins. We are committed to disciplined capital allocation which should include shareholder returns in the form of dividends and share buybacks. We expect that our strong balance sheet and large liquidity position will allow us to opportunistically invest in both our existing project areas and potential new projects.

To date, our investments have been focused in our position in the prolific Marcellus unconventional reservoir in Pennsylvania (“PA”). Our PA assets are supported by our 35% ownership in the Auburn GGS. We have a substantial remaining drillable location inventory within our existing leaseholds.

The Company is actively seeking new opportunities in several other onshore North American natural gas and oil basins.

### Three months ended March 31, 2023 Highlights

### Operational Highlights

#### Marcellus Shale – Pennsylvania

- During the three months ended March 31, 2023, Epsilon’s realized natural gas price was $2.56 per Mcf compared to $4.47 per Mcf over the same period in 2022, a 43% decrease.
- During the three months ended March 31, 2023, Epsilon’s natural gas production was 2.5 Bcf compared to 2.4 Bcf during the same period in 2022, a 0.8% increase.
- Gathered and delivered 16.2 Bcf gross (5.7 Bcf net to Epsilon’s interest) during the three months ended March 31, 2023, or 180 MMcf/d through the Auburn Gas Gathering System.

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

#### Anadarko, NW Stack Trend – Oklahoma

- During the three months ended March 31, 2023, Epsilon’s realized price for all Oklahoma production was $6.44 per Mcfe compared to $7.71 per Mcfe over the same period in 2022, a 17% decrease.
- Total production for the three months ended March 31, 2023 included natural gas, natural gas liquids, and oil and condensate and was 0.17 Bcfe, as compared to 0.17 Bcfe during the same period in 2022.
- At March 31, 2023, the Company had 1 gross (.11 net) well waiting on completion.

### Non-GAAP Financial Measures-Adjusted EBITDA

Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on derivative contracts net of cash received or paid on settlement, and (7) other income. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.

Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a normalized or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.

The table below sets forth a reconciliation of net income to Adjusted EBITDA for the three months ended March 31, 2023 and 2022, which is the most directly comparable measure of financial performance calculated under U.S. GAAP and should be reviewed carefully.

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- |
| **Net income** | ​ | $3,529,827 | ​ | $5,805,888 |
| Add Back: | ​ | ​ ​ | ​ | ​ ​ |
| Interest (income) expense, net | ​ | ​ (462,325) | ​ | ​ 98 |
| Income tax expense | ​ | ​ 1,326,922 | ​ | ​ 2,181,898 |
| Depreciation, depletion, amortization, and accretion | **​** | **​** 1,773,006 | ​ | ​ 1,389,219 |
| Stock based compensation expense | ​ | ​ 179,748 | ​ | ​ 142,302 |
| Gain on derivative contracts net of cash received or paid on settlement | ​ | ​ (705,360) | ​ | ​ (239,824) |
| Foreign currency translation loss | ​ | ​ (983) | ​ | ​ 5,402 |
| **Adjusted EBITDA** | ​ | $5,640,835 | ​ | $9,284,983 |

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

### Results of Operations

### Net Operating Revenues

For the three months ended March 31, 2023 revenues decreased $4.2 million, or 31%, to $9.4 million from $13.6 million during the same period of 2022.

Revenue and volume statistics for the three months ended March 31, 2023 and 2022 were as follows:

| ​ ​ ​ ​ Revenues Pennsylvania | ​ ​ ​ ​ ​ | ​ ​ Three months ended March 31, 2023 ​ ​ ​ ​ | ​ ​ ​ | ​ ​ 2022 ​ ​ ​ ​ |
| --- | --- | ---: | --- | ---: |
| **Natural gas revenue** | ​ | **$5,852,725** | **​** | **$10,131,015** |
| Volume (MMcf) | ​ | 2,286 | ​ | 2,265 |
| Avg. Price ($/Mcf) | **​** | $2.56 | ​ | $4.47 |
| **Gathering system revenue** | ​ | **$2,386,695** | **​** | **$2,120,773** |
| **Total PA Revenues** | **​** | **$8,239,420** | **​** | **$12,251,788** |
| **Oklahoma** | ​ | **​** **​** | **​** | **​** **​** |
| **Natural gas revenue** | ​ | **$403,453** | **​** | **$572,069** |
| Volume (MMcf) | **​** | 96 | ​ | 86 |
| Avg. Price ($/Mcf) | **​** | $4.20 | ​ | $6.68 |
| **Natural liquids revenue** | **​** | **$196,295** | **​** | **$314,428** |
| Volume (MBO) | **​** | 6.1 | ​ | 9.8 |
| Avg. Price ($/Bbl) | **​** | $32.29 | ​ | $32.19 |
| **Oil and condensate revenue** | **​** | **$517,108** | **​** | **$461,813** |
| Volume (MBO) | **​** | 6.8 | ​ | 5.1 |
| Avg. Price ($/Bbl) | **​** | $76.15 | ​ | $90.62 |
| **Total OK Revenues** | **​** | **$1,116,856** | **​** | **$1,348,310** |
| **Total Revenues** | **​** | **$9,356,276** | **​** | **$13,600,098** |

Upstream natural gas revenue for the three months ended March 31, 2023 decreased by $4.4 million, or 42%, over the same period in 2022. A decrease of $4.6 million was due to lower natural gas prices partially offset by an increase of $0.2 million due to higher sales volumes.

Upstream natural gas liquids revenue for the three months ended March 31, 2023 decreased by $0.1 million, or 38% over the same period in 2022. This was a result of decreased NGL production.

Upstream oil and condensate revenue for the three months ended March 31, 2023 increased by $0.1 million, or 12% over the same period in 2022. An increase of $0.2 million was due to higher volumes offset by a decrease of $0.1 million due to lower prices.

Gathering system revenue for the three months ended March 31, 2023 increased by $0.3 million, or 13% over the same period in 2022. This was the result of anchor shipper volumes, which pay the full gathering rate, increasing from 62% to 88% of total throughput. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues amounted to $0.4 million for each of the three months ended March 31, 2023 and 2022.

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

### Operating Costs

The following table presents total cost and cost per unit of production (Mcfe), including ad valorem, severance, and production taxes for the three months ended March 31, 2023 and 2022:

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- |
| Lease operating costs | ​ | $1,404,279 | ​ | $1,405,490 |
| Gathering system operating costs | ​ | ​ 651,341 | ​ | ​ 524,375 |
| **​** | **​** | **$2,055,620** | **​** | **$1,929,865** |
| ​ | ​ | ​ **​** | **​** | **​** **​** |
| Upstream operating costs—Total $/Mcfe | ​ | ​ 0.57 | ​ | ​ 0.58 |
| Gathering system operating costs $/Mcf | ​ | ​ 0.18 | ​ | ​ 0.12 |

Operating costs include the effects of elimination entries to remove the gathering fees paid to Epsilon’s ownership in the gathering system.

Upstream operating costs consist of lease operating expenses necessary to extract natural gas and oil, including gathering and treating the natural gas and oil to ready it for sale. For the three months ended March 31, 2023 and 2022, upstream operating costs remained consistent.

Gathering system operating costs consist primarily of rental payments for the natural gas fueled compression units and overhead fees due to the system’s operator. For the three months ended March 31, 2023, gathering system operating costs increased by $0.1 million, or 24% from the same period in 2022. This increase is due to a higher mix of anchor shipper volumes and a CPI-U adjusted increase to the G&A fee on these volumes.

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

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| **Depletion, depreciation, amortization and accretion** | **​** | **$1,773,006** | ​ | **$1,389,219** |

Natural gas and oil and gathering system assets are depleted and depreciated using the units of production method aggregating properties on a field basis. For leasehold acquisition costs and the cost to acquire proved and unproved properties, the reserve base used to calculate depreciation and depletion is total proved reserves. At this time, the Company has only minimal leasehold acquisition costs. For natural gas and oil development and gathering system costs, the reserve base used to calculate depletion and depreciation is proved developed reserves. A reserve report is prepared as of December 31, each year.

Depreciation expense includes amounts pertaining to our office furniture and fixtures, leasehold improvements, computer hardware. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 7 years. Also included in depreciation expense is an amount pertaining to buildings owned by the Company. Depreciation for the buildings is calculated using the straight-line method over an estimated useful life of 30 years.

Accretion expense is related to the asset retirement costs.

For the three months ended March 31, 2023, DD&A expense was generally consistent compared to the same period in 2022, increasing by $0.2 million, or 12%.

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

### General and Administrative (“G&A”)

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| **General and administrative** | **​** | **$2,203,521** | ​ | **$1,313,434** |

G&A expenses consist of general corporate expenses such as compensation, legal, accounting and professional fees, consulting services, travel and other related corporate costs such as stock options granted and restricted shares of stock granted and the related non-cash compensation.

G&A expenses increased by $0.9 million, or 68%, during the three months ended March 31, 2023 from 2022. This was primarily due to $0.4 million in compensation associated with management transition, $0.1 million in legal fees related to the complaint filed against Chesapeake, $0.2 million in other service fees, and $0.2 million in other miscellaneous G&A.

### Loss on Derivative Contracts

| ​ ​ ​ | ​ ​ | ​ ​ Three months ended March 31, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| **Gain (loss) on derivative contracts** | **​** | **$1,068,660** | **​** | **$(971,904)** |

For the three months ended March 31, 2023 and 2022, Epsilon was entered into NYMEX Henry Hub (“HH”) Natural Gas Futures swaps and Tennessee basis swap derivative contracts for the purpose of hedging its physical natural gas sales revenue. During the three months ended March 31, 2023, we received net cash settlements of $363,300. During the three months ended March 31, 2022, we paid net cash settlements of $1,211,728.

For the three months ended March 31, 2023, realized gains on derivative contracts increased as the NYMEX Henry Hub Natural Gas Futures prices decreased further from the prices at which the Company sold the Henry Hub swaps. As of March 31, 2023, the Company had no derivative contracts beyond December 31, 2023.

### Capital Resources and Liquidity

### Cash Flow

The primary source of cash for Epsilon during the three months ended March 31, 2023 and 2022 was funds generated from operations. The primary uses of cash for the three months ended March 31, 2023 were development of natural gas properties, investment in U.S. Treasury Notes, the repurchase of shares of common stock, and the distribution of dividends. The primary uses of cash for the three months ended March 31, 2022 were development of natural gas properties and the distribution of dividends.

At March 31, 2023, we had a working capital surplus of $50.8 million, an increase of $1.6 million over the $49.2 million surplus at December 31, 2022. The Company anticipates its current cash balance, cash flows from operations, and available sources of liquidity to be sufficient to meet its cash requirements for the next twelve months and beyond.

#### Three months ended March 31, 2023 compared to 2022

During the three months ended March 31, 2023, $7.6 million was provided by the Company’s operating activities, compared to $7.7 million provided during the same period in 2022, a $0.1 million, and 2% decrease.

The Company used $30.9 million and $2.9 million of cash for investing activities during the three months ended March 31, 2023 and 2022, respectively. The Company invested $30,1 million in U.S Treasury Notes and $0.8 million on leasehold and development costs targeting increasing production in Pennsylvania and Oklahoma.

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

The Company used $2.8 million of cash for financing activities during the three months ended March 31, 2023. This was spent primarily on dividend payments and the repurchase of shares of common stock. The Company used $1.3 million of cash for financing activities during the three months ended March 31, 2022. This cash was spent on dividend payments.

### Credit Agreement

The Company has a senior secured credit facility which includes a total commitment of up to $100 million. The effective borrowing base is $30 million, which is subject to semi-annual redetermination. There are currently no borrowings under the facility. If we decide to access the facility, depending on the level of borrowing, we might need to increase our hedging activity. Hedging requirements were amended to be between 0%-62.5% of the 24-month projected production volumes, based on percentage utilization on the facility. Borrowings from the Facility may be used for the acquisition and development of oil and gas properties, investments in cash flow generating assets complimentary to the production of oil and gas, and for letters of credit and other general corporate purposes. Upon each advance, interest is charged at the highest of a) the Prime Rate, or b) the sum of the Federal Funds Rate plus 0.5%, plus an applicable margin (0.25%-1.25%, based on percentage utilization on the facility). The facility matures on March 1, 2024.

On February 10, 2023, Epsilon Energy USA entered into the Ninth Amendment of the Credit Agreement. The borrowing base was increased to $30 million. Per ASC 848, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, LIBOR was removed as a reference option in the calculation of interest. Hedging requirements were amended to be between 0%-62.5% of the 24-month projected production volumes, based on percentage utilization on the facility. Also, cash distributions to the parent company (Epsilon Energy Ltd.) were allowed if the facility is \< 80% utilized and the leverage ratio (total debt / income adjusted for interest, taxes and non-cash amounts) is less than 2 to 1.

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 3 to 1 (income adjusted for interest, taxes and non-cash amounts / cash interest expense)
- Current ratio greater than 1 to 1 (current assets / current liabilities)
- Leverage ratio less than 3.5 to 1 (total debt / income adjusted for interest, taxes and non-cash amounts)

We were in compliance with the financial covenants of the agreement as of March 31, 2023 and expect to be in compliance for the next 12 months. We currently have no borrowings under the facility.

### Repurchase Transactions

On March 9, 2023, the Board of Directors authorized a new share repurchase program of up to 2,292,644 common shares, representing 10% of the outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $15.0 million. The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on March 27, 2023 and will end on March 26, 2024, unless the maximum amount of common shares is purchased before then or Epsilon provides earlier notice of termination. During the three months ended March 31, 2023, we repurchased 47,220 common shares at an average price of $5.32 per share (excluding commissions).

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 982,500 common shares of the maximum of 1,183,410 authorized for repurchase and spent

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

$6,234,879 under the plan. The repurchased stock had an average price of $6.32 per share (excluding commissions) and was subsequently retired during the year ended December 31, 2022.

Under the same plan, in 2023, we repurchased and retired 190,700 common shares at an average price of $5.82 per share (excluding commissions) before the plan terminated on March 7, 2023.

### Derivative Transactions

The Company has entered into hedging arrangements to reduce the impact of natural gas price volatility on operations. By reducing the price volatility from a significant portion of natural gas production, the potential effects of changing prices on operating cash flows have been mitigated, but not eliminated. While mitigating the negative effects of falling commodity prices, these derivative contracts also limit the benefits we might otherwise receive from increases in commodity prices.

At March 31, 2023, Epsilon’s outstanding natural gas commodity contracts consisted of the following:

| ​ ​ ​ ​ ​ ​ Derivative Type 2023 ​ | ​ ​ Volume (MMbtu) ​ | ​ ​ ​ ​ | ​ ​ Weighted Average Price ($/MMbtu) ​ ​ Swaps ​ ​ | ​ ​ ​ | ​ ​ Basis Differential ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ Fair Value of Asset March 31, 2023 ​ ​ |
| --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| NYMEX Henry Hub swap | 920,000 | ​ | $5.21 | ​ | $— |  | $2,373,200 |
| Tennessee Z4 basis swap | 920,000 | ​ | $— | ​ | $(1.25) |  | ​ (445,750) |
| ​ | 1,840,000 | ​ | ​ ​ | ​ | ​ ​ | ​ | $1,927,450 |

### Contractual Obligations

The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of March 31, 2023, the Company had short term commitments of $0.2 million for capital expenditures and long term commitments of $7.4 million for asset retirement obligations.

Based on current natural gas prices and anticipated levels of production, we believe that the estimated net cash generated from operations, together with cash on hand and amounts available under our credit agreement, will be adequate to meet liquidity needs for the next 12 months and beyond, including satisfying our financial obligations and funding our operating and development activities.

## Market risk

As filed, 2,906 characters.

Our earnings and cash flow are significantly affected by changes in the market price of commodities. The prices of natural gas and oil can fluctuate widely and are influenced by numerous factors such as demand, production levels, world political and economic events, and the strength of the US dollar relative to other currencies. Should the price of natural gas and oil decline substantially, the value of our assets could fall dramatically, impacting our future operations and exploration and development activities, along with our gas gathering system revenues. In addition, our operations are exposed to market risks in the ordinary course of our business, including interest rate and certain exposure as well as risks relating to changes in the general economic conditions in the United States.

### Gathering System Revenue Risk

The Auburn Gas Gathering System lies within the Marcellus Basin with historically high levels of recoverable reserves and low cost of production. We believe that a short-term low commodity price environment will not significantly impact the reserves produced and thus the revenue of our gas gathering system.

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

### Interest Rate Risk

Market risk is estimated as the change in fair value resulting from a hypothetical 100 basis point change in the interest rate on the outstanding balance under our credit agreement. The credit agreement allows us to fix the interest rate for all or a portion of the principal balance for a period up to three months. To the extent that the interest rate is fixed, interest rate changes affect the instrument’s fair market value but do not affect results of operations or cash flows. Conversely, for the portion of the credit agreement that has a floating interest rate, interest rate changes will not affect the fair market value but will affect future results of operations and cash flows.

At March 31, 2023 and 2022, the outstanding principal balance under the credit agreement was nil.

### Derivative Contracts

The Company’s financial results and condition depend on the prices received for natural gas production. Natural gas prices have fluctuated widely and are determined by economic and political factors. Supply and demand factors, including weather, general economic conditions, the ability to transport the gas to other regions, as well as conditions in other natural gas regions, impact prices. Epsilon has established a hedging strategy and may manage the risk associated with changes in commodity prices by entering into various derivative financial instrument agreements and physical contracts. Although these commodity price risk management activities could expose Epsilon to losses or gains, entering into these contracts helps to stabilize cash flows and support the Company’s capital spending program.

## Controls and procedures

As filed, 2,532 characters.

### Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our principal executive officer and principal financial officer have concluded that our current disclosure controls and procedures were effective as of March 31, 2023 at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that of limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.

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

## Risk factors

As filed, 164 characters.

There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022.

Filed May 11, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-009240. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.