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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 September 30, 2025

☐ 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 November 4, 2025, there were 22,067,213 Common Shares outstanding.

Table of Contents


Contents

FORWARD-LOOKING STATEMENTS		4
PART I-FINANCIAL INFORMATION		5
ITEM 1. FINANCIAL STATEMENTS		5
Unaudited Condensed Consolidated Balance Sheets		5
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income		6
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity		7
Unaudited Condensed Consolidated Statements of Cash Flows		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	11
3.	Cash, Cash Equivalents, and Restricted Cash	11
4.	Short Term Investments	12
5.	Property and Equipment	12
	Property Impairment	13
6.	Revolving Line of Credit	13
7.	Shareholders’ Equity	14
8.	Revenue Recognition	15
9.	Accumulated Other Comprehensive Income	17
10.	Income Taxes	17
11.	Commitments and Contingencies	18
12.	Leases	18
13.	Net Income Per Share	19
14.	Operating Segments	19
15.	Commodity Risk Management Activities	23
	Commodity Price Risks	23
	Commodity Derivative Contracts	24
16.	Asset Retirement Obligations	25
17.	Fair Value Measurements	25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27
	Overview	27
	Business Strategy	27
	Operational Highlights	28
	Non-GAAP Financial Measures-Adjusted EBITDA	29
	Net Operating Revenues	31
	Operating Costs	32
	Depletion, Depreciation, Amortization and Accretion	33
	General and Administrative	33
	Interest Income	34
	Interest Expense	34
	Gain (Loss) on Derivative Contracts	34

Table of Contents

	Capital Resources and Liquidity	34
	Cash Flow	34
	Credit Agreement	35
	Repurchase Transactions	36
	Derivative Transactions	36
	Contractual Obligations	37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		37
	Gathering System Revenue Risk	37
	Interest Rate Risk	37
	Derivative Contracts	38
ITEM 4. CONTROLS AND PROCEDURES		38
	Disclosure Controls and Procedures	38
	Changes in Internal Control Over Financial Reporting	38
	Inherent Limitations on Effectiveness of Controls	38
PART II OTHER INFORMATION		38
ITEM 1. LEGAL PROCEEDINGS		38
ITEM 1A. RISK FACTORS		38
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS		39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		39
ITEM 4. MINE SAFETY DISCLOSURES		39
ITEM 5. OTHER INFORMATION		39
ITEM 6. EXHIBITS		40
SIGNATURES		41

Table of Contents

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, 2024, 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, 2024. Our Annual Report on Form 10-K for the year ended December 31, 2024 is available on our website at www.epsilonenergyltd.com.

Table of Contents

PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Balance Sheets


	September 30,		December 31,
	2025		2024
ASSETS
Current assets
Cash and cash equivalents	$	12,766,167	$	6,519,793
Accounts receivable		4,515,199		5,843,722
Fair value of derivatives		889,187		—
Prepaid income taxes		—		975,963
Other current assets		965,970		792,041
Total current assets		19,136,523		14,131,519
Non-current assets
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties		200,066,005		191,879,210
Unproved properties		33,396,744		28,364,186
Accumulated depletion, depreciation, amortization and impairment		(134,181,378)		(123,281,395)
Total oil and gas properties, net		99,281,371		96,962,001
Gathering system		43,540,301		43,116,371
Accumulated depletion, depreciation, amortization and impairment		(37,271,826)		(36,449,511)
Total gathering system, net		6,268,475		6,666,860
Land		637,764		637,764
Buildings and other property and equipment, net		221,901		259,335
Total property and equipment, net		106,409,511		104,525,960
Other assets:
Operating lease right-of-use assets, long term		272,298		344,589
Restricted cash		470,000		470,000
Prepaid drilling costs		4,673		982,717
Total non-current assets		107,156,482		106,323,266
Total assets	$	126,293,005	$	120,454,785

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable trade	$	2,963,805	$	2,334,732
Gathering fees payable		978,890		997,016
Royalties payable		1,481,520		1,400,976
Income taxes payable		1,556,724		—
Accrued capital expenditures		1,605,705		572,079
Accrued compensation		726,213		695,018
Other accrued liabilities		490,970		371,503
Fair value of derivatives		—		487,548
Operating lease liabilities		120,799		121,135
Total current liabilities		9,924,626		6,980,007
Non-current liabilities
Asset retirement obligations		3,822,030		3,652,296
Deferred income taxes		12,062,053		12,738,577
Operating lease liabilities, long term		266,263		355,776
Total non-current liabilities		16,150,346		16,746,649
Total liabilities		26,074,972		23,726,656
Commitments and contingencies (Note 11)
Shareholders' equity
Preferred shares, no par value, unlimited shares authorized, none issued or outstanding		—		—
Common shares, no par value, unlimited shares authorized and 22,058,574 shares issued and outstanding at September 30, 2025 and 22,008,766 issued and outstanding at December 31, 2024		116,081,031		116,081,031
Additional paid-in capital		13,267,196		12,118,907
Accumulated deficit		(38,995,173)		(41,505,076)
Accumulated other comprehensive income		9,864,979		10,033,267
Total shareholders' equity		100,218,033		96,728,129
Total liabilities and shareholders' equity	$	126,293,005	$	120,454,785

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 September 30,				Nine months ended September 30,
	2025		2024		2025		2024
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue	$	7,536,248	$	6,203,953	$	31,586,766	$	18,118,368
Gas gathering and compression revenue		1,445,211		1,083,988		5,182,566		4,464,134
Total revenue		8,981,459		7,287,941		36,769,332		22,582,502

Operating costs and expenses:
Lease operating expenses		2,397,052		2,099,501		7,615,735		5,517,830
Gathering system operating expenses		563,542		490,325		1,729,988		1,692,862
Depletion, depreciation, amortization, and accretion		2,570,462		2,698,812		9,247,973		7,127,641
Impairment expense		—		—		2,676,669		—
General and administrative expenses:
Stock based compensation expense		376,613		309,109		1,148,289		944,267
Other general and administrative expenses		2,467,785		1,449,576		5,748,081		4,486,814
Total operating costs and expenses		8,375,454		7,047,323		28,166,735		19,769,414
Operating income		606,005		240,618		8,602,597		2,813,088

Other income (expense):
Interest income		84,894		60,693		117,440		435,908
Interest expense		(11,666)		(17,598)		(43,783)		(35,117)
Gain on derivative contracts, net		964,307		440,712		2,076,000		245,095
Other income (expense), net		5,252		9,994		(28,086)		111,067
Other income, net		1,042,787		493,801		2,121,571		756,953

Net income before income tax expense		1,648,792		734,419		10,724,168		3,570,041
Income tax expense		576,497		368,398		4,084,378		881,464
NET INCOME	$	1,072,295	$	366,021	$	6,639,790	$	2,688,577
Currency translation adjustments		(42,676)		39,845		(168,288)		62,438
Unrealized loss on securities		—		—		—		(1,598)
NET COMPREHENSIVE INCOME	$	1,029,619	$	405,866	$	6,471,502	$	2,749,417

Net income per share, basic	$	0.05	$	0.02	$	0.30	$	0.12
Net income per share, diluted	$	0.05	$	0.02	$	0.30	$	0.12
Weighted average number of shares outstanding, basic		22,017,310		21,948,519		22,028,248		21,954,803
Weighted average number of shares outstanding, diluted		22,159,532		22,155,292		22,170,223		22,000,881

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 (Loss)		Deficit		Equity
Balance at January 1, 2025	22,008,766	$	116,081,031	—	$	—	$	12,118,907	$	10,033,267	$	(41,505,076)	$	96,728,129
Net income	—		—	—		—		—		—		4,016,034		4,016,034
Dividends paid	—		—	—		—		—		—		(1,375,612)		(1,375,612)
Stock-based compensation expense	—		—	—		—		385,838		—		—		385,838
Other comprehensive loss	—		—	—		—		—		(50,116)		—		(50,116)
Balance at March 31, 2025	22,008,766	$	116,081,031	—	$	—	$	12,504,745	$	9,983,151	$	(38,864,654)	$	99,704,273
Net income	—		—	—		—		—		—		1,551,461		1,551,461
Dividends paid	—		—	—		—		—		—		(1,375,760)		(1,375,760)
Stock-based compensation expense	—		—	—		—		385,838		—		—		385,838
Vesting of shares of restricted stock	8,639		—	—		—		—		—		—		—
Other comprehensive loss	—		—	—		—		—		(75,496)		—		(75,496)
Balance at June 30, 2025	22,017,405	$	116,081,031	—	$	—	$	12,890,583	$	9,907,655	$	(38,688,953)	$	100,190,316
Net income	—		—	—		—		—		—		1,072,295		1,072,295
Dividends paid	—		—	—		—		—		—		(1,378,515)		(1,378,515)
Stock-based compensation expense	—		—	—		—		376,613		—		—		376,613
Vesting of shares of restricted stock	41,169		—	—		—		—		—		—		—
Other comprehensive loss	—		—	—		—		—		(42,676)		—		(42,676)
Balance at September 30, 2025	22,058,574	$	116,081,031	—	$	—	$	13,267,196	$	9,864,979	$	(38,995,173)	$	100,218,033

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

Table of Contents


									Accumulated
									Other				Total
	Common Shares Issued			Treasury Shares			Additional		Comprehensive		Accumulated		Shareholders'
	Shares	Amount		Shares	Amount		paid-in Capital		Income (Loss)		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 income	—		—	—		—		—		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
Net income	—		—	—		—		—		—		366,021		366,021
Dividends paid	—		—	—		—		—		—		(1,374,428)		(1,374,428)
Stock-based compensation expense	—		—	—		—		309,109		—		—		309,109
Buyback of common shares	—		—	(125,000)		(627,500)		—		—		—		(627,500)
Vesting of shares of restricted stock	51,837		—	—		—		—		—		—		—
Other comprehensive income	—		—	—		—		—		39,845		—		39,845
Balance at September 30, 2024	21,973,687	$	116,708,531	(125,000)	$	(627,500)	$	11,818,758	$	9,833,117	$	(39,374,242)	$	98,358,664

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


	Nine months ended September 30,
	2025		2024
Cash flows from operating activities:
Net income	$	6,639,790	$	2,688,577
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion		9,247,973		7,127,641
Impairment expense		2,676,669		—
Accretion of discount on available for sale securities		—		(297,637)
Gain on derivative contracts		(2,076,000)		(245,095)
Settlement received on derivative contracts		699,265		1,245,931
Settlement of asset retirement obligation		(1,600)		(88,992)
Stock-based compensation expense		1,148,289		944,267
Deferred income tax (benefit) expense		(676,523)		584,088
Changes in assets and liabilities:
Accounts receivable		1,328,523		1,545,431
Prepaid income taxes		—		(67,878)
Other assets and liabilities		(191,487)		(94,360)
Accounts payable, royalties payable, gathering fees payable, and other accrued liabilities		(430,885)		(1,520,707)
Income taxes payable		2,532,686		—
Net cash provided by operating activities		20,896,700		11,821,266
Cash flows from investing activities:
Additions to unproved oil and gas properties		(5,032,558)		(3,100,294)
Additions to proved oil and gas properties		(5,901,411)		(28,728,498)
Additions to gathering system properties		(384,124)		(76,625)
Additions to land, buildings and property and equipment		(12,102)		(13,912)
Purchases of short term investments - available for sale		—		(4,045,785)
Proceeds from short term investments - held to maturity		—		23,116,930
Prepaid drilling costs		978,044		1,813,808
Net cash used in investing activities		(10,352,151)		(11,034,376)
Cash flows from financing activities:
Buyback of common shares		—		(1,831,208)
Dividends paid		(4,129,887)		(4,116,777)
Net cash used in financing activities		(4,129,887)		(5,947,985)
Effect of currency rates on cash, cash equivalents, and restricted cash		(168,288)		62,438
Increase (decrease) in cash, cash equivalents, and restricted cash		6,246,374		(5,098,657)
Cash, cash equivalents, and restricted cash, beginning of period		6,989,793		13,873,628
Cash, cash equivalents, and restricted cash, end of period	$	13,236,167	$	8,774,971

Supplemental cash flow disclosures:
Income tax paid - federal	$	1,417,860	$	—
Income tax paid - state (PA)	$	755,138	$	—
Income tax paid - state (other)	$	26,710	$	4,000
Interest paid	$	9,935	$	16,832

Non-cash investing activities:
Change in proved properties accrued in accounts payable	$	2,266,859	$	818,504
Change in gathering system accrued in accounts payable	$	39,805	$	173,193
Asset retirement obligation asset additions and adjustments	$	25,196	$	39,597

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 Alberta Business Corporations Act. 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.” 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 August 11, 2025, Epsilon signed definitive agreements to acquire two entities (Peak Exploration and Production LLC and Peak BLM Lease LLC, together “Peak”) majority owned by funds of Yorktown Energy Partners LLC. Combined consideration due at closing is the issuance of 6 million Epsilon common shares and the assumption of an estimated $51.2 million of debt. Additional contingent consideration of up to 2.5 million Epsilon common shares could be due subject to the ability to access acreage currently affected by a drilling permit moratorium in Converse County, Wyoming. The assets to be acquired include an operated position of 40,500 net acres producing 2.2 MBoepd in the Powder River Basin in Campbell and Converse County, Wyoming. The transactions are expected to close in Q4 2025, subject to obtaining the requisite Epsilon shareholder approval.

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, 2024. 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.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

Recently Issued Accounting Standards

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. The amendments will be effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of this new standard and believes that the adoption will result in additional disclosures, but will not have any other impact on its consolidated financial statements.

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 improve 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 has adopted ASU No. 2024-01 as of January 1, 2025. There was no impact as a result of the adoption of this ASU.

In November 2024, the FASB issued ASU 2024-3 "Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures." The ASU will improve the decision usefulness for investors by requiring public business entities to disclose more detailed information about their expenses such as (a) inventory and manufacturing expense, (b) employee compensation, (c) depreciation, (d) intangible asset amortization, etc. The amendments will be effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The amendments will be applied prospectively with an option for a retrospective application. The Company is evaluating the impact of this new standard and believes that the adoption will result in additional disclosures, but will not have any other impact on its consolidated financial statements.

In July 2025, the FASB issued ASU 2025-05, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit losses for Accounts Receivable and Contract Assets. The amendments in this update provide (1) all entities with a practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets and (2) entities other than public business entities with an accounting policy election to consider collection activity after the balance sheet date when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606. The amendments will be effective for fiscal years beginning after December 15, 2025, with early adoption permitted. The Company is evaluating the impact of this new standard and believes that the adoption may result in additional disclosures, but will not have any material impact on its 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 September 30, 2025 and December 31, 2024:


	September 30,		December 31,
	2025		2024
Cash and cash equivalents	$	12,766,167	$	6,519,793
Restricted cash included in other assets		470,000		470,000
Cash, cash equivalents, and restricted cash in the statement of cash flows	$	13,236,167	$	6,989,793

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

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.

As of September 30, 2025 and December 31, 2024, the Company had no short term investments.

During the nine months ended September 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. During the three months ended September 30, 2024, the Company did not acquire or sell any securities. The realized gains are included in other income in the consolidated Statements of Operations and Comprehensive Income.

5. Property and Equipment

The following table summarizes the Company’s property and equipment as of September 30, 2025 and December 31, 2024:


	September 30,		December 31,
	2025		2024
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties	$	200,066,005	$	191,879,210
Unproved properties		33,396,744		28,364,186
Accumulated depletion, depreciation, amortization and impairment		(134,181,378)		(123,281,395)
Total oil and gas properties, net		99,281,371		96,962,001
Gathering system		43,540,301		43,116,371
Accumulated depletion, depreciation, amortization and impairment		(37,271,826)		(36,449,511)
Total gathering system, net		6,268,475		6,666,860
Land		637,764		637,764
Buildings and other property and equipment, net		221,901		259,335
Total property and equipment, net	$	106,409,511	$	104,525,960

Asset Acquisitions

During the nine months ended September 30, 2025, Epsilon had no asset acquisitions.

During the nine months ended September 30, 2024, Epsilon acquired assets that included the following:

●

a 25% working interest in three producing wells located in Ector County, Texas.

●

a 25% working interest in an additional 3,620 gross undeveloped acres in Ector County, Texas.

●

a 50% working interest in 14,243 gross undeveloped acres in Alberta, Canada.

Management determined that substantially all the fair value of the assets acquired was concentrated in a group of similar identifiable assets. Based on this determination, the acquisition was accounted for as an asset acquisition.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

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, basis differentials, 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 properties to their estimated fair value 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 nine months ended September 30, 2025, Epsilon recorded an impairment of $2.7 million for two wells drilled in Alberta, Canada. The impairment was a result of a decrease in estimated reserves due to early production coming in below expectations, cost overruns and lower forward commodity prices. During the three months ended September 30, 2025, no impairment was recorded.

During the three and nine months ended September 30, 2024, no impairment was recorded. For the year ended December 31, 2024, the Company had $0.53 million of impairment reflected in proved properties on the Consolidated Balance Sheets. To be consistent with the current presentation, the prior year impairment has been reclassed to accumulated depletion, depreciation, amortization and impairment on the Consolidated Balance Sheets.

6. Revolving Line of Credit

The Company closed a senior secured reserve based revolving credit facility on June 28, 2023, with Frost Bank as issuing bank and sole lender. The borrowing base at September 30, 2025 was $45 million (redetermined as of February 10, 2025), supported by the Company’s upstream assets in Pennsylvania and subject to semi-annual redeterminations with a maturity date of June 28, 2027. Interest will be charged at the Daily Simple SOFR rate plus a margin of 3.25%. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower). There are currently no borrowings under the facility.

Under the terms of the facility, the Company must adhere to the following financial covenants:

●

Current ratio of 1.0 to 1.0 (current assets / current liabilities)

●

Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and non-cash amounts)

Additionally, if the Leverage ratio is greater than 1.0 to 1.0, or the borrowing base utilization is greater than 50%, the Company is required to hedge 50% of the anticipated production from PDP reserves for a rolling 24-month period.

On October 8, 2025, the Company closed a new senior secured reserve based revolving credit facility with Frost Bank as administrative agent and Frost Bank and Texas Capital Bank as lenders (replacing the previous credit facility). The borrowing base was initially set at $45 million, supported by the Company’s upstream assets and subject to semi-annual redeterminations with a maturity date of October 8, 2029. Interest will be charged at the Daily Simple SOFR rate plus a margin of 3-4%. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary (Borrower) and the Company was added as a co-borrower. There are currently no borrowings under the facility.

Under the terms of the facility, the Company must adhere to the following financial covenants:

●

Current ratio of 1.0 to 1.0 (current assets / current liabilities)

●

Leverage ratio of less than 2.5 to 1.0 (total debt / income adjusted for interest, taxes and noncash amounts)

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

Additionally, once the facility is drawn, the Company is required to hedge 50% of the anticipated production from PDP reserves for a rolling 18-month period (reduces to 25% on the last 6 months if the facility utilization is <50% of the borrowing base).

We were in compliance with the financial covenants of the agreement as of September 30, 2025.

Balance at

September 30,

December 31,

Current

2025

2024

Borrowing Base

Interest Rate

Revolving line of credit

—

45,000,000

SOFR + 3.25%

7. Shareholders’ Equity

(a)Authorized shares

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

(b)Purchases of Equity Shares

Normal Course Issuer Bid

On February 12, 2025, Epsilon’s board of directors (the “Board”) authorized a new share repurchase program of up to 2,200,876 common shares, representing 10% of the current outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $13.0 million. The program commenced on February 12, 2025 and ends on February 11, 2026, unless the maximum amount of common shares is purchased before then or the Board approves earlier termination.

The previous share repurchase program commenced on March 19, 2024. During the year ended December 31, 2024, we repurchased 125,000 common shares and spent $627,500 at an average price of $5.00 per share (excluding commissions) under the plan. On February 12, 2025, the Board terminated and revoked authority under the program.

During the nine months ended September 30, 2025, no shares were repurchased under the new or previous program.

(c)Equity Incentive Plan

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.

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 is authorized to issue up to 2,000,000 Common Shares.

Restricted Stock

For the nine months ended September 30, 2025, no restricted common shares were awarded to the Company’s board of directors and employees. For the year ended December 31, 2024, 300,052 restricted common shares with a weighted average grant date fair value of $5.97 were awarded to the Company’s management, employees, and board of directors. These shares vest over a three-year period, with an equal number of shares being issued per period on the anniversary of the award resolution. The vesting of the shares is contingent on the individuals’ continued employment or service. The Company determined the fair value of the granted Restricted Stock based on the market price of the common shares of the Company on the date of grant.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

The following table summarizes restricted stock activity for the nine months ended September 30, 2025, and the year ended December 31, 2024:


	Nine months ended				Year ended
	September 30, 2025				December 31, 2024
	Number of	Weighted	Weighted		Number of	Weighted	Weighted
	Restricted	Average	Average		Restricted	Average	Average
	Shares	Remaining Life	Grant Date		Shares	Remaining Life	Grant Date
	Outstanding	(years)	Fair Value		Outstanding	(years)	Fair Value
Balance non-vested Restricted Stock at beginning of period	560,970	1.61	$	5.77	491,536	1.74	$	5.59
Granted	—	—		-	300,052	1.92		5.97
Vested	(49,808)	—		5.72	(230,618)	—		5.65
Balance non-vested Restricted Stock at end of period	511,162	0.95	$	5.78	560,970	1.61	$	5.77

Stock compensation expense for the granted Restricted Stock is recognized over the vesting period. Stock compensation expense recognized during the three and nine months ended September 30, 2025 was $376,613 and $1,148,289, respectively (for the three and nine months ended September 30, 2024 was $309,109 and $944,267, respectively).

As of September 30, 2025, the Company had unrecognized stock-based compensation related to these shares of $2,050,180 to be recognized over a weighted average period of 1 year (at December 31, 2024: $3,198,469 over 1.30 years).

(d)Dividends

On February 26, 2025, June 3, 2025, and September 2, 2025, the Board declared a quarterly dividend of $0.0625 per common share (annualized $0.25 per common share) totaling in aggregate an amount of approximately $4.1 million that has been paid during the nine months ended September 30, 2025.

8. Revenue Recognition

Revenues are comprised of sales of natural gas, oil and natural gas liquids (“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. Gathering System revenues derived from Epsilon’s production, which have been eliminated from total gathering system revenues (“elimination entry”), amounted to $0.4 million and $1.5 million, respectively, for the three and nine months ended September 30, 2025 ($0.3 million and $0.8 million, respectively, for the three and nine months ended September 30, 2024).

The following table details revenue for the three and nine months ended September 30, 2025 and 2024.


	Three months ended September 30,				Nine Months Ended September 30,
	2025		2024		2025		2024
Operating revenue
Natural gas	$	4,758,578	$	1,903,946	$	22,282,495	$	6,828,155
Natural gas liquids		267,019		335,271		799,289		1,096,678
Oil and condensate		2,510,651		3,964,736		8,504,982		10,193,535
Gathering and compression fees⁽¹⁾		1,445,211		1,083,988		5,182,566		4,464,134
Total operating revenue	$	8,981,459	$	7,287,941	$	36,769,332	$	22,582,502

(1)

Net of the elimination entry

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

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 and Comprehensive Income.

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 Auburn gas gathering system in Pennsylvania. 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 transmission and compression has occurred. As a result, the Company must estimate the amount of production that was transmitted and compressed within the system. Estimated revenue due to the Company is recorded within the receivables line item on the accompanying Consolidated Balance Sheets until payment is received.

Current Expected Credit Losses

Under ASU 326, Financial Instruments – Credit Losses, estimated losses on financial assets are provided through an allowance for credit losses. The majority of our financial assets are held in cash and cash equivalents and accounts receivable. The accounts receivable are primarily from purchasers of oil and natural gas, counterparties to our financial instruments, and revenues earned for compression and gathering services. Our oil, gas, and natural gas liquids accounts receivable are generally collected within 30 days after the end of the month. Compression and gathering receivables are generally collected within 60 days after the end of the month. We assess collectability through various procedures, including review of our trade receivable balances by counterparty, assessing economic events and conditions, our historical experience with counterparties, the counterparty’s financial condition and the amount and age of past due accounts. As of September 30, 2025 and December 31, 2024, we determined that our allowance for credit loss was nil.


	September 30,		December 31,		December 31,
	2025		2024		2023
Accounts receivable
Natural gas and oil sales	$	3,224,441	$	4,888,294	$	4,327,886
Joint interest billing		—		—		17,476
Gathering and compression fees		1,071,634		918,471		1,543,239
Commodity contract		219,124		36,957		72,075
Interest		—		—		54,772
Total accounts receivable	$	4,515,199	$	5,843,722	$	6,015,448

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

9. Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes certain transactions that have generally been reported in the Consolidated Statements of Changes in Shareholders’ Equity. The activity in accumulated other comprehensive income during the three and nine months ended September 30, 2025 and 2024 consisted of the following:


	Three months ended September 30,				Nine Months Ended September 30,
	2025		2024		2025		2024
Balance at beginning of period	$	9,907,655	$	9,793,272	$	10,033,267	$	9,772,277
Translation (loss)/gain		(42,676)		39,845		(168,288)		62,438
Unrealized gain/(loss) on securities		—		—		—		(1,598)
Balance at end of period	$	9,864,979	$	9,833,117	$	9,864,979	$	9,833,117

10. Income Taxes

Income tax provisions for the three and nine months ended September 30, 2025 and 2024 are as follows:


	Three months ended September 30,				Nine months ended September 30,
	2025		2024		2025		2024
Current:
Federal	$	387,475	$	(198,619)	$	3,746,118	$	268,691
State		85,869		(71,807)		1,014,783		28,685
Total current income tax expense		473,344		(270,426)		4,760,901		297,376
Deferred:
Federal		98,977		565,137		(605,049)		919,522
State		4,176		73,687		(71,474)		(335,434)
Total deferred tax expense		103,153		638,824		(676,523)		584,088
Income tax expense	$	576,497	$	368,398	$	4,084,378	$	881,464

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 appropriate support for the income tax positions taken and to be taken on our tax returns and that the accruals for tax liabilities are adequate for all open years based on our assessment of various factors including past experience and interpretations of tax law applied to the facts of each matter. The Company's tax returns are open to audit under the statute of limitations for the years ending December 31, 2021 through December 31, 2024. To the extent we utilize net operating losses generated in earlier years, such earlier years may also be subject to audit.

Starting in 2023, distributions of Epsilon Energy USA Inc. earnings to Epsilon Energy Ltd. incur a 5% U.S. dividend withholding tax, provided the Company is eligible for benefits under the U.S. / Canada income treaty.

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 nine months ended September 30, 2025 was higher than the statutory federal rate as a result of state income taxes and the valuation allowance against the Canadian net operating loss.

In July 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, which includes a broad range of tax reform provisions affecting businesses. The OBBBA extends or makes permanent certain tax law changes enacted as part of the 2017 Tax Cuts and Jobs Act, as well as makes other changes to the current tax code. As a result of this enactment, our deferred tax balances as of September 30, 2025 reflect the provisions of the new law currently in effect, resulting in the deferral of a portion of current federal tax over future periods. As our income tax provision includes both current and deferred components, the overall net impact is not significant. We are continuing to monitor additional provisions of the OBBBA that become effective through 2027 for potential future impact.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

11. Commitments and Contingencies

The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of September 30, 2025, the Company had commitments of $0.2 million for capital expenditures.

From time to time, the Company may be involved in various legal matters. Management believes that as of September 30, 2025, there are no legal matters whose resolution could have a material adverse effect on the unaudited condensed consolidated financial statements.

12. Leases

Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of September 30, 2025 and December 31, 2024 as summarized in the following table:


	September 30,		December 31,
	2025		2024
Asset
Operating lease right-of-use assets, long term	$	272,298	$	344,589
Total operating lease right-of-use assets	$	272,298	$	344,589

Liabilities
Operating lease liabilities	$	120,799	$	121,135
Operating lease liabilities, long term		266,263		355,776
Total operating lease liabilities	$	387,062	$	476,911

Operating lease costs	$	185,368	$	236,044

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	224,377	$	214,230
Weighted average remaining lease term (years) - operating lease		2.15		2.50
Weighted average discount rate (annualized) - operating lease		8.25%		8.25%

On March 1, 2023, the Company commenced a new office lease with a 70 month lease term and future lease payments estimated to be approximately $0.85 million. There are no other pending leases, and no lease arrangements in which the Company is the lessor.

Lease expense for operating leases was $0.19 million and $0.24 million for the nine months ended September 30, 2025 and the year ended December 31, 2024, respectively. This lease expense is presented in other general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.

Future minimum lease payments as of September 30, 2025 are as follows:


	Operating Leases
2025	$	43,388
2026		177,021
2027		180,492
2028		183,963
Total minimum lease payments		584,864
Less: imputed interest		(197,802)
Present value of future minimum lease payments		387,062
Less: current obligations under leases		(120,799)
Long-term lease obligations	$	266,263

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

13. Net Income Per Share

Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed based upon the weighted-average number of common shares outstanding during the period plus the assumed issuance of common shares for all potentially dilutive securities.

The net income used in the calculation of basic and diluted net income per share is as follows:


	Three months ended September 30,				Nine months ended September 30,
	2025		2024		2025		2024
Net income	$	1,072,295	$	366,021	$	6,639,790	$	2,688,577

In calculating the net income per share, basic and diluted, the following weighted-average shares were used:


	Three months ended September 30,		Nine months ended September 30,
	2025	2024	2025	2024
Basic weighted-average number of shares outstanding	22,017,310	21,948,519	22,028,248	21,954,803
Unvested time-based restricted shares	142,222	206,773	141,975	46,078
Diluted weighted-average shares outstanding	22,159,532	22,155,292	22,170,223	22,000,881

The Company excluded the following shares from the diluted EPS because their inclusion would have been anti-dilutive.


	Three months ended September 30,		Nine months ended September 30,
	2025	2024	2025	2024
Anti-dilutive unvested time-based restricted shares	369,387	408,816	399,441	478,005

14. Operating Segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (CODM). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as executive management consisting of the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer. The CODM uses the Company’s consolidated financial results, including operating income or loss by segment, to make key operating decisions, assess performance, and to allocate resources. Segment performance is evaluated based on operating income or loss as shown in the table below. Interest income and income taxes are managed separately on a group basis.

The Company’s two reportable segments are as follows:

The Upstream segment activities include acquisition, development and production of natural gas and oil reserves on properties within the United States and Canada; and

The Gas Gathering segment partners with two other companies to operate a natural gas gathering system.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

Segment activity for the nine months ended September 30, 2025 and 2024 is as follows:


	Upstream		Gas Gathering		Total
As of and for the nine months ended September 30, 2025
Operating revenue
Natural gas	$	22,282,495	$	—	$	22,282,495
Natural gas liquids		799,289		—		799,289
Oil and condensate		8,504,982		—		8,504,982
Gathering and compression fees		—		5,182,566		5,182,566
Intersegment gathering and compression fees		—		1,465,548		1,465,548
		31,586,766		6,648,114		38,234,880

Reconciliation of operating revenue
Elimination of intersegment revenues						(1,465,548)
Total consolidated operating revenue⁽¹⁾						36,769,332

Operating costs
Gathering, transportation, and compression		5,705,765		—		5,705,765
Other lease operating expense		1,909,970		—		1,909,970
Gathering system operating expenses		—		1,729,988		1,729,988
Intersegment other lease operating expense		1,465,548		—		1,465,548
Impairment		2,676,669		—		2,676,669
Depletion, depreciation, amortization and accretion		8,419,766		828,207		9,247,973
Segment operating income	$	11,409,048	$	4,089,919	$	14,033,419

Reconciliation of segment operating income
Salary expense						2,622,769
Stock based compensation						1,148,289
Other general and administrative						3,125,312
Elimination of intersegment other lease operating expenses						(1,465,548)
Total consolidated operating income						8,602,597

Other income (expense)
Interest income						117,440
Interest expense						(43,783)
Gain on derivative contracts						2,076,000
Other expense						(28,086)
Other expense, net						2,121,571
Net income before income tax expense					$	10,724,168

Capital expenditures⁽²⁾	$	10,946,071	$	384,124	$	11,330,195
Segment assets	$	99,286,044	$	6,268,475	$	105,554,519

Total segment assets reconciled to consolidated amounts are as follows:
Total segment assets					$	105,554,519
Current assets, net						19,136,523
Other property and equipment						859,665
Operating lease right-of-use asset						272,298
Restricted cash						470,000
					$	126,293,005

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements


	Upstream		Gas Gathering		Total
As of and for the nine months ended September 30, 2024
Operating revenue
Natural gas	$	6,828,155	$	—	$	6,828,155
Natural gas liquids		1,096,678		—		1,096,678
Oil and condensate		10,193,535		—		10,193,535
Gathering and compression fees		—		4,464,134		4,464,134
Intersegment gathering and compression fees		—		842,625		842,625
		18,118,368		5,306,759		23,425,127

Reconciliation of operating revenue
Elimination of intersegment revenues						(842,625)
Total consolidated operating revenue⁽¹⁾						22,582,502

Operating costs
Gathering, transportation, and compression		3,759,752		—		3,759,752
Other lease operating expense		1,758,078		—		1,758,078
Gathering system operating expenses		—		1,692,862		1,692,862
Intersegment other lease operating expense		842,625		—		842,625
Depletion, depreciation, amortization and accretion		6,446,271		681,370		7,127,641
Segment operating income	$	5,311,642	$	2,932,527	$	7,401,544

Reconciliation of segment operating income
Salary expense						2,169,379
Stock based compensation						944,267
Other general and administrative						2,317,435
Elimination of intersegment other lease operating expenses						(842,625)
Total consolidated operating income						2,813,088

Other income (expense)
Interest income						435,908
Interest expense						(35,117)
Gain on derivative contracts						245,095
Other expense						111,067
Other income, net						756,953
Net income before income tax expense					$	3,570,041

Capital expenditures⁽²⁾	$	31,842,704	$	76,625	$	31,919,329
Segment assets	$	98,473,841	$	6,766,726	$	105,240,567

Total segment assets reconciled to consolidated amounts are as follows:
Total segment assets					$	105,240,567
Current assets, net						14,811,129
Other property and equipment						906,897
Operating lease right-of-use asset						368,564
Restricted cash						470,000
					$	121,797,157

(1)

Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the nine months ended September 30, 2025 and 2024 have been eliminated upon consolidation. For the nine months ended September 30, 2025, Epsilon sold natural gas to 34 unique customers. The one customer over 10% comprised 34% of total revenue. For the nine months ended September 30, 2024, Epsilon sold natural gas to 32 unique customers. The two customers over 10% comprised 18% and 11% of total revenue.

(2)

Capital expenditures for the Upstream segment consist primarily of the acquisition of properties, and the drilling and completing of wells while Gas Gathering consists of expenditures relating to the expansion, completion, and maintenance of the gathering and compression facility.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

Segment activity for the three months ended September 30, 2025 and 2024 is as follows:


	Upstream		Gas Gathering		Total
As of and for the three months ended September 30, 2025
Operating revenue
Natural gas	$	4,758,578	$	—	$	4,758,578
Natural gas liquids		267,019		—		267,019
Oil and condensate		2,510,651		—		2,510,651
Gathering and compression fees		—		1,445,211		1,445,211
Intersegment gathering and compression fees		—		401,325		401,325
		7,536,248		1,846,536		9,382,784

Reconciliation of operating revenue
Elimination of intersegment revenues						(401,325)
Total consolidated operating revenue⁽¹⁾						8,981,459

Operating costs
Gathering, transportation, and compression		1,727,590		—		1,727,590
Other lease operating expense		669,462		—		669,462
Gathering system operating expenses		—		563,542		563,542
Intersegment other lease operating expense		401,325		—		401,325
Impairment		—		—		—
Depletion, depreciation, amortization and accretion		2,354,222		216,240

Epsilon Energy Ltd. 10-Q