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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 March 31, 2026

☐ 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 May 11, 2026, there were 30,248,617 Common Shares outstanding.

Table of Contents


Contents

FORWARD-LOOKING STATEMENTS			4
PART I-FINANCIAL INFORMATION			5
ITEM 1. FINANCIAL STATEMENTS			5
Unaudited Condensed Consolidated Balance Sheets			5
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income			6
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity			7
Unaudited Condensed Consolidated Statements of Cash Flows			8
Notes to the Unaudited Condensed Consolidated Financial Statements
1.	Description of Business		9
2.	Basis of Preparation		9
	Interim Financial Statements		9
	Principles of Consolidation		9
	Use of Estimates		9
	Recently Issued Accounting Standards		9
3.	Cash, Cash Equivalents, and Restricted Cash		10
4.	Property and Equipment		10
	Property Impairment		11
5.	Revolving Line of Credit		11
6.	Shareholders’ Equity		11
7.	Revenue Recognition		13
8.	Accumulated Other Comprehensive Income		14
9.	Income Taxes		14
10.	Commitments and Contingencies		15
11.	Leases		16
12.	Net Income Per Share		17
13.	Operating Segments		17
14.	Commodity Risk Management Activities		20
	Commodity Price Risks		20
	Commodity Derivative Contracts		20
15.	Asset Retirement Obligations		21
16.	Fair Value Measurements		22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			23
	Overview		23
	Business Strategy		23
	Operational Highlights		24
	Non-GAAP Financial Measures-Adjusted EBITDA		25
	Net Operating Revenues		26
	Operating Costs		27
	Depletion, Depreciation, Amortization and Accretion		27
	General and Administrative		28
	Interest Income		29
	Interest Expense		29
	Gain (Loss) on Derivative Contracts		29
	Capital Resources and Liquidity		29

Table of Contents

	Cash Flow	29
	Credit Agreement	30
	Repurchase Transactions	30
	Derivative Transactions	31
	Contractual Obligations	31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		32
	Gathering System Revenue Risk	32
	Interest Rate Risk	32
	Derivative Contracts	32
ITEM 4. CONTROLS AND PROCEDURES		32
	Disclosure Controls and Procedures	32
	Changes in Internal Control Over Financial Reporting	33
	Inherent Limitations on Effectiveness of Controls	33
PART II OTHER INFORMATION		33
ITEM 1. LEGAL PROCEEDINGS		33
ITEM 1A. RISK FACTORS		34
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS		34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		34
ITEM 4. MINE SAFETY DISCLOSURES		34
ITEM 5. OTHER INFORMATION		34
ITEM 6. EXHIBITS		35
SIGNATURES		36

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, 2025, 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, 2025. Our Annual Report on Form 10-K for the year ended December 31, 2025 is available on our website at www.epsilonenergyltd.com.

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PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Balance Sheets


		March 31,			December 31,
		2026			2025
ASSETS
Current assets
Cash and cash equivalents		$	7,912,858		$	8,959,954
Accounts receivable			16,794,429			16,132,501
Fair value of derivatives			426,255			2,694,340
Prepaid income taxes			2,959,475			2,949,311
Other current assets			1,688,563			1,847,672
Total current assets			29,781,580			32,583,778
Non-current assets
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties			237,783,115			233,334,212
Unproved properties			79,690,561			79,307,169
Accumulated depletion, depreciation, amortization and impairment			(134,196,469)			(131,636,141)
Total oil and gas properties, net			183,277,207			181,005,240
Gathering system			43,593,370			43,540,389
Accumulated depletion, depreciation, amortization and impairment			(37,680,704)			(37,472,139)
Total gathering system, net			5,912,666			6,068,250
Land			1,231,965			1,231,965
Buildings and other property and equipment, net			4,077,163			4,132,732
Total property and equipment, net			194,499,001			192,438,187
Other assets:
Operating lease right-of-use assets, long term			429,923			488,949
Restricted cash			553,000			553,000
Fair value of derivatives, long term			185,056			1,154,936
Deferred financing costs			724,263			774,347
Prepaid drilling costs			246,220			246,220
Total non-current assets			196,637,463			195,655,639
Total assets		$	226,419,043		$	228,239,417

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable trade		$	8,159,934		$	11,148,050
Gathering fees payable			1,047,841			1,076,143
Royalties payable			10,071,572			8,702,526
Accrued capital expenditures			577,154			24,888
Accrued compensation			739,649			1,056,304
Other accrued liabilities			2,927,196			2,682,090
Fair value of derivatives			3,833,399			—
Operating lease liabilities			271,790			271,494
Total current liabilities			27,628,535			24,961,495
Non-current liabilities
Credit facility payable			45,500,000			50,500,000
Ad valorem taxes, long term			7,411,971			7,411,971
Asset retirement obligations			7,553,458			7,437,960
Fair value of derivatives, long term			810,629			—
Deferred income taxes			13,120,790			12,855,585
Operating lease liabilities, long term			271,046			340,052
Total non-current liabilities			74,667,894			78,545,568
Total liabilities			102,296,429			103,507,063
Commitments and contingencies (Note 10)
Shareholders' equity
Preferred shares, no par value, unlimited shares authorized, none issued or outstanding			—			—
Common shares, no par value, unlimited shares authorized and 30,239,980 shares issued and outstanding at March 31, 2026 and December 31, 2025			154,274,125			154,274,125
Additional paid-in capital			14,411,351			13,863,824
Accumulated deficit			(54,457,110)			(53,302,162)
Accumulated other comprehensive income			9,894,248			9,896,567
Total shareholders' equity			124,122,614			124,732,354
Total liabilities and shareholders' equity		$	226,419,043		$	228,239,417

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 March 31,
		2026			2025
Revenues from contracts with customers:
Gas, oil, NGL, and condensate revenue		$	23,938,010		$	14,270,790
Gas gathering and compression revenue			1,657,777			1,892,350
Total revenue			25,595,787			16,163,140

Operating costs and expenses:
Lease operating expenses			7,195,313			2,755,898
Gathering system operating expenses			594,446			552,651
Depletion, depreciation, amortization, and accretion			3,002,339			3,475,857
Impairment expense			—			6,669
Transaction costs			71,420			—
General and administrative expenses:
Stock based compensation expense			547,527			385,838
Other general and administrative expenses			3,378,142			1,818,418
Total operating costs and expenses			14,789,187			8,995,331
Operating income			10,806,600			7,167,809

Other income (expense):
Interest income			45,543			15,299
Interest expense			(941,581)			(12,211)
Loss on derivative contracts, net			(8,929,829)			(1,462,170)
Other income (expense), net			16,428			(22,499)
Other expense, net			(9,809,439)			(1,481,581)

Net income before income tax expense			997,161			5,686,228
Income tax expense			267,736			1,670,194
NET INCOME		$	729,425		$	4,016,034
Currency translation adjustments			(2,319)			(50,116)
NET COMPREHENSIVE INCOME		$	727,106		$	3,965,918

Net income per share, basic		$	0.02		$	0.18
Net income per share, diluted		$	0.02		$	0.18
Weighted average number of shares outstanding, basic			30,239,980			22,008,766
Weighted average number of shares outstanding, diluted			30,262,466			22,109,819

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

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EPSILON ENERGY LTD.

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity


										Accumulated
										Other				Total
		Common Shares Issued			Treasury Shares			Additional		Comprehensive		Accumulated		Shareholders'
		Shares	Amount		Shares	Amount		paid-in Capital		Income		Deficit		Equity
Balance at January 1, 2026		30,239,980	$	154,274,125	—	$	—	$	13,863,824	$	9,896,567	$	(53,302,162)	$	124,732,354
Net income		—		—	—		—		—		—		729,425		729,425
Dividends paid		—		—	—		—		—		—		(1,884,373)		(1,884,373)
Stock-based compensation expense		—		—	—		—		547,527		—		—		547,527
Other comprehensive loss		—		—	—		—		—		(2,319)		—		(2,319)
Balance at March 31, 2026		30,239,980	$	154,274,125	—	$	—	$	14,411,351	$	9,894,248	$	(54,457,110)	$	124,122,614


										Accumulated
										Other				Total
		Common Shares Issued			Treasury Shares			Additional		Comprehensive		Accumulated		Shareholders'
		Shares	Amount		Shares	Amount		paid-in Capital		Income		Deficit		Equity
Balance at January 1, 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

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


		Three months ended March 31,
		2026			2025
Cash flows from operating activities:
Net income		$	729,425		$	4,016,034
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, amortization, and accretion			3,002,339			3,475,857
Impairment expense			—			6,669
Amortization on deferred financing costs			50,084			—
Loss on derivative contracts			8,929,829			1,462,170
Settlement paid on derivative contracts			(1,047,836)			(415,043)
Settlement of asset retirement obligation			—			(1,600)
Stock-based compensation expense			547,527			385,838
Deferred income tax expense (benefit)			265,205			(321,452)
Changes in assets and liabilities:
Accounts receivable			(661,928)			(2,159,795)
Prepaid income taxes			(10,164)			978,542
Other assets and liabilities			112,036			141,640
Accounts payable, royalties payable, gathering fees payable, and other accrued liabilities			(1,813,998)			91,390
Income taxes payable			—			922,326
Net cash provided by operating activities			10,102,519			8,582,576
Cash flows from investing activities:
Additions to unproved oil and gas properties			(383,391)			(5,060,901)
Additions to proved oil and gas properties			(3,830,774)			(2,578,866)
Additions to gathering system properties			(50,583)			(104,275)
Deductions to land, buildings and property and equipment			1,825			—
Prepaid drilling costs			—			960,136
Net cash used in investing activities			(4,262,923)			(6,783,906)
Cash flows from financing activities:
Payment on credit facility			(5,000,000)			—
Dividends paid			(1,884,373)			(1,375,612)
Net cash used in financing activities			(6,884,373)			(1,375,612)
Effect of currency rates on cash, cash equivalents, and restricted cash			(2,319)			(50,116)
Decrease (increase) in cash, cash equivalents, and restricted cash			(1,047,096)			372,942
Cash, cash equivalents, and restricted cash, beginning of period			9,512,954			6,989,793
Cash, cash equivalents, and restricted cash, end of period		$	8,465,858		$	7,362,735

Supplemental cash flow disclosures:
Income tax paid - federal		$	—		$	80,000
Income tax paid - state (PA)		$	10,933		$	5,138
Income tax paid - state (other)		$	—		$	25
Interest paid		$	42,347		$	657

Non-cash investing activities:
Change in proved properties accrued in accounts payable		$	618,129		$	341,974
Change in gathering system accrued in accounts payable		$	2,398		$	(44,228)
Asset retirement obligation asset additions and adjustments		$	—		$	18,235

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.

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, 2025. 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 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, Epsilon Operating, LLC, Dewey Energy GP, LLC, Peak Exploration & Production LLC, Peak BLM Lease LLC, Peak Powder River Resources, LLC, Peak Energy Operating #2, LLC, Willow Springs Development, LLC, Peak Powder River Acquisition, 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 reserves and related cash flow estimates used in impairment tests of oil and natural gas and gathering system properties, asset retirement obligations, accrued natural gas and oil revenues and operating expenses, accrued gathering system revenues and operating expenses, as well as the valuation of commodity derivative instruments. Actual results could differ from those estimates.

Recently Issued Accounting Standards

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.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed 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 March 31, 2026 and December 31, 2025:


		March 31,			December 31,
		2026			2025
Cash and cash equivalents		$	7,912,858		$	8,959,954
Restricted cash included in other assets			553,000			553,000
Cash, cash equivalents, and restricted cash in the statement of cash flows		$	8,465,858		$	9,512,954

4. Property and Equipment

The following table summarizes the Company’s property and equipment as of March 31, 2026 and December 31, 2025:


		March 31,			December 31,
		2026			2025
Property and equipment:
Oil and gas properties, successful efforts method
Proved properties		$	237,783,115		$	233,334,212
Unproved properties			79,690,561			79,307,169
Accumulated depletion, depreciation, amortization and impairment			(134,196,469)			(131,636,141)
Total oil and gas properties, net			183,277,207			181,005,240
Gathering system			43,593,370			43,540,389
Accumulated depletion, depreciation, amortization and impairment			(37,680,704)			(37,472,139)
Total gathering system, net			5,912,666			6,068,250
Land			1,231,965			1,231,965
Buildings and other property and equipment, net			4,077,163			4,132,732
Total property and equipment, net		$	194,499,001		$	192,438,187

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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 three months ended March 31, 2026, no impairment was recorded.

During the three months ended March 31, 2025, Epsilon recorded an impairment of $0.01 million for one well drilled during 2024 that was deemed non-commercial. For the year ended December 31, 2025, the Company recorded an impairment of $3.2 million on the Canadian wells (2 gross, 0.5 net) and $0.7 million on the New Mexico wells (2 gross, 0.2 net) due to low forward oil prices on December 31, 2025 (which are required to be used in impairment testing) and an offset frac hit impacting production and reserves in New Mexico.

5. Revolving Line of Credit

The Company closed a new senior secured reserve based revolving credit facility on October 10, 2025 with Frost Bank as administrative agent and Frost Bank and Texas Capital Bank as lenders. As of March 31, 2026, the borrowing base was $80 million, supported by the Company’s producing reserves and is subject to semi-annual redeterminations with a maturity date of October 10, 2029. Interest will be charged at the 3-month Term SOFR rate plus a margin of 3-4% (depending on facility utilization), payable quarterly. The facility is secured by the assets of the Company’s Epsilon Energy USA subsidiary. During April 2026, the Company made a $5 million repayment on the outstanding credit 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)

Additionally, the Company is required to hedge 50% of its forecasted Proved Developed Producing production over a rolling 18-month period. If the facility utilization drops below 50%, then the required hedging drops to 25% of Proved Developed Producing production for the last 6 months of the 18-month period.

We were in compliance with the financial covenants of the agreement as of March 31, 2026.

 

Balance at

 

Balance at

 

March 31,

 

December 31,

 

2026

2025

 

Borrowing Base

 

Interest Rate

Credit facility payable

45,500,000

50,500,000

80,000,000

SOFR + 3.25%

6. Shareholders’ Equity

(a)Authorized shares

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

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

(b)Purchases of Equity Shares

Normal Course Issuer Bid

On February 18, 2026, the Board authorized a new share repurchase program of up to 3,014,986 common shares, representing 10% of the outstanding common shares of the Company at such time, for an aggregate purchase price of not more than US $15.0 million. The program commenced on February 19, 2026 and is set to expire February 18, 2027, unless the maximum amount of common shares is purchased before then or the Board approves earlier termination.

On February 12, 2025, 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 expired on February 11, 2026.

During the three months ended March 31, 2026, no shares were repurchased under the new or previous share repurchase 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 three months ended March 31, 2026, no restricted common shares were awarded to the Company’s board of directors and employees. For the year ended December 31, 2025, 488,283 restricted common shares with a weighted average grant date fair value of $4.78 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.

The following table summarizes restricted stock activity for the three months ended March 31, 2026, and the year ended December 31, 2025:


		Three months ended							Year ended
		March 31, 2026							December 31, 2025
		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		781,792		1.71		$	5.06		560,970		1.61		$	5.77
Granted		—		—			—		488,283		1.50			4.78
Vested		—		—			—		(267,461)		—			5.60
Balance non-vested Restricted Stock at end of period		781,792		1.46		$	5.06		781,792		1.71		$	5.06

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, 2026 and 2025 was $547,527 and $385,838, respectively.

As of March 31, 2026, the Company had unrecognized stock-based compensation related to these shares of $3,598,699 to be recognized over a weighted average period of 1.28 years (at December 31, 2025: $4,146,227 over 1.37 years).

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

(d)Dividends

On March 3, 2026, 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 $1.9 million that was paid on March 31, 2026.

7. 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 $0.6 million, respectively, for the three months ended March 31, 2026 and 2025.

The following table details revenue for the three months ended March 31, 2026 and 2025.


		Three Months Ended March 31,
		2026			2025
Revenue
Natural gas		$	13,402,522		$	10,613,573
Natural gas liquids			1,073,301			387,250
Oil and condensate			9,462,187			3,269,967
Gathering and compression fees⁽¹⁾			1,657,777			1,892,350
Total revenue		$	25,595,787		$	16,163,140

(1)

Net of the elimination entry

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. For operated production in Wyoming, cash consideration is typically received within 30 days after the end of a production month for oil, while natural gas and NGLs cash consideration is typically received within 60 days after the end of a production month. 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 GGS 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.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

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 March 31, 2026 and December 31, 2025, we determined that our allowance for credit loss was nil.


		March 31,			December 31,			December 31,
		2026			2025			2024
Accounts receivable
Natural gas and oil sales		$	13,233,923		$	10,848,263		$	4,888,294
Joint interest billing			2,828,466			3,603,864			—
Gathering and compression fees			1,230,169			1,307,947			918,471
Commodity contract			(498,129)			167,636			36,957
Other receivables			—			204,791			—
Total accounts receivable		$	16,794,429		$	16,132,501		$	5,843,722

8. 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 months ended March 31, 2026 and 2025 consisted of the following:


		Three Months Ended March 31,
		2026			2025
Balance at beginning of period		$	9,896,567		$	10,033,267
Translation loss			(2,319)			(50,116)
Balance at end of period		$	9,894,248		$	9,983,151

9. Income Taxes

Income tax provisions for the three months ended March 31, 2026 and 2025 are as follows:


		Three months ended March 31,
		2026			2025
Current:
Federal		$	—		$	1,564,061
State			2,531			427,585
Total current income tax expense			2,531			1,991,646
Deferred:
Federal			232,732			(290,264)
State			32,473			(31,188)
Total deferred tax expense			265,205			(321,452)
Income tax expense		$	267,736		$	1,670,194

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

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, 2022 through December 31, 2025. To the extent we utilize net operating losses generated in earlier years, such earlier years may also be subject to audit..

From 2023-2025, distributions of Epsilon Energy USA Inc. earnings to Epsilon Energy Ltd. incurred a 5% U.S. dividend withholding tax, provided the Company was 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 three months ended March 31, 2026 was higher than the statutory federal rate as a result of state income taxes partially offset by 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, 2026, the Company had commitments of $10.9 million for capital expenditures.

Litigation

In 2025, the Company filed a lawsuit against a contractor regarding alleged non-performance while running casing in a well. The Company is seeking damages due to its inability to complete the Leavitt Fed 2-9-4MH well. Arbitration is scheduled for May 15, 2026 in Casper, WY.

The Company has intervened as a defendant-intervenor in litigation challenging BLM’s issuance of federal oil and gas leases acquired by the Company in 2017, 2018, and 2020. Plaintiffs allege deficiencies in BLM’s environmental review under NEPA. The Company intervened to protect its leasehold interests. Management does not believe the outcome will have a material adverse effect on the Company’s financial position.

Between September 30, 2025 and October 28, 2025, we received multiple demand letters on behalf of purported Epsilon stockholders (the “Demands”). The Demands primarily alleged that the Preliminary Proxy Statement filed on September 19, 2025 or the Definitive Proxy Statement filed on October 10, 2025, as applicable, failed to disclose certain material information with respect to the acquisition of Peak Exploration and Production, LLC, and Peak BLM Lease LLC.

On October 16, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Anthony Morgan (the “Morgan Complaint”). On October 17, 2025, we received a copy of a complaint filed against Epsilon and certain members of Epsilon’s Board of Directors in the Supreme Court of the State of New York, County of New York, on behalf of purported Epsilon stockholder Richard Lawrence (the “Lawrence Complaint,” and together with the Morgan Complaint, the “Complaints”).

The Complaints allege, among other things, that Epsilon and the other named defendants (the “Epsilon Defendants”) violated New York common law based on claims of negligence, negligent misrepresentation and concealment. Specifically, the Complaints allege that the Preliminary Proxy Statement or the Definitive Proxy Statement, as applicable, failed to disclose, among other things, certain details regarding the background of the Transactions. Among other remedies, the Complaints sought an injunction against consummating the Transactions, rescission or actual and punitive damages if the Transactions are consummated, costs and attorneys’ fees. To date, we have not been served with the Complaints, and the Plaintiffs have not taken any additional steps in furtherance of prosecuting the Complaints.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

While we believe that the disclosures set forth in the Preliminary Proxy Statement and the Definitive Proxy Statement comply fully with applicable law, to moot certain of the claims made in the Demands and Complaints, to avoid nuisance and potential expense and delay, we voluntarily supplemented the Definitive Proxy Statement with certain disclosures in our Supplemental Disclosures to Definitive Proxy Statement filed on October 31, 2025. Nothing in our Supplemental Disclosures was an admission of the legal necessity or materiality under applicable law of any of the disclosures set forth in the Preliminary Proxy Statement or the Definitive Proxy Statement. To the contrary, we deny all allegations in the Demands and Complaints that any additional disclosure was required.

11. Leases

Under ASC 842, Leases, the Company recognized an operating lease related to its corporate office as of March 31, 2026 and December 31, 2025 as summarized in the following table:


		March 31,			December 31,
		2026			2025
Asset
Operating lease right-of-use assets, long term		$	429,923		$	488,949
Total operating lease right-of-use assets		$	429,923		$	488,949

Liabilities
Operating lease liabilities		$	271,790		$	271,494
Operating lease liabilities, long term			271,046			340,052
Total operating lease liabilities		$	542,836		$	611,546

Operating lease costs		$	84,813		$	269,910

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	92,906		$	316,435
Weighted average remaining lease term (years) - operating lease			1.78			1.86
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. Through its subsidiaries, the Company also leases office space in both Englewood, CO and Wright, WY. Lease expense for operating leases was $0.27 million and $0.24 for the years ended December 31, 2025 and 2024, respectively. This lease expense is presented in other general and administrative expenses in the consolidated statements of operations and comprehensive income.

Lease expense for operating leases was $0.08 million and $0.27 million for the three months ended March 31, 2026 and the year ended December 31, 2025, 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 March 31, 2026 are as follows:


	Operating Leases
2026	$	250,919
2027		282,059
2028		183,963
Total minimum lease payments		716,941
Less: imputed interest		(174,105)
Present value of future minimum lease payments		542,836
Less: current obligations under leases		(271,790)
Long-term lease obligations	$	271,046

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

12. 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 March 31,
		2026			2025
Net income		$	729,425		$	4,016,034

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


		Three months ended March 31,
		2026		2025
Basic weighted-average number of shares outstanding		30,239,980		22,008,766
Unvested time-based restricted shares		22,486		101,053
Diluted weighted-average shares outstanding		30,262,466		22,109,819

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


		Three months ended March 31,
		2026		2025
Anti-dilutive unvested time-based restricted shares		759,306		459,917

13. 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 three months ended March 31, 2026 and 2025 is as follows:


		Upstream			Gas Gathering			Total
As of and for the three months ended March 31, 2026
Operating revenue
Natural gas		$	13,402,522		$	—		$	13,402,522
Natural gas liquids			1,073,301			—			1,073,301
Oil and condensate			9,462,187			—			9,462,187
Gathering and compression fees			—			1,657,777			1,657,777
Intersegment gathering and compression fees			—			438,502			438,502
			23,938,010			2,096,279			26,034,289

Reconciliation of operating revenue
Elimination of intersegment revenues									(438,502)
Total consolidated operating revenue⁽¹⁾⁽³⁾									25,595,787

Operating costs
Gathering, transportation, and compression			2,746,419			—			2,746,419
Other lease operating expense			4,448,894			—			4,448,894
Gathering system operating expenses			—			594,446			594,446
Intersegment other lease operating expense			438,502			—			438,502
Depletion, depreciation, amortization and accretion			2,791,393			210,946			3,002,339
Segment operating income		$	13,512,802		$	1,290,887		$	14,365,187

Reconciliation of segment operating income
Salary expense									(2,299,623)
Stock based compensation									(547,527)
Transaction costs									(71,420)
Other general and administrative									(1,078,519)
Elimination of intersegment other lease operating expenses									438,502
Interest income									45,543
Interest expense									(941,581)
Gain on derivative contracts									(8,929,829)
Other income									16,428
Net income before income tax expense								$	997,161

Capital expenditures⁽²⁾		$	4,212,340		$	50,583		$	4,262,923
Segment assets⁽³⁾		$	183,523,427		$	5,912,666		$	189,436,093

Total segment assets reconciled to consolidated amounts are as follows:
Total segment assets								$	189,436,093
Current assets, net									29,781,580
Fair value of derivatives, long term									185,056
Other property and equipment									5,309,128
Operating lease right-of-use asset									429,923
Credit facility fees									724,263
Restricted Cash									553,000
Total assets								$	226,419,043

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements


		Upstream			Gas Gathering			Total
As of and for the three months ended March 31, 2025
Operating revenue
Natural gas		$	10,613,573		$	—		$	10,613,573
Natural gas liquids			387,250			—			387,250
Oil and condensate			3,269,967			—			3,269,967
Gathering and compression fees			—			1,892,350			1,892,350
Intersegment gathering and compression fees			—			556,858			556,858
			14,270,790			2,449,208			16,719,998

Reconciliation of operating revenue
Elimination of intersegment revenues									(556,858)
Total consolidated operating revenue⁽¹⁾⁽³⁾									16,163,140

Operating costs
Gathering, transportation, and compression			2,053,715			—			2,053,715
Other lease operating expense			702,183			—			702,183
Gathering system operating expenses			—			552,651			552,651
Intersegment other lease operating expense			556,858			—			556,858
Impairment			6,669			—			6,669
Depletion, depreciation, amortization and accretion			3,146,306			329,551			3,475,857
Segment operating income		$	7,805,059		$	1,567,006		$	8,815,207

Reconciliation of segment operating income
Salary expense									(1,079,670)
Stock based compensation									(385,838)
Other general and administrative									(738,748)
Elimination of intersegment other lease operating expenses									556,858
Interest income									15,299
Interest expense									(12,211)
Loss on derivative contracts									(1,462,170)
Other income									(22,499)
Net income before income tax expense								$	5,686,228

Capital expenditures⁽²⁾		$	7,639,767		$	104,275		$	7,744,042
Segment assets⁽³⁾		$	101,889,212		$	6,399,266		$	108,288,478

Total segment assets reconciled to consolidated amounts are as follows:
Total segment assets								$	108,288,478
Current assets, net									15,543,547
Other property and equipment									884,658
Operating lease right-of-use asset									318,604
Restricted cash									470,000
Total assets								$	125,505,287

(1)

Segment operating revenue represents revenues generated from the operations of the segment. Inter-segment sales during the three months ended March 31, 2026 and 2025 have been eliminated upon consolidation. For the three months ended March 31, 2026, one purchaser each accounted for 10% or more of our total revenue: HF Sinclair (27%). For the three months ended March 31, 2025, three purchasers each accounted for 10% or more of our total revenue: Expand Energy Marketing (15%) and Ares Energy (18%) from the upstream segment and Williams (15%) from the gas gathering segment.

(2)

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

(3)

Our upstream segment includes Canadian revenue and assets for the three months ended March 31, 2026 of $0.2 million and $7.2 million, respectively. Our upstream segment includes Canadian revenue and assets for the three months ended March 31, 2025 of $0.1 million and $10.3 million, respectively.

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

14. Commodity Risk Management Activities

Commodity Price Risks

Epsilon engages in price risk management activities from time to time. These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas and oil by securing derivative contracts for a portion of expected sales volumes.

Inherent in the Company’s fixed price contracts, are certain business risks, including market risk and credit risk. Market risk is the risk that the price of oil and natural gas will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not currently require collateral from any of its counterparties nor do its counterparties currently require collateral from the Company.

The Company enters into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its future natural gas and oil production and related cash flows. The natural gas and oil revenues and cash flows are affected by changes in commodity product prices, which are volatile and cannot be accurately predicted. The objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future natural gas and oil sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget.

Epsilon has historically elected not to designate any of its financial commodity derivative contracts as accounting hedges and, accordingly, accounts for these financial commodity derivative contracts using the mark-to-market accounting method. Under this accounting method, changes in the fair value of outstanding financial instruments are recognized as gains or losses in the period of change and are recorded as Loss on derivative contracts on the condensed Consolidated Statements of Operations and Comprehensive Income. The related cash flow impact is reflected in cash flows from operating activities. During the three months ended March 31, 2026, Epsilon recognized losses on commodity derivative contracts of $8,929,829. This amount included cash paid of $1,047,836. For the three months ended March 31, 2025, Epsilon recognized losses on commodity derivative contracts of $1,462,170. This amount included cash paid on settlements on these contracts of $415,043.

Commodity Derivative Contracts

At March 31, 2026, the Company had outstanding NYMEX HH swaps totaling 1.27 Bcf, NYMEX HH options totaling 4.33 Bcf, NYMEX WTI CMA swaps totaling 312,077 Bbls, and NYMEX WTI CMA options totaling 157,987 Bbls for the contract period of April 2026 to January 2028.

At March 31, 2025, the Company had outstanding natural gas NYMEX Henry Hub (“HH”) swaps totaling 1.56 Bcf, natural gas Tennessee Z4 basis swaps totaling 1.56 Bcf, and crude oil NYMEX WTI CMA swaps totaling 47 MBbls.


		Fair Value of Derivative Assets
		March 31,			December 31,
		2026			2025
Current
NYMEX Henry Hub (LD) Options Call		$	—		$	—
NYMEX Henry Hub (LD) Options Put			967,137			709,792
NYMEX Henry Hub (LD) Swaps			685,577			683,222
NYMEX WTI CMA Options Put			205,985			313,499
NYMEX WTI CMA Swaps			—			1,398,169
Long-term
NYMEX Henry Hub (LD) Options Put			738,950			647,795
NYMEX Henry Hub (LD) Swaps			33,445			28,058
NYMEX WTI CMA Options Put			387,226			900,856
		$	3,018,320		$	5,401,303

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements


		Fair Value of Derivative Liabilities
		March 31,			December 31,
		2026			2025
Current
NYMEX Henry Hub (LD) Options Call		$	(721,504)		$	(295,384)
NYMEX Henry Hub (LD) Swaps			(71,181)			(51,081)
NYMEX WTI CMA Options Call			(655,625)			(63,877)
NYMEX WTI CMA Swaps			(3,817,533)			—
Long-term
NYMEX Henry Hub (LD) Options Call			(494,277)			(654,616)
NYMEX WTI CMA Options Call			(863,773)			(418,612)
NYMEX WTI CMA Options Put			(26,748)			—
NYMEX WTI CMA Swaps			(400,396)			—
		$	(7,051,037)		$	(1,552,027)

Net Fair Value of Derivatives		$	(4,032,717)		$	3,849,276

Net Current		$	(3,407,144)		$	2,694,340
Net Long-Term		$	(625,573)		$	(465,832)

The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated:


		Three months ended March 31,
		2026			2025
Fair value of asset (liability), beginning of the period		$	3,849,276		$	(487,548)
Loss on derivative contracts included in earnings			(8,929,829)			(1,462,170)
Settlement of commodity derivative contracts			1,047,836			415,043
Fair value of liability, end of the period		$	(4,032,717)		$	(1,534,675)

15. Asset Retirement Obligations

Asset retirement obligations are estimated by management based on Epsilon’s net ownership interest in all wells and the gathering system, estimated costs to reclaim and abandon such assets and the estimated timing of the costs to be incurred in future periods, and the forecast risk free cost of capital. Each year we review, and to the extent necessary, revise our asset retirement obligations estimates in accordance with recent activity and current service costs.

The following tables summarize the changes in asset retirement obligations for the periods indicated:


	Three Months Ended			Year ended
		March 31,			December 31,
	2026			2025
Balance beginning of period	$	7,437,960		$	3,652,296
Liabilities acquired		—			3,841,144
Liabilities disposed of		—			(287,716)
Wells plugged and abandoned		—			(1,600)
Accretion		115,498			233,836
Balance end of period	$	7,553,458		$	7,437,960

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Epsilon Energy Ltd.

Notes to the Unaudited Condensed Consolidated Financial Statements

16. Fair Value Measurements

The methodologies used to determine the fair value of our financial assets and liabilities at March 31, 2026 were the same as those used at December 31, 2025.

Cash and cash equivalents, restricted cash, accounts receivable, and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. The Company’s revolving line of credit has a recorded value that approximates its fair value since its variable interest rate is tied to current market rates and the applicable margins represent market rates. The revolving line of credit is classified within Level 2 of the fair value hierarchy.

Commodity derivative instruments consist of NYMEX HH swap, NYMEX HH option, and Tennessee Z4 basis swap contracts for natural gas, and NYMEX WTI CMA swap contracts for crude oil. The Company’s derivative contracts are valued based on a marked to market approach. These assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy. The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations.


	March 31, 2026
	Level 1		Level 2			Level 3			Effect of Netting			Net Fair Value
Assets
Derivative contracts	$	—	$	3,018,320		$	—		$	(3,018,320)		$	—
Cash equivalents	$	182,110	$	—		$	—		$	—		$	182,110
Liabilities
Derivative contracts	$	—	$	7,051,037		$	—		$	(3,018,320)		$	4,032,717


	December 31, 2025
	Level 1		Level 2			Level 3			Effect of Netting			Net Fair Value
Assets
Derivative contracts	$	—	$	5,401,303		$	—		$	(1,552,027)		$	3,849,276
Cash equivalents	$	181,076	$	—		$	—		$	—		$	181,076
Liabilities
Derivative contracts	$	—	$	1,552,027		$	—		$	(1,552,027)		$	—

17. Subsequent Events

On May 4, 2026, the Company closed the sale of certain overriding royalty interests in Susquehanna County, Pennsylvania to an undisclosed private buyer for $3.9 million. The assets covered 940 gross acres and 90 producing Marcellus wells with an average net revenue interest of 0.25% per well. The effective of the transaction was April 1, 2026.

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

The following discussion is intended to assist in the understanding of trends and significant changes in our 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, 2026 and 2025 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, 2025. 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 Appalachian Basin in Pennsylvania, the Powder River Basin in Wyoming, the Permian Basin in Texas and New Mexico, and the Western Canadian Sedimentary Basin in Alberta, Canada.

At March 31, 2026 we held leasehold rights to 52,149 net acres. We have natural gas production from our non-operated wells in Pennsylvania and natural gas, natural gas liquids, and oil production from our operated and non-operated wells in the Permian, Powder River, and Western Canadian Sedimentary Basins.

At December 31, 2025 our total estimated net proved reserves were 86.4 Bcf of natural gas reserves, 9.3 MMBbls of oil reserves, and 2.4 MMBbls of NGL reserves.

Our Pennsylvania (“PA”) assets are supported by our 35% ownership in the Auburn GGS.

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

Business Strategy

We are committed to disciplined capital allocation which could include shareholder returns in the form of dividends and/or share buybacks. We plan to maintain a strong balance sheet and liquidity position to allow us to opportunistically invest in both our existing project areas and potential new projects.

On November 14, 2025, Epsilon acquired Peak Exploration and Production LLC and Peak BLM Lease LLC and their subsidiaries (together, "Peak") through a business combination. The acquisition added 284 gross (60 net) wells, including 105 gross (45 net) operated wells, and 60,945 gross (39,566 net) acres located in Campbell, Converse and Johnson Counties, Wyoming.

On December 11, 2025, Epsilon divested Dewey Energy Holdings, LLC, a wholly owned subsidiary of the Company to an undisclosed private buyer. The assets sold included approximately 964 Mcfe/d (60% natural gas) of production and approximately 6,400 net deep acres and 2,200 net shallow acres of leasehold, all located in Dewey County, Oklahoma.

We have a substantial remaining drillable location inventory within our existing leaseholds in Pennsylvania, Wyoming, and Texas.

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Three months ended March 31, 2026 Highlights

Operational Highlights

Marcellus Shale – Pennsylvania

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During the three months ended March 31, 2026, Epsilon's realized natural gas price was $5.77 per Mcf, a 47% increase over the three months ended March 31, 2025.

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During the three months ended March 31, 2026, Epsilon’s net revenue interest natural gas production was 2.1 Bcf, a 19% increase over the three months ended March 31, 2025.

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Gathered and delivered 9.6 Bcf gross (3.3 net to Epsilon's interest) during the three months ended March 31, 2026, or 107 MMcf/d through the Auburn Gas Gathering System.

Powder River Basin – Wyoming

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During the three months ended March 31, 2026, Epsilon's realized price for all Powder River Basin production was $49.84 per Boe (74% liquids).

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Total net revenue interest production for the three months ended March 31, 2026, which included oil, natural gas liquids, and natural gas, was 179.6 Mboe

Permian Basin – Texas and New Mexico

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During the three months ended March 31, 2026, Epsilon's realized price for all Permian Basin production was $48.29 per Boe (85% liquids), a 12% decrease over the three months ended March 31, 2025.

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Total net revenue interest production for the three months ended March 31, 2026, which included oil, natural gas liquids, and natural gas, was 51.7 Mboe compared to 61.9 Mboe during the same period in 2025, a 16% decrease.

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During the three months ended March 31, 2026, the Company had 1 gross (.25 net) well drilled.

Western Canadian Sedimentary Basin—Alberta, Canada

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During the three months ended March 31, 2026, Epsilon's realized price for all Canada production was $27.99 per Boe (49% liquids).

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Total net revenue interest production for the three months ended March 31, 2026, which included oil, natural gas liquids, and natural gas, was 5.7 Mboe.

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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) transaction costs, (7) gain or loss on derivative contracts net of cash received or paid on settlement, and (8) net other income (expense). 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 Adjusted 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, 2026 and 2025, 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,
	2026		2025
Net income	$	729,425	$	4,016,034
Add Back:
Interest expense (income), net		896,038		(3,088)
Income tax (benefit) expense		267,736		1,670,194
Depreciation, depletion, amortization, and accretion		3,002,339		3,475,857
Impairment expense		—		6,669
Stock based compensation expense		547,527		385,838
Transaction costs		71,420		—
Loss on derivative contracts net of cash received or paid on settlement		7,881,993		1,047,127
Foreign currency translation loss		(1,875)		10,289
Adjusted EBITDA	$	13,394,603	$	10,608,920

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Results of Operations

Net Operating Revenues

For the three months ended March 31, 2026, revenues increased $9.4 million, or 58%, to $25.6 million from $16.2 million during the same period of 2025.

Revenue and volume statistics for the three months ended March 31, 2026 and 2025 were as follows:


		Three months ended
		March 31,
		2026			2025
Revenues
Pennsylvania
Natural gas revenue		$	12,312,568		$	10,327,894
Volume (MMcf)			2,133			2,637
Avg. Price ($/Mcf)		$	5.77		$	3.92
Gathering system revenue (net of elimination)		$	1,657,777		$	1,892,350
Total PA Revenues		$	13,970,345		$	12,220,244
Permian Basin
Natural gas revenue		$	(19,619)		$	78,339
Volume (MMcf)			47			50
Avg. Price ($/Mcf)		$	(0.41)		$	1.57
Natural gas liquids revenue		$	185,332		$	284,961
Volume (MBoe)			10.8			12.1
Avg. Price ($/Bbl)		$	17.22		$	23.56
Oil and condensate revenue		$	2,332,637		$	3,019,495
Volume (MBbl)			33.1			41.5
Avg. Price ($/Bbl)		$	70.54		$	72.72
Total Permian Basin Revenues		$	2,498,350		$	3,382,795
Oklahoma
Natural gas revenue		$	10,075		$	207,340
Volume (MMcf)			1			53
Avg. Price ($/Mcf)		$	10.41		$	3.94
Natural gas liquids revenue		$	2,754		$	102,289
Volume (MBoe)			0.1			3.7
Avg. Price ($/Bbl)		$	32.60		$	27.68
Oil and condensate revenue		$	384		$	157,937
Volume (MBbl)			(0.5)			2.2
Avg. Price ($/Bbl)		$	(0.82)		$	70.35
Total OK Revenues		$	13,213		$	467,566
Wyoming
Natural gas revenue		$	1,068,303		$	—
Volume (MMcf)			283			—
Avg. Price ($/Mcf)		$	3.77		$	—
Natural gas liquids revenue		$	859,968		$	—
Volume (MBoe)			30			—
Avg. Price ($/Bbl)		$	28.32		$	—
Oil and condensate revenue		$	7,025,297		$	—
Volume (MBbl)			102.1			—
Avg. Price ($/Bbl)		$	68.81		$	—
Total WY Revenues		$	8,953,568		$	—
Canada
Natural gas revenue		$	31,195		$	—
Volume (MMcf)			17			—
Avg. Price ($/Mcf)		$	1.79		$	—
Natural gas liquids revenue		$	25,247		$	—
Volume (MBoe)			1.2			—
Avg. Price ($/Bbl)		$	21.37		$	—
Oil and condensate revenue		$	103,869		$	92,535
Volume (MBbl)			1.6			1.8
Avg. Price ($/Bbl)		$	62.99		$	51.27
Total Canada Revenues		$	160,311		$	92,535
Total Revenues		$	25,595,787		$	16,163,140

Upstream natural gas revenue for the three months ended March 31, 2026 increased by $2.8 million, or 26%, over the same period in 2025. An increase of $3.8 million was due to higher natural gas prices and a decrease of $1.0 million was a result of decrease in volume due to the natural decline in the producing wells partially offset due to increased volumes as a result of the Peak acquisition..

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Upstream natural gas liquids revenue for the three months ended March 31, 2026 increased by $0.7 million, or 177%, over the same period in 2025. This increase was primarily due to increased volumes as a result of the Peak acquisition.

Upstream oil and condensate revenue for the three months ended March 31, 2026 increased by $6.2 million, or 189% over the same period in 2025. An increase of $6.5 million was due to higher volumes as a result of the Peak acquisition and a decrease of $0.3 million was due to a decrease in prices for oil in the Permian Basin.

Gathering system revenue for the three months ended March 31, 2026 decreased by $0.2 million, or 12%, compared with the same period in 2025 due to lower thoughput volumes partially offset due to higher contractual rates for gathering and compression. Revenues derived from transporting and compressing our production, which have been eliminated from gathering system revenues amounted to $0.4 million and $0.6 million, respectively, for the three months ended March 31, 2026 and 2025.

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, 2026 and 2025:


	Three months ended March 31,
	2026			2025
Lease operating costs (net of elimination)	$	7,195,313		$	2,755,898
Gathering system operating costs		594,446			552,651
	$	7,789,759		$	3,308,549

Upstream operating costs—Total $/Mcfe	$	2.02		$	0.89
Gathering system operating costs $/Mcf	$	0.17		$	0.13

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 in preparation for sale. For the three months ended March 31, 2026 these costs increased by $4.4 million, or 161%, over the same period in 2025. The increase is primarily due to the Wyoming assets inclusion following the Peak acquisition (higher operating costs per unit relative to the other asset areas), workover expenses in Pennsylvania, and Ad Valorem taxes in Texas ($0.5 million for the three months ended March 31, 2026).

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, 2026, gathering system operating costs were constant compared to the same period in 2025.

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


	Three months ended March 31,
	2026			2025
Depletion, depreciation, amortization and accretion	$	3,002,339		$	3,475,857

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. For natural gas and oil development and gathering system costs, the reserve base used to calculate depletion and depreciation is proved developed reserves.

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Depreciation expense includes amounts pertaining to our office furniture and fixtures, leasehold improvements, and 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.

DD&A expense for the three months ended March 31, 2026 decreased by $0.5 million, or 14%, from the same period in 2025. This decrease was a result of higher reserves and lower production in Pennsylvania and Texas and the sale of the Oklahoma assets (offset by the addition of the Wyoming assets).

Impairment


	Three months ended March 31,
	2026			2025
Impairment	$	—		$	6,669

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 market 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 properties to their estimated fair value is required. Additionally, GAAP requires that 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.

For the three months ended March 31, 2026, there was no impairment. For the three months ended March 31, 2025, the Company recorded an impairment of $0.01 million for costs on the Killam project well drilled during 2024 that was deemed non-commercial.

Transaction Costs


	Three months ended March 31,
	2026			2025
Transaction Costs	$	71,420		$	—

For the three months ended March 31, 2026, the Company had transaction costs related to the Peak acquisition of $0.1 million for advisory and legal services incurred by the Company. For the three months ended March 31, 2025, there were no transaction costs.

General and Administrative (“G&A”)


	Three months ended March 31,
	2026			2025
General and administrative expenses
Stock based compensation expense	$	547,527		$	385,838
Other general and administrative expense		3,378,142			1,818,418
Total general and administrative expenses	$	3,925,669		$	2,204,256

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 restricted stock granted.

G&A expenses for the three months ended March 31, 2026 increased by $ 1.7 million, or 78%, from the same period in 2025. This was primarily due to $1.4 million increased compensation expenses related to the addition of 17 full-time employees as a result of the Peak acquisition and 6 former Peak employees on transition services contracts.

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Interest Income


		Three months ended March 31,
		2026			2025
Interest income		$	45,543		$	15,299

Interest income for the three months ended March 31, 2026 increased by $0.03 million, or 198%, from the same period in 2025. This was primarily due to an increase in the balance of interest-bearing investments.

Interest Expense


	Three months ended March 31,
	2026			2025
Interest expense	$	941,581		$	12,211

Interest expense is related to the interest paid and amortization of debt issuance costs for the revolving credit facility.

Interest expense during the three months ended March 31, 2026 increased by $0.9 million, or 7,611%, from the same period in 2025. This increase is related to the interest paid on the credit facility as a result of the balance increase.

Loss on Derivative Contracts


		Three months ended March 31,
		2026			2025
Loss on derivative contracts, net		$	(8,929,829)		$	(1,462,170)

During the three months ended March 31, 2026, the Company had NYMEX Henry Hub (“HH”) Natural Gas Futures swaps, NYMEX HH options, and crude oil NYMEX WTI CMA swaps derivative contracts for the purpose of hedging a portion of its physical natural gas and oil sales revenue. For the three months ended March 31, 2025, Epsilon had NYMEX HH Natural Gas futures swaps, Tennessee Gas Pipeline Zone 4 basis swaps, and crude oil NYMEX WTI CMA swaps derivative contracts for the purpose of hedging a portion of its physical natural gas and oil sales revenue. The amounts recorded represent the fair value changes on our derivative instruments during the year.

During the three months ended March 31, 2026 and 2025, we paid net cash settlements of $1,047,836 and $415,043, respectively.

For the three months ended March 31, 2026, realized losses on derivative contracts increased by $7.5 million. This increase was primarily the result of a significant increase in crude oil prices during the quarter and its impact on the Peak hedge book assumed in the acquisition.

Capital Resources and Liquidity

Cash Flow

The primary source of cash for Epsilon during the three months ended March 31, 2026 and 2025 was funds generated from operations. The primary uses of cash for the three months ended March 31, 2026 were the development of upstream properties, the reduction of the outstanding credit facility, and the distribution of dividends. The primary uses of cash for the three months ended March 31, 2025 were the development of upstream properties and the distribution of dividends.

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At March 31, 2026, we had a working capital surplus of $2.2 million, a decrease of $5.4 million from the $7.6 million surplus at December 31, 2025. The Company anticipates its current cash balance, available borrowings, and cash flows from operations to be sufficient to meet its cash requirements for at least the next twelve months.

Three months ended March 31, 2026 compared to 2025

During the three months ended March 31, 2026, $10.1 million was provided by the Company’s operating activities, compared to $8.6 million during the same period in 2025, representing an 18% increase. The increase was primarily due to produced oil volumes from the acquired Wyoming assets and higher realized gas prices in Pennsylvania.

The Company used $4.3 million and $6.8 million of cash for investing activities during the three months ended March 31, 2026 and 2025, respectively. During the three months ended March 31, 2026, the Company had net investments primarily in well and facilities costs and leasehold in Pennsylvania, Texas, and Wyoming. During the three months ended March 31, 2025, the Company had net investments of $6.8 million primarily in well costs in Pennsylvania, Texas, and Canada.

The Company used $6.9 million and $1.4 million of cash for financing activities during the three months ended March 31, 2026 and 2025, respectively. During the three months ended March 31, 2026, this was spent on the repayment of the outstanding balance on the credit facility and dividend payments. During the three months ended March 31, 2025, this was spent on dividend payments.

Credit Agreement

The Company closed a new senior secured reserve based revolving credit facility on October 10, 2025 with Frost Bank as administrative agent and Frost Bank and Texas Capital Bank as lenders. This replaced the Company’s previous credit facility. As of March 31, 2025, the borrowing base was $80 million, supported by the Company’s producing reserves and is subject to semi-annual redeterminations with a maturity date of October 10, 2029. Interest will be charged at the 3-month Term SOFR rate plus a margin of 3-4% (depending on facilit

Epsilon Energy Ltd. 10-Q