[10-Q] Epsilon Energy Ltd. Quarterly Earnings Report

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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.)

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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:

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

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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.

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

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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.

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Table of Contents

Table of Contents

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		​	​
Contents		​ ​ ​	​
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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

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​	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

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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.

​

​

4

Table of Contents

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

​

5

Table of Contents

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

​

6

Table of Contents

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

​

7

Table of Contents

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

​

8

Table of Contents

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.

9

Table of Contents

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

​

​

10

Table of Contents

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.

11

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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).

​

12

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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.

13

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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

​

14

Table of Contents

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.

​

15

Table of Contents

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

​

​

16

Table of Contents

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:

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

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

​

17

Table of Contents

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

​

18

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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.

​

19

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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

​

20

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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

​

​

21

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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.

​

​

​

​

​

22

Table of Contents

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.

​

23

Table of Contents

Three months ended March 31, 2026 Highlights

Operational Highlights

Marcellus Shale – Pennsylvania

● 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.

● 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.

● 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

● 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).

● 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

● 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.

● 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.

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

Western Canadian Sedimentary Basin—Alberta, Canada

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

● 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.

24

Table of Contents

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

​

​

25

Table of Contents

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..

26

Table of Contents

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.

​

27

Table of Contents

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.

​

28

Table of Contents

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.

29

Table of Contents

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 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. The current balance as of May 11, 2026 is $40.5 million.

​

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, 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.

​

Repurchase Transactions

On February 18, 2026, the Board authorized a new share repurchase program of up to 3,014,986 common shares, representing 10% of the current outstanding common shares of Epsilon, for an aggregate purchase price of not more than US $15.0 million. The program is pursuant to a normal course issuer bid and will be conducted in accordance with Rule 10b-18 under the Exchange Act. The program commenced on February 19, 2026 and will end on 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 outstanding common shares of the Company at such time, for an aggregate purchase price of not more than US $13.0 million. The program is pursuant to a normal course issuer bid and conducted in accordance with Rule 10b-18 under the Exchange Act. 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 program.

30

Table of Contents

Derivative Transactions

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

At March 31, 2026, Epsilon’s outstanding natural gas and crude oil commodity contracts consisted of the following:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Weighted Average Price ($/Mmbtu)

​

​

​

​

​

Volume

​

​

​

​

Ceiling

​

Floor

​

Fair Value of Asset

Derivative Type

​ ​ ​

(MMbtu)

​ ​ ​

Swaps

​ ​ ​

Price

​ ​ ​

Price

​ ​ ​

March 31, 2026

2026

​

​

​

​

​

​

​

​

​

​

​

​

​

​

NYMEX Henry Hub (LD) Options Call

(1,721,969)

​

$

—

​

$

5.01

​

$

—

$

(252,176)

NYMEX Henry Hub (LD) Options Put

—

​

$

—

​

$

—

​

$

3.35

$

669,179

NYMEX Henry Hub (LD) Swaps

(931,345)

​

$

3.91

​

$

—

​

$

—

$

636,364

2027

​

​

​

​

​

​

​

​

​

​

​

​

​

NYMEX Henry Hub (LD) Options Call

(2,584,716)

​

$

—

​

$

4.76

​

$

—

$

(934,172)

NYMEX Henry Hub (LD) Options Put

—

​

$

—

​

$

—

​

$

3.25

$

1,029,348

NYMEX Henry Hub (LD) Swaps

(312,297)

​

$

3.76

​

$

—

​

$

—

$

1,676

2028

​

​

​

​

​

​

​

​

​

​

​

​

​

NYMEX Henry Hub (LD) Options Call

(27,978)

​

$

—

​

$

4.70

​

$

—

$

(29,433)

NYMEX Henry Hub (LD) Options Put

—

​

$

—

​

$

—

​

$

3.65

$

7,560

NYMEX Henry Hub (LD) Swaps

(27,978)

​

$

4.46

​

$

—

​

$

—

$

(16,947)

​

(5,606,283)

​

​

​

​

​

​

​

​

​

$

1,111,399

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Weighted Average Price ($/Bbl)

​

​

​

​

Volume

​

​

​

​

Ceiling

​

Floor

​

Fair Value of Asset

Derivative Type

​ ​ ​

(Bbl)

​ ​ ​

Swaps

​ ​ ​

Price

​ ​ ​

Price

​ ​ ​

March 31, 2026

2026

​

​

​

​

​

​

​

​

​

​

​

​

​

​

NYMEX WTI CMA Options Call

​

(31,583)

​

$

—

​

$

69.12

​

$

—

$

(362,083)

NYMEX WTI CMA Options Put

​

—

​

$

—

​

$

—

​

$

59.10

$

78,977

NYMEX WTI CMA Swaps

​

(197,783)

​

$

63.75

​

$

—

​

$

—

$

(3,571,714)

2027

​

​

​

​

​

​

​

​

​

​

​

​

​

​

NYMEX WTI CMA Options Call

​

(118,096)

​

$

—

​

$

67.82

​

$

—

$

(1,085,356)

NYMEX WTI CMA Options Put

​

—

​

$

—

​

$

—

​

$

57.60

$

473,422

NYMEX WTI CMA Swaps

​

(105,986)

​

$

63.76

​

$

—

​

$

—

$

(605,479)

2028

​

​

​

​

​

​

​

​

​

​

​

​

​

​

NYMEX WTI CMA Options Call

​

(8,308)

​

$

—

​

$

67.96

​

$

—

$

(71,959)

NYMEX WTI CMA Options Put

​

—

​

$

—

​

$

—

​

$

57.57

$

40,812

NYMEX WTI CMA Swaps

​

(8,308)

​

$

62.97

​

$

—

​

$

—

$

(40,736)

​

(470,064)

​

​

​

​

​

​

​

​

​

​

$

(5,144,116)

​

Contractual Obligations

The following table summarizes our contractual obligations at March 31, 2026.

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Payments Due by Period

​

​

​

​

​

Less than

​

1 – 3

​

Greater than

​

​ ​ ​

Total

​ ​ ​

1 Year

​ ​ ​

Years

​ ​ ​

3 Years

Derivative liabilities

​

$

7,051,037

​

$

5,265,843

​

$

1,785,194

​

$

—

Asset retirement obligations, undiscounted

​

​

18,877,123

​

​

—

​

​

—

​

​

18,877,123

Capital expenditure commitments

​

10,877,319

​

10,877,319

​

—

​

—

Total future commitments

​

$

36,805,479

​

$

16,143,162

​

$

1,785,194

​

$

18,877,123

31

Table of Contents

The Company enters into commitments for capital expenditures in advance of the expenditures being made. As of March 31, 2026, our commitments for capital expenditures were $10.9 million related to the drilling of 1 gross (0.25 net) well in Texas, 4 gross (0.32 net) wells in Pennsylvania, and the completion of 2 gross (0.68 net) wells in Wyoming.

​

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Gathering System Revenue Risk

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

Interest Rate Risk

Market risk is estimated as the change in fair value resulting from a hypothetical 100 basis point change in the interest rate on the outstanding balance under our credit agreement. The credit agreement allows us to fix the interest rate.

At March 31, 2026 and 2025, the outstanding principal balance under the credit agreement was $45.5 million and nil, respectively.

Derivative Contracts

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

​

​

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our chief executive officer and chief financial officer have concluded that our current disclosure controls and procedures were not effective as of March 31, 2026 because of the material weakness in internal control over financial reporting discussed below.

​

​

32

Table of Contents

As a result, we performed additional analysis as deemed necessary to ensure that our condensed financial statements were prepared in accordance with GAAP. Accordingly, management believes that the condensed financial statements included in this 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented

​

Material Weakness in Internal Control Over Financial Reporting

​

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

​

In Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, management identified a material weakness related to the accounting for significant and non-standard transactions. In response to the material weakness, we are in the process of developing and implementing a plan to strengthen review and approval procedures related to the accounting for significant and non-standard transactions. We will continue to assess, implement, and enhance our remediation efforts until the material weakness identified above is fully remediated.

​

Changes in Internal Control over Financial Reporting

While we have initiated remediation efforts with respect to the material weakness described above, there were no changes in our internal control over financial reporting occurred during the quarter ended March 31, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

​

​

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

33

Table of Contents

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.

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.

​

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2025.

​

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Purchases of Equity Securities by Epsilon Energy Ltd.

For the three months ended March 31, 2026, no shares had been repurchased.

​

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

​

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

​

ITEM 5. OTHER INFORMATION

Not applicable.

​

​

34

Table of Contents

ITEM 6. —EXHIBITS

​

Exhibit No.		Description of Exhibit
​	​	​
31.1		Sarbanes-Oxley Section 302 certification of Principal Executive Officer.
31.2		Sarbanes-Oxley Section 302 certification of Principal Financial Officer.
32.1		Sarbanes-Oxley Section 906 certification of Principal Executive Officer.
32.2		Sarbanes-Oxley Section 906 certification of Principal Financial Officer.
​	​
101.INS		Inline XBRL Instance Document.
101.SCH		Inline XBRL Schema Document.
101.CAL		Inline XBRL Calculation Linkbase Document.
101.DEF		Inline XBRL Definition Linkbase Document.
101.LAB		Inline XBRL Labels Linkbase Document.
101.PRE		Inline XBRL Presentation Linkbase Document.
​	​	​
104	​	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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Table of Contents

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

​	​	​	​
Epsilon Energy Ltd.	​	​
(Registrant)	​	​
​	​	​
Date: May 13, 2026	​	By:	/s/ J. Andrew Williamson
​	​	​	J. Andrew Williamson
​	​	​	Chief Financial Officer

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