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CORRESP
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CORRESP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10
-
K/A

(Mark One)

☒

ANNUAL REPORT PURSUANT TO SECTION

13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal

year ended
December

31, 2021
.

OR

☐

TRANSITION REPORT PURSUANT TO SECTION

13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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.)

16945 Northchase Drive
,
Suite 1610

Houston
,
Texas

77060

(
281
)
670
-
0002

(Address of principal executive offices including zip code and

telephone number, including area
code)

Securities registered pursuant to Section

12(b)

of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Shares, no par value

“
EPSN
”

NASDAQ

Global Market

Securities registered pursuant to
Section

12(g)

of the Act:

NONE

(Title of class)

Indicate by check mark if the registrant is a well
-
known seasoned issuer, as defined in Rule

405 of the Securities Act.

Yes

☐

No

☒

Indicate by check mark if the registrant is not required to file
reports pursuant to Section

13 or Section

15(d)

of the Act.

Yes

☐

No

☒

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 registrant was required to file such reports), and (2)

has been subject to such filing requirements for the past 90

days.

Yes

☒

No

☐

Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule

405 of Regulation S
-
T
(§232.405 of this chapter) during the preceding 12

months (or for such shorter period that the registrant was required to submit such files
).

Yes

☒

No

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non
-
accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated
filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule

12b
-
2 of the Exchange
Act.

Large accelerated filer

☐

Accelerated filer

☐

Non
-
accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period

for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐

Ind
icate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effect
iveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes
-
Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit report.
☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule

12b
-
2 of the Exchange Act).

Yes

☐

No

☒

Aggregate market value of the voting and non
-
voting common equity held by non
-
affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the last business day of t
he registrant’s most recently completed second fiscal quarter:
$43.0

million.
There were
23,684,453

shares of Common Shares ($0 par value) outstanding as of March 22, 202
2
.

1

PART

I

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 sta
tements 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 oil and natural gas production rates,
commodity prices for crude oil or natural gas, supply and demand for oil and natural gas; the estimated quantity of oil
and natural gas reserves, including reserve life; future develo
pment 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
an
d uncertainties include, but are not limited to, those described in
this

Annual Report on Form 10
-
K, and those described
from time to time in our future reports filed with the Securities and Exchange Commission.

DEFINED TERMS

We have included below the def
initions for certain terms used in this document:

‘‘3
-
D seismic’’

Geophysical data that depict the subsurface strata in three dimensions. 3
-
D seismic typically
provides a more detailed and accurate interpretation of the subsurface strata than 2
-
D, or two
-
d
imensional, seismic.

‘‘ABCA’’

Business
Corporation
s Act (Alberta).

‘‘Anchor shippers’’

Parties listed in the Anchor Shipper Gas Gathering Agreement for Northern Pennsylvania,
including
Epsilon

Energy

USA
,

Inc.,
Equinor USA Onshore Properties, Inc., and
Chesapeake Energy

Corporation
.

for the
Auburn Gas Gathering System.

‘‘ASC’’

Accounting Standards Codification.

‘‘Bbl’’

One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil, NGLs and
other liquid hydrocarbons.

‘‘B
cf’’
One billion cubic feet, used in reference to natural gas.

‘‘BOE’’

One stock tank barrel of oil equivalent, computed on an approximate energy equivalent basis that one
Bbl of crude oil equals six Mcf of natural gas and one Bbl of crude oil equals one Bbl of natural gas liquids.

‘‘Completion’’

The process of preparing a

n
atural gas and oil

wellbore for production through the installation of
permanent production equipment, as well as perforation and fracture stimulation to optimize production.

‘‘Delay rental’’

Consideration paid to the lessor by a lessee to extend the terms

of an oil and natural gas lease in
the absence of drilling operations and/or production that is contractually required to hold the lease. This consideration is
generally required to be paid on or before the anniversary date of the
natural gas and oil

leas
e during its primary term, and
typically extends the lease for an additional year.

‘‘Development well’’

A well drilled within the proved area of an oil or natural gas reservoir to the depth of a
stratigraphic horizon known to be productive.

2

‘‘Differential’
’

The difference between a benchmark price of oil and natural gas, such as the NYMEX crude oil
spot price, and the wellhead price received.

‘‘Dry hole’’

A well found to be incapable of producing either
natural gas or oil

in sufficient quanti
ties to justify

completion as a

natural gas or oil

well.

‘‘Exit rate’’
Upstream term referring to the rate of production of oil and/or gas as of a specified date.

‘‘Exploratory well’’

A well drilled to find a new field or to find a new reservoir in a field previously fou
nd to be
productive of oil or natural gas in another reservoir.

‘‘FASB’’

Financial Accounting Standards Board.

‘‘Field’’

An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same
individual geological structural
feature and/or stratigraphic condition. There may be two or more reservoirs in a field that
are separated vertically by intervening impervious strata, or laterally by local geologic barriers, or both. Reservoirs that
are associated by being in overlapping
or adjacent fields may be treated as a single or common operational field. The
geological terms ‘‘structural feature’’ and ‘‘stratigraphic condition’’ are intended to identify localized geological feature
s
as opposed to the broader terms of basins, trends,

provinces, plays, areas of interest, etc.

‘‘Free cash flow’’

A measure of a company’s financial performance, calculated as operating cash flow minus
capital expenditures. Free cash flow represents the cash that a company is able to generate after spendin
g the money
required to maintain or expand its asset base.

‘‘GAAP’’

Generally accepted accounting principles in the United States of America.

‘
‘Gross acres’’

or
‘‘gross wells’’

The total acres or wells, as the case may be, in which a working interest is
ow
ned.

“
Henry Hub”

A natural gas pipeline located in Erath, Louisiana, that serves as the official delivery location for
futures contracts on the New York Mercantile Exchange (NYMEX). The hub is owned by Sabine Pipe Line LLC and has
access to many of the
major gas markets in the United States
.

‘‘ISDA’’
International Swaps and Derivatives Association, Inc.

‘‘Lease operating expense’’

or ‘‘LOE’’ The expenses of lifting oil or gas from a producing formation to
t
he
surface, constituting part of the current ope
rating expenses of a working interest, and also including labor, superintendence,
supplies, repairs, short
-
lived assets, maintenance, allocated overhead costs and other expenses incidental to production,
but not including lease acquisition or drilling or c
ompletion expenses.

‘‘LIBOR’’

London interbank offered rate.

‘‘MBbl’’

One thousand barrels of oil, NGLs or other liquid hydrocarbons.

‘‘MBbl/d’’

One MBbl per day. ‘‘MBOE’’ One thousand BOE. ‘‘MBOE/d’’ One MBOE per day.

‘‘Mcf’’

One thousand cubic feet, used

in reference to natural gas. ‘‘MMBbl’’ One million Bbl.

‘‘MMBOE’’

One million BOE.

‘‘MMBtu’’

One million British Thermal Units, used in reference to natural gas.

‘‘MMcf’’
One million cubic feet, used in reference to natural gas.

‘‘MMcf/d’’

One MMcf per da
y.

‘‘Net acres’’

or
‘‘net wells’’
The sum of the fractional working interests owned in gross acres or wells, as the
case may be.

‘‘Net production’’

The total production attributable to our fractional working interest owned.

‘‘NGL’’
Natural gas liquid.

‘‘NY
MEX’’

The New York Mercantile Exchange. ‘‘PDNP’’ Proved developed nonproducing reserves. ‘‘PDP’’
Proved developed producing reserves.

3

‘‘Plugging and abandonment’’

Refers to the sealing off of fluids in the strata penetrated by a well so that the
fluids from one stratum will not escape into another or to the surface. Regulations of most states legally require plugging
of abandoned wells.

‘‘Prospect’’
A property on w
hich indications of oil or gas have been identified based on available seismic and
geological information.

‘‘Proved developed reserves’’
Proved reserves that can be expected to be recovered through existing wells with
existing equipment and operating metho
ds or in which the cost of the required equipment is relatively minor compared to
the cost of a new well.

‘‘Proved reserves’’
Those reserves that, by analysis of geoscience and engineering data, can be estimated with
reasonable certainty to be economicall
y producible
—
from a given date forward, from known reservoirs and under existing
economic conditions, operating methods and government regulations
—

prior to the time at which contracts providing the
right to operate expire, unless evidence indicates that r
enewal is reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the
operator must be reasonably certain that it will commence the projec
t, within a reasonable time.

The area of the reservoir considered as proved includes all of the following:

a.

The area identified by drilling and limited by fluid contacts, if any, and

b.

Adjacent undrilled portions of the reservoir that can, with reasonable cer
tainty, be judged to be continuous
with it and to contain economically producible oil or gas on the basis of available geoscience and engineering
data.

Reserves that can be produced economically through application of improved recovery techniques (includin
g, but
not limited to, fluid injection) are included in the proved classification when both of the following occur:

a.

Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the
reservoir as a whole, the
operation of an installed program in the reservoir or an analogous reservoir, or other
evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which
the project or program was based, and

b.

The project has been a
pproved for development by all necessary parties and entities, including governmental
entities.

Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be
determined. The price shall be the average price

during the 12
-
month period before the ending date of the period covered
by the report, determined as an unweighted arithmetic average of the

first
-
day
-
of
-
the
-
month price for each month within
such period, unless prices are defined by contractual arrangeme
nts, excluding escalations based upon future conditions.

‘‘Proved undeveloped reserves’’

or
‘‘PUDs’
’ Proved reserves that are expected to be recovered from new wells
on undrilled acreage, or from existing wells where a relatively major expenditure is requi
red for recompletion. Reserves
on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of
production when drilled, unless evidence using reliable technology exists that establishes reasonable

certainty of economic
producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a
development plan has been adopted indicating that they are scheduled to be drilled within five years, unless specific
circumstances justify a longer time. Under no circumstances shall estimates of proved undeveloped reserves be attributable
to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless
such techniqu
es have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other
evidence using reliable technology establishing reasonable certainty.

‘‘PV
-
10’’

The present value, discounted at 10% per annum, of future net reve
nues (estimated future gross
revenues less estimated future costs of production, development, and asset retirement costs) associated with reserves and
is not necessarily the same as market value. PV
-
10 does not include estimated future income taxes. Unless

otherwise noted,
PV
-
10 is calcula