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MANAGEMENT PROXY CIRCULAR TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

Table of Contents

CONFIDENTIAL TREATMENT

As confidentially submitted to the Securities and Exchange Commission on February 12, 2018. This draft registration statement has not been publicly filed with the Securities and Exchange Commission, and all information herein remains strictly confidential.

Registration No. 333-            

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Epsilon Energy Ltd.
(Exact Name of Registrant as Specified in Its Charter)

Alberta, Canada*
(State or Other Jurisdiction
of Incorporation)
  1311
(Primary Standard Industrial
Classification Code Number)
  Not Applicable**
(IRS Employer
Identification Number)

16701 Greenspoint Park Drive, Suite 195
Houston, Texas 77060
(281) 670-0002

(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)

Michael Raleigh
16701 Greenspoint Park Drive, Suite 195
Houston, Texas 77060
(281) 670-0002

with a copy to:

Gislar Donnenberg
DLA Piper LLP (US)
1000 Louisiana Street, Suite 2800
Houston, Texas 77002
(713) 425-8451

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective
and the consummation of the domestication transaction covered hereby.

           If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    o

           If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.    o

           If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

           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. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

Emerging growth company ý

           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 7(a)(2)(B) of the Securities Act. o



CALCULATION OF REGISTRATION FEE

               
 
Title of each class of securities
to be registered

  Amount to be
registered

  Proposed maximum
offering price per
unit

  Proposed maximum
aggregate offering
price

  Amount of
registration fee

 

Common Stock

  [            ](1)   $[            ](2)   $[            ](2)   $[            ]

 

(1)
Represents shares of common stock of Epsilon Energy, Inc., a to-be-formed Delaware corporation, being registered in connection with the domestication of Epsilon Energy Ltd., a corporation incorporated pursuant to the Business Corporation Act (Alberta). Assumes the proposed domestication is approved by the registrant's shareholders and thereafter consummated.

(2)
Estimated pursuant to Rule 457(c) solely for the purpose of calculating the registration fee based on the average of the high and low prices of the registrant's common stock as reported on the Toronto Stock Exchange on [DATE], 2018.

           The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant files a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


   

*
The registrant intends to change its jurisdiction of incorporation from the Province of Alberta in Canada to the State of Delaware in the United States of America through a continuance under Section 189 of the Business Corporations Act (Alberta), or the ABCA. The change in jurisdiction is sometimes referred to herein as the "domestication" and is subject to shareholder approval.

**
The registrant intends to obtain an employer identification number at such time as the domestication is effected and the registrant is incorporated in the State of Delaware.



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The information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This document shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

PRELIMINARY—SUBJECT TO COMPLETION—DATED AS OF FEBRUARY 12, 2018

EPSILON ENERGY LTD.

PROPOSED DOMESTICATION—YOUR VOTE IS VERY IMPORTANT

Dear Shareholders:

          We are furnishing this management proxy circular/prospectus to shareholders of Epsilon Energy Ltd. in connection with the solicitation of proxies by our management for use at a special meeting of our shareholders (the "Special Meeting") to be held on [DATE], 2018, at [TIME] (Houston, Texas time), at our executive offices, 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060.

          The purpose of the Special Meeting is to obtain shareholder approval to change our jurisdiction of incorporation from the Province of Alberta in Canada to the State of Delaware in the United States of America. We refer to this transaction as the "domestication" throughout this letter and the management proxy circular/prospectus that accompanies it. We are also seeking shareholder approval of the adoption of the Epsilon Energy, Inc. 2018 Equity Incentive Plan.

          We are pursuing the domestication for a number of reasons. Our domestication is intended to enhance shareholder value over the long term by, among other things, improving our ability and flexibility to meet future equity and debt financing needs and enhancing the marketability of our capital stock by raising our profile in the United States capital markets. In addition, our corporate offices and operations are located in the United States and a large percentage of our shareholders are located there.

          We chose the State of Delaware to be our domicile principally because the Delaware General Corporation Law, or DGCL, expressly accommodates a continuance authorized by Section 189 of the ABCA. We also chose the State of Delaware because of the substantial body of case law that has evolved over the years interpreting various provisions of the DGCL.

          If we complete the domestication, we will continue our legal existence in Delaware as if we had originally been incorporated under Delaware law. In addition, each outstanding common share of Epsilon Energy Ltd. as an Alberta corporation will then represent one share of common stock of Epsilon Energy, Inc. as a Delaware corporation. Our common shares are currently traded on the Toronto Stock Exchange, or the TSX, under the symbol "EPS." Upon the completion of our domestication, we intend to apply to list our common stock on the Nasdaq Capital Market under the trading symbol "EPSN." Upon the listing of our shares on the Nasdaq Capital Market, we intend to apply to delist our shares from the Toronto Stock Exchange. Our management will comprise the same directors and executive officers who served in such capacities immediately prior to the domestication.

          The record date for the determination of shareholders entitled to receive notice of, and to vote at, the Special Meeting is [DATE], 2018. At such date, 55,045,705 common shares of Epsilon Energy Ltd. were outstanding. The holders of at least two thirds of our common shares present at the Special Meeting in person or by proxy (and assuming a quorum of our outstanding common shares are represented at the Special Meeting in person or by proxy) must vote to approve the domestication proposal. Dissenting shareholders have the right to be paid the fair value of their shares in accordance with Section 191 of the ABCA. If approved by our shareholders, the domestication is expected to become effective as soon as practicable after the Special Meeting. Our Board of Directors has reserved the right to terminate or abandon our domestication at any time prior to its effectiveness, notwithstanding shareholder approval, if it determines for any reason that the consummation of our domestication would be inadvisable or not in our best interests. In addition, the holders of a majority of our common shares present at the Special Meeting in person or by proxy (and assuming a quorum of our outstanding common shares are represented at the Special Meeting in person or by proxy) must vote to approve the adoption of the equity incentive plan.

          Your existing certificates representing your Epsilon Energy Ltd. common shares will represent the same number of shares of Epsilon Energy, Inc. common stock after the domestication without any action on your part. You will not have to exchange any share certificates. We will issue new certificates to you representing shares of common stock of Epsilon Energy, Inc. as a Delaware corporation upon a transfer of the shares by you or at your request.

          The accompanying proxy circular/prospectus provides a detailed description of our proposed domestication and other information to assist you in considering the proposals on which you are asked to vote. We urge you to review this information carefully and, if you require assistance, to consult with your financial, tax or other professional advisers.

          For the reasons set forth in the prospectus, our Board of Directors unanimously believes that the proposed domestication is in our best interests and in the best interests of our shareholders. Our Board of Directors unanimously recommends that you vote FOR approval of our domestication and FOR approval of the adoption of the equity incentive plan.

          Your vote is very important. Whether or not you plan to attend the Special Meeting, we ask that you indicate the manner in which you wish your shares to be voted and sign and return your proxy as promptly as possible in the enclosed envelope so that your vote may be recorded. If your shares are registered in your name, you may vote your shares in person if you attend the meeting, even if you send in your proxy.

          We appreciate your continued interest in our company.

Very truly yours,

Michael Raleigh

Chief Executive Officer



          We are an "emerging growth company" as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 22 of this proxy circular/prospectus for a discussion of specified matters that should be considered.

          Neither the Securities and Exchange Commission nor any state securities commission or similar authority in Canada has approved or disapproved of these securities or determined if this proxy circular/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

          This proxy circular/prospectus is dated [DATE], 2018, and is first being mailed to shareholders on or about [DATE], 2018.


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EPSILON ENERGY LTD.
16701 Greenspoint Park Drive, Suite 195
Houston, Texas 77060

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To our Shareholders:

        NOTICE IS HEREBY GIVEN that a special meeting of shareholders of EPSILON ENERGY LTD., or the Corporation, will be held on [DATE], 2018, at [TIME] (Houston, Texas time) at our executive offices, 16701 Greenspoint Park Drive, Suite 195, Houston, Texas, for the following purposes:

    1.
    to consider, and if deemed advisable, approve a special resolution authorizing the Corporation to make an application under Section 189 of the Business Corporations Act (Alberta) to change its jurisdiction of incorporation from the Province of Alberta, Canada to the State of Delaware, United States of America, and to approve the certificate of incorporation authorized in the special resolution to be effective as of the date of the Corporation's domestication ("Proposal 1" or the "domestication");

    2.
    to consider and vote upon a proposal to approve, assuming the domestication proposal is approved, the Epsilon Energy, Inc. 2018 Equity Incentive Plan, or 2018 Plan, a copy of which is attached to the accompanying management proxy circular/prospectus as Exhibit G ("Proposal 2" or the "incentive plan proposal"); and

    3.
    to transact such other business as is proper at such meeting or any adjournment thereof.

        A shareholder wishing to be represented by proxy at the Special Meeting or any postponement or adjournment thereof must deposit his or her duly executed form of proxy with the Corporation's transfer agent and registrar, Computershare Trust Company of Canada, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2Y1, Attention: Proxy Department, or by facsimile to (416) 263-9524 or 1-866-249-7775 not later than [TIME] (Houston, Texas time) on [DATE], 2018, or, if the Special Meeting is adjourned, 48 hours (excluding Saturdays, Sundays and holidays) before any postponement or adjournment of the Meeting. The time limit for the deposit of proxies may be waived by the chair of the Special Meeting at his discretion, without notice, and the chair is under no obligation to accept or reject any particular late proxy. A shareholder may also vote by telephone or via the Internet by following the instructions on the form of proxy. If a shareholder votes by telephone or via the Internet, completion or return of the proxy form is not needed.

        The directors of the Corporation have fixed the close of business on [DATE], 2018, as the record date for the determination of the shareholders of the Corporation entitled to receive notice of the Special Meeting and to vote at the Special Meeting. At such date, 55,045,705 common shares were outstanding. The holders of at least two thirds of our common shares present at the Special Meeting in person or by proxy (and assuming a quorum of our outstanding common shares are represented at the Special Meeting in person or by proxy) must vote to approve the domestication proposal. The holders of a majority of our common shares present at the Special Meeting in person or by proxy (and assuming a quorum of our outstanding common shares are represented at the Special Meeting in person or by proxy) must vote to approve the incentive plan proposal. No cumulative voting rights are authorized. A proxy circular/prospectus and form of proxy accompany this Notice.

DATED at Houston, Texas, this                day of [MONTH], 2018.

John Lovoi, Chairman of the Board


Table of Contents


MANAGEMENT PROXY CIRCULAR

TABLE OF CONTENTS

 
  Page  

Glossary of Certain Definitions

    ii  

Summary

    1  

Risk Factors

    22  

Description of the Business

    37  

Properties

    38  

Financial Information About Segments

    39  

Employees

    42  

Legal Proceedings

    42  

Environmental Regulation and Liability

    42  

Market for Our Common Equity and Related Stockholder Matters

    44  

Selected Financial Data

    45  

Management's Discussion and Analysis of Financial Condition and Results of Operation

    47  

Quantitative and Qualitative Disclosures About Market Risk

    63  

Financial Statements and Supplementary Data

    64  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    64  

Directors, Executive Officers and Corporate Governance

    64  

Executive Compensation

    71  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    74  

Certain Relationships and Related Transactions

    77  

Principal Accounting Fees and Services

    77  

Forward Looking Statements

    77  

The Special Meeting

    78  

The Domestication

    82  

General

    82  

Principal Reasons for the Domestication

    82  

Effects of the Domestication

    83  

Treatment of Outstanding Capital Stock and Options

    83  

Shareholder Approval

    84  

Regulatory and Other Approvals

    84  

Comparison of Shareholder Rights

    84  

Proposed Certificate of Incorporation and Bylaws of Epsilon Energy Inc. 

    94  

Dissenting Rights of Shareholders

    95  

Accounting Treatment of the Domestication

    97  

United States and Canadian Income Tax Considerations

    97  

Description of Capital Stock

    107  

Interest of Management in the Domestication. 

    108  

Legal Matters. 

    109  

Experts. 

    109  

Where You Can Find More Information. 

    109  

General

    109  

Index To Financial Statements

    F-1  

Exhibits

       

Exhibit A—Special Resolution

    Exhibit A  

Exhibit B—Form of Certificate of Domestication

    Exhibit B  

Exhibit C—Form of Certificate of Incorporation

    Exhibit C  

Exhibit D—Form of Bylaws

    Exhibit D  

Exhibit E—Section 191 of the Alberta Business Corporations Act

    Exhibit E  

Exhibit F—Proxy Card

    Exhibit F  

Exhibit G—Epsilon Energy, Inc. 2018 Equity Incentive Plan

    Exhibit G  

Information Not Required in Prospectus

    II-1  

Exhibit Index

    II-1  

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GLOSSARY OF CERTAIN DEFINITIONS

        Unless otherwise provided in this Circular or the context otherwise requires, references to the "Corporation," "Epsilon Energy," "we," "us" and "our" refer to Epsilon Energy Ltd., an Alberta corporation, before the change of jurisdiction. References to "Epsilon" and "Epsilon Energy, Inc." refer to Epsilon Energy, Inc., a Delaware corporation, as of the effective time of the change in jurisdiction. Unless otherwise indicated, references herein to "$" or "dollars" are expressed in U.S. dollars (US$). References in this management proxy circular/prospectus to Canadian dollars are noted as "Cdn$."

        We have included below the definitions for certain terms used in this Circular:

"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-dimensional, seismic.

"Anchor shippers" Parties listed in Anchor Shipper Gas Gathering Agreement for Northern Pennsylvania, including Epsilon Midstream, LLC.

"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.

"Bcf" 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 an oil and gas wellbore for production through the installation of permanent production equipment, as well as perforation and fracture stimulation to optimize production.

"Costless collar" An option position where the proceeds from the sale of a call option at its inception fund the purchase of a put option at its inception.

"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 oil and gas lease 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.

"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 oil or gas in sufficient quantities to justify completion as an oil or gas 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 found 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

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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 features 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 spending 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 owned.

"ISDA" International Swaps and Derivatives Association, Inc.

"Lease operating expense" or "LOE" The expenses of lifting oil or gas from a producing formation to the surface, constituting part of the current operating 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 completion 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 day.

"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.

"NYMEX" The New York Mercantile Exchange.

"PDNP" Proved developed nonproducing reserves.

"PDP" Proved developed producing reserves.

"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.

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"Prospect" A property on which 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 methods 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 economically 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 renewal 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 project, 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 certainty, 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 (including, 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 approved 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 arrangements, 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 required 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 techniques 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.

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"PV-10" The present value, discounted at 10% per annum, of future net revenues (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 calculated using the pricing scheme as required by the Securities and Exchange Commission ("SEC"). PV-10 of proved reserves is calculated the same as the standardized measure of discounted future net cash flows, except that the standardized measure of discounted future net cash flows includes future estimated income taxes discounted at 10% per annum. See the definition of standardized measure of discounted future net cash flows.

"Reasonable certainty" If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical and geochemical) engineering, and economic data are made to estimated ultimate recovery with time, reasonably certain estimated ultimate recovery is much more likely to increase or remain constant than to decrease.

"Reserves" Estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.

"Reservoir" A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

"Royalty" The amount or fee paid to the owner of mineral rights, expressed as a percentage or fraction of gross income from crude oil or natural gas produced and sold, unencumbered by expenses relating to the drilling, completing or operating of the affected well.

"Royalty interest" An interest in an oil or natural gas property entitling the owner to shares of the crude oil or natural gas production free of costs of exploration, development and production operations.

"Section" An area of one square mile of land, 640 acres, with 36 sections making up one survey township on a rectangular grid.

"Standardized Measure" or "SMOG" The standardized measure of discounted future net cash flows (the "Standardized Measure") is an estimate of future net cash flows associated with proved reserves, discounted at 10% per annum. Future net cash flows is calculated by reducing future net revenues by estimated future income tax expenses and discounting at 10% per annum. The Standardized Measure and the PV-10 of proved reserves is calculated in the same exact fashion, except that the Standardized Measure includes future estimated income taxes discounted at 10% per annum. The Standardized Measure is in accordance with GAAP.

"Working interest" The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.

"Workover" Operations on a producing well to restore or increase production.

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EPSILON ENERGY LTD.

PROXY CIRCULAR/PROSPECTUS
(All dollar amounts expressed herein are U.S. dollars)

SUMMARY

        This summary highlights selected information appearing elsewhere in this proxy circular/prospectus (the "Circular") and does not contain all the information that you should consider in making a decision with respect to the proposals described herein. You should read this summary, together with the more detailed information, including our financial statements and the related notes appearing elsewhere in this Circular, and the exhibits attached hereto. You should carefully consider, among other things, the matters discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included in this Circular. You should read this Circular in its entirety.

    Epsilon Energy Ltd.

        Epsilon Energy Ltd. ("we," "Epsilon" or the "Corporation") was incorporated March 14, 2005, pursuant to the ABCA. The Corporation is extra-provincially registered in Ontario pursuant to the Business Corporations Act (Ontario). Epsilon is a North American on-shore focused independent oil and gas company engaged in the acquisition, development, gathering and production of oil and gas reserves. Our primary areas of operation are Pennsylvania and Oklahoma. Our assets are concentrated in areas with known hydrocarbon resources, which are conducive to multi-well, repeatable drilling programs. The common shares of the Corporation trade on the TSX with the ticker symbol "EPS". At December 31, 2016, Epsilon's total estimated net proved reserves were 49,397 million cubic feet (Mcf) of natural gas reserves and leasehold rights to approximately 76,171 gross (11,522 net) acres. The Corporation has natural gas production from its joint venture in Pennsylvania with Chesapeake Energy Corp. The Corporation has also added oil and natural gas production from its recent acquisitions in the Anadarko Basin in Oklahoma.

        We conduct operations in the United States through our wholly owned subsidiaries Epsilon Energy USA Inc., an Ohio corporation, or Epsilon Energy USA; Epsilon Midstream, LLC, a Pennsylvania limited liability company, or Epsilon Midstream; Epsilon Operating, LLC, a Delaware limited liability company, Dewey Energy GP LLC, a Delaware limited liability company, and Dewey Energy Holdings LLC, a Delaware limited liability company.

        Epsilon Energy USA is the 100% owner of Epsilon Midstream, which owns a 35% undivided interest in the Auburn Gas Gathering System, or the Auburn GGS, located in Susquehanna County, Pennsylvania, with partners Appalachia Midstream Services, LLC (43.875%) and Statoil Pipelines, LLC (21.125%). Anchor Shippers, Epsilon Energy, Statoil USA Onshore Properties, Inc., and Chesapeake Energy, Inc. dedicated approximately 18,000 mineral acres to the Auburn GGS for a term of 15 years under a cost of service agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction of the system.

        Our principal executive office is located at 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060, and our telephone number at that address is (281) 670-0002. Our registered office in Alberta, Canada is located at 14505 Bannister Road SE, Suite 300, Calgary, AB, Canada T2X 3J3.

        Significant additional information about Epsilon Energy is set forth in the section of this Circular entitled "Description of the Business," beginning at page 35.

        Set forth below in a question and answer format is general information regarding the Special Meeting to which this Circular relates. This general information regarding the Special Meeting is followed by a more detailed summary of the process relating to, reasons for and effects of our proposed change in jurisdiction of incorporation from the Province of Alberta in Canada to the State of Delaware in the United States (Proposal 1 in the Notice of Special Meeting), which we refer to in this Circular as the "domestication" or the "continuance" and the adoption of the 2018 Plan (Proposal 2 in the Notice of Special Meeting).

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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS

Q.
What is the purpose of the Special Meeting?

A.
The purpose of the Special Meeting is to vote on the proposal to approve a special resolution authorizing us to make an application to change our jurisdiction of incorporation to Delaware and adopt a certificate of incorporation of Epsilon Energy, Inc. to be effective as of the date of our domestication. Assuming the approval of the domestication, Epsilon's shareholders also are being asked to consider and vote upon a proposal to adopt the 2018 Epsilon Energy, Inc. Equity Incentive Plan, or the 2018 Plan, and to transact such other business as is proper at the Special Meeting.

Q.
Where and when will the Special Meeting be held?

A.
The Special Meeting will be held at our executive offices, 16701 Greenspoint Park Drive, Suite 195, Houston, Texas, on [DATE], 2018, at [TIME] (Houston, Texas time).

Q.
Who is soliciting my vote?

A.
Our management is soliciting your proxy to vote at the Special Meeting. This Circular and form of proxy were first mailed to our holders of common shares of the Corporation (the "Shareholders") on or about [DATE], 2018. Your vote is important. We encourage you to vote as soon as possible after carefully reviewing this Circular.

Q.
Who is entitled to vote?

A.
The record date for the determination of shareholders entitled to receive notice of the Special Meeting is [DATE], 2018, or the Record Date. In accordance with the provisions of the ABCA, we will prepare a list of our registered Shareholders as of the Record Date. If you were a Shareholder as of the Record Date, you will be entitled to vote at the Special Meeting.

Q.
What am I voting on?

A.
The Shareholders are entitled to vote on a special resolution authorizing us to make an application under Section 189 of the ABCA to change our jurisdiction of incorporation from the Province of Alberta, Canada to the State of Delaware, United States of America, by way of a continuance under Section 189 of the ABCA and a domestication under Section 388 of the Delaware General Corporation Law, or the DGCL, and to approve the certificate of incorporation of Epsilon Energy, Inc. authorized in the special resolution to be effective as of the date of our domestication, and to approve the 2018 Plan.

Q.
What is the voting recommendation of the Board of Directors?

A.
The board of directors of the Corporation, or the Board, recommends a vote FOR the special resolution authorizing us to make an application under Section 189 of the ABCA to change our jurisdiction of incorporation from the Province of Alberta, Canada to the State of Delaware, United States of America, by way of a continuance, and to approve the certificate of incorporation of Epsilon Energy, Inc. authorized in the special resolution to be effective as of the date of our domestication. The Board also recommends a vote FOR the approval of the 2018 Plan.

Q.
Will any other matters be voted on?

A.
The Board does not intend to present any other matters at the Special Meeting. The Board does not know of any other matters that will be brought before our Shareholders for a vote at the Special Meeting. If any other matter is properly brought before the Special Meeting, your signed

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    proxy card gives authority to Michael Raleigh and, failing him, B. Lane Bond, as proxies, with full power of substitution, to vote on such matters at their discretion.

Q.
How many votes do I have?

A.
Shareholders are entitled to one vote for each common share held as of the close of business on the Record Date.

Q.
What is the difference between holding common shares as a Shareholder of record and as a beneficial owner?

A.
Many Shareholders hold their common shares through a stockbroker or bank (an "Intermediary" or "Intermediaries") rather than directly in their own names. As summarized below, there are some distinctions between common shares held of record and those owned beneficially.

            Shareholder of Record—If your common shares are registered directly in your name with our transfer agent, you are considered, with respect to those shares, the "shareholder of record," and these Circular materials are being sent directly to you by us. You may vote the common shares registered directly in your name by completing and mailing the proxy card or by voting in person at the Special Meeting.

            Beneficial Owner—Non-registered Shareholders who have not objected to their Intermediary disclosing certain ownership information about themselves to the Corporation are referred to as "NOBOs." Those non-registered Shareholders who have objected to their Intermediary disclosing ownership information about themselves to the Corporation are referred to as "OBOs." The Corporation has elected to send the Notice, this Circular and the form of proxy (collectively, the "meeting materials") directly to the NOBOs, and, to the extent possible, indirectly through Intermediaries to the OBOs. The Intermediaries (or their service companies) are responsible for forwarding the meeting materials to each OBO, unless the OBO has waived the right to receive them. Intermediaries will frequently use service companies to forward the meeting materials to non-registered Shareholders.

Q.
How do I vote?

A.
If you are a Shareholder of record, there are two ways to vote: (1) by completing and mailing your proxy card, or (2) by voting in person at the Special Meeting. If you return your proxy card but you do not indicate your voting preferences, the proxies will vote your common shares FOR the domestication, FOR the adoption of the 2018 Plan and on any other matter that is properly submitted for Shareholder vote at the Special Meeting.

Generally, a non-registered Shareholder who has not waived the right to receive meeting materials will either:

    (i)
    be given a voting instruction form ("VIF") which is not signed by the Intermediary, and which, when properly completed and signed by the non-registered Shareholder and returned to the Intermediary or its service company, will constitute voting instructions that the Intermediary must follow; or

    (ii)
    less frequently, be given a form of proxy that has already been signed by the Intermediary (typically by a facsimile, stamped signature), which is restricted as to the number of common shares beneficially owned by the non-registered Shareholder and must be completed, but not signed, by the non-registered Shareholder and deposited with the Corporation's transfer agent, Computershare Trust Company of Canada.

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            These meeting materials are being sent to both registered Shareholders and non-registered Shareholders. If you are a non-registered Shareholder, and the Corporation or its agent has sent these meeting materials to you, your name and address and information about your holdings of securities have been obtained in accordance with applicable securities regulatory requirements from the Intermediary holding securities on your behalf. By choosing to send these meeting materials to you directly, the Corporation (and not the Intermediary holding securities on your behalf) has assumed responsibility for delivering these materials to you and executing your proper voting instructions. Please return your voting instructions as specified in the request for voting instruction.

            VIFs, whether provided by the Corporation or by an Intermediary, should be completed and returned in accordance with the specific instructions noted on the VIF, including those regarding where and by when the VIF is to be delivered. The purpose of this procedure is to permit non-registered Shareholders to direct the voting of the common shares that they beneficially own.

            Should a non-registered Shareholder who receives a VIF wish to attend the Special Meeting or have someone else attend on such holder's behalf, the non-registered Shareholder should follow the instructions set forth in the VIF.

Q.
Can I change my vote or revoke my proxy?

A.
A Shareholder of record who has given a proxy has the power to revoke it by depositing an instrument in writing executed by the Shareholder or by the Shareholder's attorney authorized in writing either at our registered office at any time up to and including the last business day preceding the day of the Special Meeting, or any postponement or adjournment thereof, or with the chairman of the Special Meeting on the day of the Special Meeting or any postponement or adjournment thereof, or in any other manner permitted by law. A Shareholder of record who has given a proxy may also revoke it by signing a form of proxy bearing a later date and depositing it by the time specified in the Notice or by delivering a written statement revoking the proxy. The written statement must be delivered to the Corporate Secretary of the Corporation at 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060 no later than 5:00 p.m. (Houston, Texas time) on the last business day prior to the date of the Special Meeting or any postponement or adjournment of the Special Meeting, or to the chairman of the Special Meeting on the day of the Special Meeting or any postponement or adjournment thereof.

Q.
How are votes counted?

A.
We will appoint a scrutineer at the Special Meeting, who will collect all proxies and ballots and tabulate the results. The scrutineer is typically a representative of our transfer agent.

Q.
Who pays for soliciting proxies?

A.
We will bear the cost of soliciting proxies from the Shareholders. It is planned that the solicitation will be initially by mail, but proxies may also be solicited by our employees by telephone or email. These persons will receive no additional compensation for such services but will be reimbursed for reasonable out-of-pocket expenses. Arrangements will also be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of common shares held of record by these persons, and we will reimburse them for their reasonable out-of-pocket expenses. The cost of such solicitation, estimated to be approximately $10,000, will be borne by us.

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Q.
What is the quorum requirement of the Special Meeting?

A.
A quorum will be present at the Special Meeting if there are at least two persons present holding or representing by proxy in the aggregate not less than 5% of the common shares entitled to be voted at the Special Meeting.

Q.
What are broker non-votes?

A.
Broker non-votes occur when Shareholders of record, such as banks and brokers holding common shares on behalf of beneficial owners, do not receive voting instructions from the beneficial Shareholders at least ten days before the Special Meeting. Broker non-votes will not affect the outcome of the matters being voted on at the Special Meeting, assuming that a quorum is obtained.

Q.
What is the vote required to approve the domestication?

A.
Our change of jurisdiction from the Province of Alberta in Canada to the State of Delaware in the United States requires the affirmative vote, in person or by proxy, of two thirds of the votes cast by the Shareholders at the Special Meeting if a quorum is present.

Q.
What is the vote required to approve the 2018 Plan?

A.
The adoption of the 2018 Plan requires the affirmative vote, in person or by proxy, of a majority of the votes cast by the Shareholders at the Special Meeting if a quorum is present.

Q.
Multiple shareholders live in my household, and together we received only one copy of this Circular. How can I obtain my own separate copy of this document for the Special Meeting?

A.
You may pick up copies in person at the Special Meeting or download them from our website, http://www.epsilonenergyltd.com/ (click on the link to the Investor Center page). If you want copies mailed to you and are a beneficial owner, you must request them from your broker, bank or other nominee. If you want copies mailed to you and are a Shareholder of record, we will mail them promptly if you request them from our corporate office by phone at (281) 670-0002 or by mail to 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060, Attention: AeRayna Flores. We cannot guarantee you will receive mailed copies before the Special Meeting.

Q.
Who can help answer my questions?

A.
If you have questions about the Special Meeting you should contact AeRayna Flores at (281) 670-0002 or by emailing her at admin@epsilonenergy.com. You may also obtain additional information about us from documents filed with Canadian securities regulatory authorities by following the instructions in the section titled "Where You Can Find More Information."

    Voting Securities and Principal Holders Thereof

        The Corporation is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares. As at the effective date of this Circular (the "Effective Date"), which is [DATE], 55,045,705 common shares are issued and outstanding as fully paid and non-assessable. No other shares of any other class are issued or outstanding. The common shares are the only shares entitled to be voted at the Special Meeting and holders of common shares are entitled to one vote for each common share held.

        Holders of common shares of record at the close of business on the Record Date are entitled to vote such common shares at the Meeting on the basis of one vote for each common share held except to the extent that, (a) the holder has transferred the ownership of any of his common shares after the

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Record Date, and (b) the transferee of those common shares produces properly endorsed share certificates, or otherwise establishes that he owns the common shares, and demands not later than ten (10) days before the day of the Meeting that his name be included in the list of persons entitled to vote at the Special Meeting, in which case the transferee will be entitled to vote his common shares at the Meeting.

        To the knowledge of the directors and the executive officers of the Corporation, except as set forth below, as at the Effective Date, no person or company beneficially owns, directly or indirectly, or controls or directs, voting securities carrying 10% or more of the voting rights attached to any class of voting securities of the Corporation.

Name
  Number of
Common Shares
  Percentage of
Common Shares
 

Advisory Research, Inc. 

    6,621,026     12.04 %

JVL Advisors, LLC

    10,996,837     19.99 %

Oakview Capital Management, L.P. 

    6,319,465     11.49 %

Azvalor Asset Management SGIIC

    10,126,974     18.40 %


THE DOMESTICATION PROPOSAL

        Our Board is proposing to change our jurisdiction of incorporation from the Province of Alberta in Canada to the State of Delaware in the United States through a transaction called a "continuance" under Section 189 of the ABCA and a "domestication" under Section 388 of the DGCL. Under the DGCL, a corporation becomes domesticated in the State of Delaware by filing a certificate of corporate domestication and a certificate of incorporation with the Secretary of State of the State of Delaware. The domesticated corporation, which will be called Epsilon Energy, Inc., will become subject to the DGCL on the date of its domestication, but will be deemed for the purposes of the DGCL to have commenced its existence in Delaware on the date it originally commenced existence in Canada. The Board of Directors has unanimously approved the domestication, believes it to be in our best interests, and unanimously recommends its approval.

        Our Board has determined to pursue the domestication for a number of reasons. Our domestication is intended to enhance shareholder value over the long-term by, among other things, improving our ability and flexibility to meet future equity and debt financing needs and enhancing the marketability of our capital stock by raising our profile in the United States capital markets. In addition, our corporate offices and operations are located in the United States and a large percentage of our Shareholders are located there.

        We chose the State of Delaware to be our domicile principally because the DGCL expressly accommodates continuances under the ABCA, and also because of the comprehensive body of case law interpreting the DGCL that has evolved over the years, including case law interpreting the duties and obligations of directors and officers.

        The domestication will change the corporate laws that apply to our Shareholders from the laws of the Province of Alberta, and the laws of Canada applicable therein, to the laws of the State of Delaware. There are material differences between the ABCA and the DGCL. Our Shareholders may have more or fewer rights under Delaware law depending on the specific set of circumstances.

        We plan to complete the proposed domestication as soon as possible following approval by our Shareholders. The domestication will be effective on the date set forth in the certificate of corporate domestication and certificate of incorporation, as filed with the Secretary of State of the State of Delaware. Thereafter, Epsilon Energy, Inc. will be subject to the certificate of incorporation filed in Delaware. Simultaneously, we will continue out of Alberta upon the issuance from the Alberta Registrar of Corporations of confirmation of the continuance, which is expected to be the same date as

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the date of the filing of the certificate of corporate domestication and certificate of incorporation in Delaware. However, the Board of Directors may decide to delay the domestication or not to proceed with the domestication after receiving approval from our Shareholders if it determines that the domestication is no longer advisable. The Board of Directors has not considered any alternative action if the domestication is not approved or if it decides to abandon the domestication.

        The domestication will not interrupt our corporate existence, our operations, our outstanding agreements and obligations, or the trading market of our common shares. Each outstanding common share at the time of the domestication will remain issued and outstanding as a share of common stock of Epsilon Energy, Inc. after our corporate existence is continued from the Province of Alberta in Canada under the ABCA and domesticated in the State of Delaware in the United States under the DGCL. Following the completion of the domestication, Epsilon Energy, Inc.'s common stock will continue to be listed on the Toronto Stock Exchange under the trading symbol "EPS," and we will apply to list the common stock of Epsilon Energy, Inc. on the Nasdaq Capital Market under the trading symbol "EPSN." Upon listing on the Nasdaq Capital Market, we intend to apply to delist our common shares from the Toronto Stock Exchange.

    Regulatory and Other Approvals

        The continuance is subject to the authorization of the Registrar of Corporations appointed under the ABCA. The Registrar is empowered to authorize the continuance if, among other things, Registrar is satisfied that the continuance will not adversely affect our creditors or Shareholders.

    Tax Consequences of the Domestication

        U.S. Federal Income Tax Consequences.    We believe that the change in our jurisdiction of incorporation will constitute a tax-free reorganization within the meaning of Section 368(a) of the United States Internal Revenue Code of 1986, as amended, or the Code, and, generally, neither we nor Epsilon Energy, Inc., the Delaware corporation, should recognize any gain or loss for U.S. federal income tax purposes as a result of the domestication, other than as described later herein in "United States Federal Income Tax Consequences." If, for any reason, we determine that the domestication would not qualify as a tax-free reorganization, we will abandon the domestication.

        For shareholders of the Corporation that are United States persons for U.S. federal income tax purposes (which we refer to as U.S. shareholders), the domestication also would generally be tax-free. However, Code Section 367 has the effect of potentially imposing income tax on such shareholders in connection with such transactions. Pursuant to the Treasury Regulations under Code Section 367, any U.S. shareholder that owns, directly or through attribution, 10% or more of the combined voting power of all classes of our stock or 10% or more of the total value of shares of all classes of our stock at the time of the domestication (which we refer to as a 10% Shareholder) will have to recognize a deemed dividend on the domestication equal to the "all earnings and profits amount," within the meaning of Treasury Regulations Section 1.367(b)-2, attributable to such shareholder's shares in the Corporation. Any U.S. shareholder that is not a 10% Shareholder and whose shares have a fair market value of less than $50,000 on the date of the domestication, will recognize no gain or loss as a result of the domestication. A U.S. shareholder that is not a 10% Shareholder but whose shares have a fair market value of at least $50,000 on the date of the domestication must generally recognize gain (but not loss) on the domestication equal to the difference between the fair market value of the Epsilon Energy, Inc. common stock received at the time of the domestication over the shareholder's tax basis in our shares. Such a shareholder, however, instead of recognizing gain, may elect to include in income as a deemed dividend the "all earnings and profits amount" attributable to his shares in the Corporation, which we refer to as a "Deemed Dividend Election."

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        Based on all available information, we believe that no U.S. shareholder of the Corporation should have a positive "all earnings and profits amount" attributable to such shareholder's shares in the Corporation. Our belief with respect to the "all earnings and profits amount" results from calculations performed by our tax advisors based on information provided to them by us.

        Based on our limited activity at the holding company level and the size of our existing earnings and profits deficit, we believe that no U.S. shareholder should have a positive "all earnings and profits amount" attributable to such shareholder's shares in the Corporation, and accordingly no 10% Shareholder or U.S. shareholders who makes a Deemed Dividend Election should be subject to tax under Code Section 367 on the domestication. However, no assurance can be given that the IRS will agree with us. If it does not agree, then a U.S. shareholder may be subject to adverse U.S. federal income tax consequences. A U.S. shareholder's tax basis in the shares of common stock of Epsilon Energy, Inc. received in the exchange will be equal to such shareholder's tax basis in the shares of the Corporation surrendered in the exchange, increased by the amount of gain (if any) recognized in connection with the domestication or the amount of the "all earnings and profits amount" included in such shareholder's income. A U.S. shareholder's holding period in the shares of common stock of Epsilon Energy, Inc. received in the exchange should include the period of time during which such shareholder held his shares in the Corporation, provided that the shares of the Corporation were held as capital assets.

        Canadian Federal Income Tax Consequences.    Under the Income Tax Act (Canada), or Tax Act, the change in our jurisdiction from Canada to the United States will cause our tax year to end immediately before the domestication. Furthermore, we will be deemed to have disposed of all of our property immediately before the continuance for proceeds of disposition equal to the fair market value of the property at that time. We will be subject to a separate corporate emigration tax imposed equal to the amount by which the fair market value of all of our property (principally consisting of all of the outstanding shares of capital stock of our wholly owned U.S. subsidiaries Epsilon Energy USA, Epsilon Midstream, Epsilon Operating, Dewey GP and Dewey Holdings) immediately before the continuance exceeds the aggregate of our liabilities at that time (other than dividends payable and taxes payable in connection with the emigration tax) and the amount of paid-in capital on all of our outstanding common shares.

        We have reviewed our assets, liabilities, paid-in capital and other tax balances with the assistance of our professional advisors. Based on our calculations, we estimate Epsilon will incur a Cdn$4-5 million Canadian income tax liability arising on the domestication. This conclusion is based in part on determinations of factual matters, including determinations regarding the fair market value of our assets and tax attributes, any or all of which could change prior to the effective time of the domestication.

        Our shareholders who hold our common shares after the domestication will not be considered to have disposed of their shares for Canadian income tax purposes by reason only of the domestication. Accordingly, the domestication will not cause Canadian resident shareholders to realize a capital gain or loss on their shares and there will be no effect on the adjusted cost base of their shares.

        The foregoing is a brief summary of the principal income tax considerations only and is qualified in its entirety by the more detailed description of income tax considerations in "United States and Canadian Tax Considerations" in this Circular, which shareholders are urged to read. This summary does not discuss all aspects of United States and Canadian tax consequences that may apply in connection with the domestication. Shareholders should consult their own tax advisors as to the tax consequences of the domestication applicable to them. In addition, please note that other tax consequences may arise under applicable law in other countries.

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ACCOUNTING TREATMENT OF THE DOMESTICATION

        Our domestication as a Delaware corporation represents a transaction between entities under common control. Assets and liabilities transferred between entities under common control are accounted for at carrying value. Accordingly, the assets and liabilities of Epsilon Energy, Inc. will be reflected at their carrying value to us.

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DISSENTING RIGHTS OF SHAREHOLDERS

        If you wish to dissent and do so in compliance with Section 191 of the ABCA, and we proceed with the domestication, you will be entitled to be paid the fair value of the common shares you hold. Fair value is determined as of the close of business on the day before the domestication is approved by our Shareholders. If you wish to dissent, you must send written objection to the domestication to us at or before the Special Meeting. If you vote in favor of the domestication, you in effect lose your rights to dissent. If you withhold your vote or vote against the domestication, you preserve your dissent rights to the extent you comply with Section 191 of the ABCA.

        However, it is not sufficient to vote against the domestication or to withhold your vote. You must also provide a separate dissent notice at or before the Special Meeting. If you grant a proxy and intend to dissent, the proxy must instruct the proxy holder to vote against the domestication in order to prevent the proxy holder from voting such shares in favor of the domestication and thereby voiding your right to dissent. Under the ABCA, you have no right of partial dissent. Accordingly, you may dissent only as to all your common shares. Section 191 of the ABCA is reprinted in its entirety as Exhibit E to this Circular.

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COMPARISON OF SHAREHOLDER RIGHTS

        Upon completion of the domestication, our Shareholders will be holders of common stock of Epsilon Energy, Inc., a Delaware corporation, and their rights will be governed by the DGCL as well as Epsilon Energy, Inc.'s certificate of incorporation and bylaws. Shareholders should be aware that the rights they currently have under the ABCA may, with respect to certain matters, be different than the rights they will have as stockholders under the DGCL. For example, under the ABCA, a company has the authority to issue an unlimited number of shares whereas, under the DGCL, a Delaware corporation may only issue the number of shares that is authorized by its certificate of incorporation and stockholder approval must be obtained to amend the certificate of incorporation to authorize the issuance of additional shares. We refer you to the section titled "The Domestication—Comparison of Shareholder Rights" for a more detailed description of the material differences between the rights of Canadian shareholders and Delaware stockholders.

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THE INCENTIVE PLAN PROPOSAL

        At the Special Meeting, Shareholders will be asked to approve the Epsilon Energy, Inc. 2018 Equity Incentive Plan, or the 2018 Plan. The Board adopted the 2018 Plan on February [    ·    ], 2018, subject to and effective upon its approval by the Shareholders. If the Shareholders approve the 2018 Plan, it will become effective upon completion of the domestication.

    Essential Incentive Plan

        In connection with the domestication, the Board determined that it was in the best interest of the Shareholders to approve a new incentive plan that is compliant with U.S. public company equity plan rules and practices that will replace the Share Compensation Plan of Epsilon Energy Ltd., or the Predecessor Plan. We operate in a challenging marketplace in which our success depends to a great extent on our ability to attract and retain employees, directors and other service providers of the highest caliber. One of the tools our Board of Directors regards as essential in addressing these human resource challenges is a competitive equity incentive program. Our employee stock incentive program provides a range of incentive tools and sufficient flexibility to permit the Board's Compensation Committee to implement them in ways that will make the most effective use of the shares our shareholders authorize for incentive purposes. We intend to use these incentives to attract new key employees and to continue to retain existing key employees, directors and other service providers for the long-term benefit of the Company and its shareholders.

    Requested Share Authorization

        The 2018 Plan authorizes the Compensation Committee to provide 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 2018 Plan, we will be authorized to issue up to 2,000,000 shares. No shares subject to awards currently outstanding under the Predecessor Plan that expire or are forfeited will become available for issuance under the 2018 Plan.

        As of January 31, 2018, 686,500 options were outstanding under the Predecessor Plan for a total of 686,500 shares of our common stock with a weighted average exercise price of Cdn$3.44 per share and weighted average expected remaining term of approximately 4.4 years, and a total of 325,000 shares remained subject to unvested awards of restricted stock and restricted stock units outstanding under the Predecessor Plan. No further awards will be granted under the Predecessor Plan, which will be terminated.

    Grant Practices

        In operating our Predecessor Plan, the Compensation Committee has monitored and managed dilution to reasonable levels. The maximum aggregate number of shares we are requesting our shareholders to authorize under the 2018 Plan would represent about 3.6% of the number of shares of our common stock outstanding on January 31, 2018, determined on a fully diluted basis.

    Key Features of 2018 Plan

        Key features of the 2018 Plan of particular interest to our shareholders reflect best practices:

    The 2018 Plan prohibits the repricing of stock options and stock appreciation rights without the approval of our shareholders.

    No discount from fair market value is permitted in setting the exercise price of stock options and stock appreciation rights.

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    The 2018 Plan generally provides for gross share counting. The number of shares remaining available for grant under the 2018 Plan is reduced by the gross number of shares subject to options and stock appreciation rights settled on a net basis, provided that any shares withheld for taxes in connection with the vesting or settlement of any full value award (but not options or stock appreciation rights) will not reduce the number of shares remaining available for the future grant of awards.

    The number of shares for which awards may be granted to any nonemployee member of our Board of Directors in a fiscal year is limited.

    The 2018 Plan requires each award to have a minimum vesting period of one year, except for 5% of the authorized shares.

    The 2018 Plan does not contain a "liberal" change in control definition (e.g., mergers require actual consummation).

    Performance awards require the achievement of pre-established goals. The 2018 Plan establishes a list of measures of business and financial performance from which the Compensation Committee may construct predetermined performance goals that must be met for an award to vest.

    The 2018 Plan has a fixed term of ten years.

        By approving the 2018 Plan, the shareholders will be specifically approving, among other things:

    the eligibility requirements for participation in the 2018 Plan;

    the maximum numbers of shares for which stock-based awards intended to qualify as performance-based may be granted to an employee in any fiscal year;

    the maximum dollar amount that a participant may receive under a cash-based award intended to qualify as performance-based for each fiscal year contained in the performance period; and

    the performance measures that may be used by the Compensation Committee to establish the performance goals applicable to the grant or vesting of awards of restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and cash-based awards that are intended to result in qualified performance-based compensation.

        While we believe that compensation provided by such awards under the 2018 Plan generally will be deductible by the Company for federal income tax purposes, under certain circumstances, such as a change in control of the Company, compensation paid in settlement of certain awards may not be deductible. Further, the Compensation Committee will retain the discretion to grant awards to covered employees that are not intended to qualify for deduction in full under Section 162(m). The 2018 Plan was generally designed to meet certain performance based requirements under IRC Section 162(m). However, with passage of the tax legislations, certain performance based exclusions under IRC Section 162(m) were repealed.

        The Board of Directors believes that the 2018 Plan will serve a critical role in attracting and retaining the high caliber employees, consultants and directors essential to our success and in motivating these individuals to strive to meet our goals. Therefore, the Board urges you to vote to approve the adoption of the 2018 Plan.

    Summary of the 2018 Plan

        The following summary of the 2018 Plan is qualified in its entirety by the specific language of the 2018 Plan, a copy of which is attached to this proxy circular/prospectus as Appendix A.

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        General.    The purpose of the 2018 Plan is to advance the interests of the Company and its shareholders by providing an incentive program that will enable the Company to attract and retain employees, consultants and directors and to provide them with an equity interest in the growth and profitability of the Company. These incentives are provided through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards and cash-based awards.

        Authorized Shares.    The maximum aggregate number of shares authorized for issuance under the 2018 Plan is 2,000,000.

        Share Counting.    Each share made subject to an award will reduce the number of shares remaining available for grant under the 2018 Plan by one share. If any award granted under the 2018 Plan expires or otherwise terminates for any reason without having been exercised or settled in full, or if shares subject to forfeiture or repurchase are forfeited or repurchased by the Company for not more than the participant's purchase price, any such shares reacquired or subject to a terminated award will again become available for issuance under the 2018 Plan. Shares will not be treated as having been issued under the 2018 Plan and will therefore not reduce the number of shares available for issuance to the extent an award is settled in cash. Shares that are withheld or that are tendered in payment of the exercise price of an option will not be made available for new awards under the 2018 Plan. However, shares withheld or reacquired by the Company in satisfaction of a tax withholding obligation in connection with the vesting or settlement of any full value award (but not options or stock appreciation rights) will not reduce the number of shares remaining available for the future grant of awards. Upon the exercise of a stock appreciation right or net-exercise of an option, the number of shares available under the 2018 Plan will be reduced by the gross number of shares for which the award is exercised.

        Adjustments for Capital Structure Changes.    Appropriate and proportionate adjustments will be made to the number of shares authorized under the 2018 Plan, to the numerical limits on certain types of awards described below, and to outstanding awards in the event of any change in our common stock through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in our capital structure, or if we make a distribution to our shareholders in a form other than common stock (excluding regular, periodic cash dividends) that has a material effect on the fair market value of our common stock. In such circumstances, the Compensation Committee also has the discretion under the 2018 Plan to adjust other terms of outstanding awards as it deems appropriate.

        Nonemployee Director Award Limits.    A nonemployee director may not be granted awards under the 2018 Plan in any fiscal year having an aggregate grant date fair value exceeding $300,000.

        Other Award Limits.    To enable compensation provided in connection with certain types of awards intended by the Compensation Committee to be deductible within the meaning of Section 162(m) of the Code, the 2018 Plan establishes a limit on the maximum aggregate number of shares or dollar value for which such awards may be granted to an employee in any fiscal year, as follows:

    No more than [            ] shares under stock-based awards.

    No more than $[            ] for each full fiscal year contained in the performance period under cash-based awards.

        In addition, to comply with applicable tax rules, the 2018 Plan also limits to [            ] the number of shares that may be issued upon the exercise of incentive stock options granted under the 2018 Plan.

        Administration.    The 2018 Plan generally will be administered by the Compensation Committee of the Board of Directors, although the Board of Directors retains the right to appoint another of its

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committees to administer the 2018 Plan or to administer the 2018 Plan directly. (For purposes of this summary, the term "Committee" will refer to either such duly appointed committee or the Board of Directors.) Subject to the provisions of the 2018 Plan, the Committee determines in its discretion the persons to whom and the times at which awards are granted, the types and sizes of awards, and all of their terms and conditions. The Committee may, subject to certain limitations on the exercise of its discretion required or otherwise provided by the 2018 Plan, amend, cancel or renew any award, waive any restrictions or conditions applicable to any award, and accelerate, continue, extend or defer the vesting of any award.

        The 2018 Plan provides, subject to certain limitations, for indemnification by the Company of any director, officer or employee against all reasonable expenses, including attorneys' fees, incurred in connection with any legal action arising from such person's action or failure to act in administering the 2018 Plan. All awards granted under the 2018 Plan will be evidenced by a written or digitally signed agreement between the Company and the participant specifying the terms and conditions of the award, consistent with the requirements of the 2018 Plan. The Committee will interpret the 2018 Plan and awards granted thereunder, and all determinations of the Committee generally will be final and binding on all persons having an interest in the 2018 Plan or any award.

        Prohibition of Option and SAR Repricing.    The 2018 Plan expressly provides that, without the approval of a majority of the votes cast in person or by proxy at a meeting of our shareholders, the Committee may not provide for any of the following with respect to underwater options or stock appreciation rights: (1) either the cancellation of such outstanding options or stock appreciation rights in exchange for the grant of new options or stock appreciation rights at a lower exercise price or the amendment of outstanding options or stock appreciation rights to reduce the exercise price, (2) the issuance of new full value awards in exchange for the cancellation of such outstanding options or stock appreciation rights, or (3) the cancellation of such outstanding options or stock appreciation rights in exchange for payments in cash.

        Minimum Vesting.    No more than 5% of the aggregate number of shares authorized under the 2018 Plan may be issued pursuant to awards that provide for service-based vesting over a period of less than one year or performance-based vesting over a performance period of less than one year.

        Eligibility.    Awards may be granted to employees, directors and consultants of the Company or any present or future parent or subsidiary corporation or other affiliated entity of the Company. Incentive stock options may be granted only to employees who, as of the time of grant, are employees of the Company or any parent or subsidiary corporation of the Company. As of January 31, 2018, we had eight employees, including three executive officers, and six non-employee directors who would be eligible under the 2018 Plan.

        Stock Options.    The Committee may grant nonstatutory stock options, incentive stock options within the meaning of Section 422 of the Code, or any combination of these. The exercise price of each option may not be less than the fair market value of a share of our common stock on the date of grant. However, any incentive stock option granted to a person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company (a "10% Shareholder") must have an exercise price equal to at least 110% of the fair market value of a share of common stock on the date of grant. On December 15, 2017, the closing price of our common stock as reported on the Toronto Stock Exchange was Cdn$2.98 per share.

        The 2018 Plan provides that the option exercise price may be paid in cash, by check, or cash equivalent; by means of a broker-assisted cashless exercise; by means of a net-exercise procedure; to the extent legally permitted, by tender to the Company of shares of common stock owned by the participant having a fair market value not less than the exercise price; by such other lawful

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consideration as approved by the Committee; or by any combination of these. Nevertheless, the Committee may restrict the forms of payment permitted in connection with any option grant. No option may be exercised unless the participant has made adequate provision for federal, state, local and foreign taxes, if any, relating to the exercise of the option, including, if permitted or required by the Company, through the participant's surrender of a portion of the option shares to the Company.

        Options will become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option granted under the 2018 Plan is ten years, provided that an incentive stock option granted to a 10% Shareholder must have a term not exceeding five years. Unless otherwise permitted by the Committee, an option generally will remain exercisable for three months following the participant's termination of service, provided that if service terminates as a result of the participant's death or disability, the option generally will remain exercisable for 12 months, but in any event the option must be exercised no later than its expiration date.

        Options are nontransferable by the participant other than by will or by the laws of descent and distribution, and are exercisable during the participant's lifetime only by the participant. However, an option may be assigned or transferred to certain family members or trusts for their benefit to the extent permitted by the Committee and, in the case of an incentive stock option, only to the extent that the transfer will not terminate its tax qualification.

        Stock Appreciation Rights.    The Committee may grant stock appreciation rights either in tandem with a related option (a "Tandem SAR") or independently of any option (a "Freestanding SAR"). A Tandem SAR requires the option holder to elect between the exercise of the underlying option for shares of common stock or the surrender of the option and the exercise of the related stock appreciation right. A Tandem SAR is exercisable only at the time and only to the extent that the related stock option is exercisable, while a Freestanding SAR is exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The exercise price of each stock appreciation right may not be less than the fair market value of a share of our common stock on the date of grant.

        Upon the exercise of any stock appreciation right, the participant is entitled to receive an amount equal to the excess of the fair market value of the underlying shares of common stock as to which the right is exercised over the aggregate exercise price for such shares. Payment of this amount upon the exercise of a Tandem SAR may be made only in shares of common stock whose fair market value on the exercise date equals the payment amount. At the Committee's discretion, payment of this amount upon the exercise of a Freestanding SAR may be made in cash or shares of common stock. The maximum term of any stock appreciation right granted under the 2018 Plan is ten years.

        Stock appreciation rights are generally nontransferable by the participant other than by will or by the laws of descent and distribution, and are generally exercisable during the participant's lifetime only by the participant. If permitted by the Committee, a Tandem SAR related to a nonstatutory stock option and a Freestanding SAR may be assigned or transferred to certain family members or trusts for their benefit to the extent permitted by the Committee. Other terms of stock appreciation rights are generally similar to the terms of comparable stock options.

        Restricted Stock Awards.    The Committee may grant restricted stock awards under the 2018 Plan either in the form of a restricted stock purchase right, giving a participant an immediate right to purchase common stock, or in the form of a restricted stock bonus, in which stock is issued in consideration for services to the Company rendered by the participant. The Committee determines the purchase price payable under restricted stock purchase awards, which may be less than the then current fair market value of our common stock. Restricted stock awards may be subject to vesting conditions based on such service or performance criteria as the Committee specifies, including the attainment of one or more performance goals similar to those described below in connection with performance

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awards. Shares acquired pursuant to a restricted stock award may not be transferred by the participant until vested. Unless otherwise provided by the Committee, a participant will forfeit any shares of restricted stock as to which the vesting restrictions have not lapsed prior to the participant's termination of service. Participants holding restricted stock will have the right to vote the shares and to receive any dividends or other distributions paid in cash or shares subject to the same restrictions as the original award.

        Restricted Stock Units.    The Committee may grant restricted stock units under the 2018 Plan, which represent rights to receive shares of our common stock at a future date determined in accordance with the participant's award agreement. No monetary payment is required for receipt of restricted stock units or the shares issued in settlement of the award, the consideration for which is furnished in the form of the participant's services to the Company. The Committee may grant restricted stock unit awards subject to the attainment of one or more performance goals similar to those described below in connection with performance awards, or may make the awards subject to vesting conditions similar to those applicable to restricted stock awards. Restricted stock units may not be transferred by the participant. Unless otherwise provided by the Committee, a participant will forfeit any restricted stock units which have not vested prior to the participant's termination of service. Participants have no voting rights or rights to receive cash dividends with respect to restricted stock unit awards until shares of common stock are issued in settlement of such awards. However, the Committee may grant restricted stock units that entitle their holders to dividend equivalent rights, which are rights to receive cash or additional restricted stock units whose value is equal to any cash dividends the Company pays. Dividend equivalent rights will be subject to the same vesting conditions and settlement terms as the original award.

        Performance Awards.    The Committee may grant performance awards subject to such conditions and the attainment of such performance goals over such periods as the Committee determines in writing and sets forth in a written agreement between the Company and the participant. These awards may be designated as performance shares or performance units, which consist of unfunded bookkeeping entries generally having initial values equal to the fair market value determined on the grant date of a share of common stock in the case of performance shares and a monetary value established by the Committee at the time of grant in the case of performance units. Performance awards will specify a predetermined amount of performance shares or performance units that may be earned by the participant to the extent that one or more performance goals are attained within a predetermined performance period. To the extent earned, performance awards may be settled in cash, shares of common stock (including shares of restricted stock that are subject to additional vesting) or any combination of these.

        Prior to the beginning of the applicable performance period, the Committee will establish one or more performance goals applicable to the award. Performance goals will be based on the attainment of specified target levels with respect to one or more measures of business or financial performance of the Company and each subsidiary corporation consolidated with the Company for financial reporting purposes, or such division or business unit of the Company as may be selected by the Committee. The Committee, in its discretion, may base performance goals on one or more of the following such measures: bookings, revenue; sales; expenses; operating income; gross margin; operating margin; earnings before any one or more of: stock-based compensation expense, interest, taxes, depreciation and amortization; pre-tax profit; adjusted pre-tax profit; net operating income; net income; economic value added; free cash flow; operating cash flow; balance of cash, cash equivalents and marketable securities; stock price; earnings per share; return on shareholder equity; return on capital; return on assets; return on investment; total shareholder return, employee satisfaction; employee retention; market share; customer satisfaction; product development; research and development expense; completion of an identified special project and completion of a joint venture or other corporate transaction.

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        The target levels with respect to these performance measures may be expressed on an absolute basis or relative to an index, budget or other standard specified by the Committee. The degree of attainment of performance measures will be calculated in accordance with the Company's financial statements, generally accepted accounting principles, if applicable, or other methodology established by the Committee, but prior to the accrual or payment of any performance award for the same performance period, and, according to criteria established by the Committee, excluding the effect (whether positive or negative) of changes in accounting standards or any unusual or infrequently occurring event or transaction occurring after the establishment of the performance goals applicable to a performance award.

        Following completion of the applicable performance period, the Committee will certify in writing the extent to which the applicable performance goals have been attained and the resulting value to be paid to the participant. The Committee retains the discretion to eliminate or reduce, but not increase, the amount that would otherwise be payable on the basis of the performance goals attained. However, no such reduction may increase the amount paid to any other participant. The Committee may make positive or negative adjustments to performance award payments to participants other than covered employees to reflect the participant's individual job performance or other factors determined by the Committee. In its discretion, the Committee may provide for a participant awarded performance shares to receive dividend equivalent rights with respect to cash dividends paid on the Company's common stock to the extent that the performance shares become vested. The Committee may provide for performance award payments in lump sums or installments.

        Unless otherwise provided by the Committee, if a participant's service terminates due to the participant's death or disability prior to completion of the applicable performance period, the final award value will be determined at the end of the performance period on the basis of the performance goals attained during the entire performance period but will be prorated for the number of days of the participant's service during the performance period. The Committee may provide similar treatment for a participant whose service is involuntarily terminated. If a participant's service terminates prior to completion of the applicable performance period for any other reason, the 2018 Plan provides that the performance award will be forfeited. No performance award may be sold or transferred other than by will or the laws of descent and distribution prior to the end of the applicable performance period.

        Cash-Based Awards and Other Stock-Based Awards.    The Committee may grant cash-based awards or other stock-based awards in such amounts and subject to such terms and conditions as the Committee determines. Cash-based awards will specify a monetary payment or range of payments, while other stock-based awards will specify a number of shares or units based on shares or other equity-related awards. Such awards may be subject to vesting conditions based on continued performance of service or subject to the attainment of one or more performance goals similar to those described above in connection with performance awards. Settlement of awards may be in cash or shares of common stock, as determined by the Committee. A participant will have no voting rights with respect to any such award unless and until shares are issued pursuant to the award. The committee may grant dividend equivalent rights with respect to other stock-based awards. The effect on such awards of the participant's termination of service will be determined by the Committee and set forth in the participant's award agreement.

        Change in Control.    The 2018 Plan provides that a "Change in Control" occurs upon (a) a person or entity (with certain exceptions described in the 2018 Plan) becoming the direct or indirect beneficial owner of more than 50% of the Company's voting stock; (b) shareholder approval of a liquidation or dissolution of the Company; or (c) the occurrence of any of the following events upon which the shareholders of the Company immediately before the event do not retain immediately after the event direct or indirect beneficial ownership of more than 50% of the voting securities of the Company, its successor or the entity to which the assets of the company were transferred: (i) a sale or exchange by the shareholders in a single transaction or series of related transactions of more than 50% of the

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Company's voting stock; (ii) a merger or consolidation in which the Company is a party; or (iii) the sale, exchange or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company).

        If a Change in Control occurs, the surviving, continuing, successor or purchasing entity or its parent may, without the consent of any participant, either assume or continue outstanding awards or substitute substantially equivalent awards for its stock. If so determined by the Committee, stock-based awards will be deemed assumed if, for each share subject to the award prior to the Change in Control, its holder is given the right to receive the same amount of consideration that a shareholder would receive as a result of the Change in Control. The vesting of any awards that are not assumed, continued or replaced in connection with a Change in Control will be accelerated in full, and, if not exercised prior to the Change in Control, will terminate effective as of the time of the Change in Control. The vesting of any awards that are assumed, continue or replaced will be accelerated in full if, within 18 months following the Change in Control, the holder's employment is terminated without cause or the holder resigns following reduction in base salary of 15% or more.

        Subject to the restrictions of Section 409A of the Code, the Committee may provide for the acceleration of vesting or settlement of any or all outstanding awards upon such other terms and to such extent as it determines. The vesting of all awards held by non-employee directors will be accelerated in full upon a Change in Control.

        The 2018 Plan also authorizes the Committee, in its discretion and without the consent of any participant, to cancel each or any award denominated in shares of stock upon a Change in Control in exchange for a payment to the participant with respect each vested share (and each unvested share if so determined by the Committee) subject to the cancelled award of an amount equal to the excess of the consideration to be paid per share of common stock in the Change in Control transaction over the exercise or purchase price per share, if any, under the award.

        Awards Subject to Section 409A of the Code.    Certain awards granted under the 2018 Plan may be deemed to constitute "deferred compensation" within the meaning of Section 409A of the Code, providing rules regarding the taxation of nonqualified deferred compensation plans, and the regulations and other administrative guidance issued pursuant to Section 409A. Any such awards will be required to comply with the requirements of Section 409A. Notwithstanding any provision of the 2018 Plan to the contrary, the Committee is authorized, in its sole discretion and without the consent of any participant, to amend the 2018 Plan or any award agreement as it deems necessary or advisable to comply with Section 409A.

        Amendment, Suspension or Termination.    The 2018 Plan will continue in effect until its termination by the Committee, provided that no awards may be granted under the 2018 Plan following the tenth anniversary of the 2018 Plan's effective date, which will be the date on which it is approved by the shareholders. The Committee may amend, suspend or terminate the 2018 Plan at any time, provided that no amendment may be made without shareholder approval that would increase the maximum aggregate number of shares of stock authorized for issuance under the 2018 Plan, change the class of persons eligible to receive incentive stock options or require shareholder approval under any applicable law or the rules of any stock exchange on which the Company's shares are then listed. No amendment, suspension or termination of the 2018 Plan may affect any outstanding award unless expressly provided by the Committee, and, in any event, may not have a materially adverse effect an outstanding award without the consent of the participant unless necessary to comply with any applicable law, regulation or rule, including, but not limited to, Section 409A of the Code.

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    Summary of U.S. Federal Income Tax Consequences

        The following summary is intended only as a general guide to the U.S. federal income tax consequences of participation in the 2018 Plan and does not attempt to describe all possible federal or other tax consequences of such participation or tax consequences based on particular circumstances.

        Incentive Stock Options.    A participant recognizes no taxable income for regular income tax purposes as a result of the grant or exercise of an incentive stock option qualifying under Section 422 of the Code. Participants who neither dispose of their shares within two years following the date the option was granted nor within one year following the exercise of the option will normally recognize a capital gain or loss upon the sale of the shares equal to the difference, if any, between the sale price and the purchase price of the shares. If a participant satisfies such holding periods upon a sale of the shares, we will not be entitled to any deduction for federal income tax purposes. If a participant disposes of shares within two years after the date of grant or within one year after the date of exercise (a "disqualifying disposition"), the difference between the fair market value of the shares on the option exercise date and the exercise price (not to exceed the gain realized on the sale if the disposition is a transaction with respect to which a loss, if sustained, would be recognized) will be taxed as ordinary income at the time of disposition. Any gain in excess of that amount will be a capital gain. If a loss is recognized, there will be no ordinary income, and such loss will be a capital loss. Any ordinary income recognized by the participant upon the disqualifying disposition of the shares generally should be deductible by us for federal income tax purposes, except to the extent such deduction is limited by applicable provisions of the Code.

        In general, the difference between the option exercise price and the fair market value of the shares on the date of exercise of an incentive stock option is treated as an adjustment in computing the participant's alternative minimum taxable income and may be subject to an alternative minimum tax which is paid if such tax exceeds the regular tax for the year. Special rules may apply with respect to certain subsequent sales of the shares in a disqualifying disposition, certain basis adjustments for purposes of computing the alternative minimum taxable income on a subsequent sale of the shares and certain tax credits which may arise with respect to participants subject to the alternative minimum tax.

        Nonstatutory Stock Options.    Options not designated or qualifying as incentive stock options are nonstatutory stock options having no special tax status. A participant generally recognizes no taxable income upon receipt of such an option. Upon exercising a nonstatutory stock option, the participant normally recognizes ordinary income equal to the difference between the exercise price paid and the fair market value of the shares on the date when the option is exercised. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. Upon the sale of stock acquired by the exercise of a nonstatutory stock option, any gain or loss, based on the difference between the sale price and the fair market value of the shares on the exercise date, will be taxed as capital gain or loss. We generally should be entitled to a tax deduction equal to the amount of ordinary income recognized by the participant as a result of the exercise of a nonstatutory stock option, except to the extent such deduction is limited by applicable provisions of the Code.

        Stock Appreciation Rights.    A Participant recognizes no taxable income upon the receipt of a stock appreciation right. Upon the exercise of a stock appreciation right, the participant generally will recognize ordinary income in an amount equal to the excess of the fair market value of the underlying shares of common stock on the exercise date over the exercise price. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant in connection with the exercise of the stock appreciation right, except to the extent such deduction is limited by applicable provisions of the Code.

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        Restricted Stock.    A participant acquiring restricted stock generally will recognize ordinary income equal to the excess of the fair market value of the shares on the "determination date" over the price paid, if any, for such shares. The "determination date" is the date on which the participant acquires the shares unless the shares are subject to a substantial risk of forfeiture and are not transferable, in which case the determination date is the earlier of (i) the date on which the shares become transferable or (ii) the date on which the shares are no longer subject to a substantial risk of forfeiture (e.g., when they become vested). If the determination date follows the date on which the participant acquires the shares, the participant may elect, pursuant to Section 83(b) of the Code, to designate the date of acquisition as the determination date by filing an election with the Internal Revenue Service no later than 30 days after the date on which the shares are acquired. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. Upon the sale of shares acquired pursuant to a restricted stock award, any gain or loss, based on the difference between the sale price and the fair market value of the shares on the determination date, will be taxed as capital gain or loss. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant on the determination date, except to the extent such deduction is limited by applicable provisions of the Code.

        Restricted Stock Unit, Performance, Cash-Based and Other Stock-Based Awards.    A participant generally will recognize no income upon the receipt of a restricted stock unit, performance share, performance unit, cash-based or other stock-based award. Upon the settlement of such awards, participants normally will recognize ordinary income in the year of settlement in an amount equal to the cash received and the fair market value of any substantially vested shares of stock received. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. If the participant receives shares of restricted stock, the participant generally will be taxed in the same manner as described above under "Restricted Stock." Upon the sale of any shares received, any gain or loss, based on the difference between the sale price and the fair market value of the shares on the determination date (as defined above under "Restricted Stock"), will be taxed as capital gain or loss. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant on the determination date, except to the extent such deduction is limited by applicable provisions of the Code.

    New 2018 Plan Benefits

        No awards will be granted under the 2018 Plan prior to its approval by the shareholders of the Company. All awards will be granted at the discretion of the Committee, and, accordingly, are not yet determinable.

        Required Vote and Board of Directors Recommendation

        Approval of this proposal requires the affirmative vote of a majority of the shares present or represented by proxy and entitled to vote on this proposal. If you hold your shares in your own name and abstain from voting on this matter, your abstention will have the same effect as a negative vote. If you hold your shares through a broker and you do not instruct the broker on how to vote on this proposal, your broker will not have authority to vote your shares. Broker non-votes will have no effect on the outcome of this vote. Abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum.

        The Board believes that the proposed adoption of the 2018 Plan is in the best interests of the Company and its shareholders for the reasons stated above.

        THEREFORE, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE ADOPTION OF THE 2018 PLAN (INCLUDING, WITHOUT LIMITATION, CERTAIN MATERIAL TERMS OF SUCH PLAN FOR PURPOSES OF SECTION 162(m) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED).

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RISK FACTORS

        You should carefully consider the risks and uncertainties described below, together with all of the other information and risks included in, or incorporated by reference into this Circular, including our consolidated financial statements and the related notes thereto, before making a decision whether to vote for the domestication described in this Circular.

        Risks Relating to the Domestication

         If the IRS does not agree with our calculation of the "all earnings and profits amount" attributable to a shareholder's shares in the Corporation, Epsilon Energy Inc.'s U.S. shareholders may owe U.S. income taxes as a result of the domestication.

        We believe that the domestication will qualify as a tax-free reorganization for U.S. federal income tax purposes. Based on a review of information available to us, we believe that Epsilon Energy Ltd., the Alberta corporation, has a deficit in "earnings and profits." As a result, no U.S. shareholder should have a positive "all earnings and profits amount" attributable to such shareholder's common shares, and therefore no 10% Shareholder or U.S. shareholders who makes a Deemed Dividend Election should be required to include any such amount in income as a result of the domestication.

        Based on our limited activity at the holding company level and the size of our existing earnings and profits deficit, we do not believe that a U.S. shareholder should have a positive "all earnings and profits amount" attributable to such shareholder's shares in the Corporation. However, if the IRS does not agree with our calculation of the "all earnings and profits amount," a U.S. shareholder may be subject to adverse U.S. federal income tax consequences on the domestication. Any 10% Shareholder will have to recognize income, categorized as a deemed dividend for U.S. federal income tax purposes, equal to the "all earnings and profits amount," within the meaning of Treasury Regulations Section 1.367(b)-2, allocable to such shareholder's shares in the Corporation. Any U.S. shareholder who is not a 10% Shareholder and whose shares have a fair market value of $50,000 or more on the date of the domestication will, assuming the Deemed Dividend Election is made by such shareholder, have income in an amount equal to the "all earnings and profits amount" attributable to his shares in Epsilon Energy Ltd., the Alberta corporation. U.S. shareholders who are not 10% Shareholders and whose shares have a fair market value below $50,000 will recognize no gain or loss as a result of the domestication. For additional information on the U.S. federal income tax consequences of the domestication, see "United States Federal Income Tax Consequences."

         The rights of our Shareholders under Canadian law will differ from their rights under Delaware law, which will, in some cases, provide less protection to Shareholders following the domestication.

        Upon consummation of the domestication, our Shareholders will become stockholders of a Delaware corporation. There are material differences between the ABCA and the DGCL and our current and proposed charter and bylaws. For example, under Canadian law, many significant corporate actions such as amending a corporation's articles of incorporation or consummating a merger require the approval of two-thirds of the votes cast by shareholders, whereas under Delaware law, a majority of the total voting power of all of those entitled to vote may approve the matter. Furthermore, Shareholders under Canadian law are entitled to dissent and appraisal rights under a number of extraordinary corporate actions, including an amalgamation with another unrelated corporation, certain amendments to a corporation's articles of incorporation or the sale of all or substantially all of a corporation's assets; under Delaware law, stockholders are entitled to dissent and appraisal rights for certain specified corporate transactions such as mergers or consolidations. If the domestication is approved, Shareholders may be afforded less protection under the DGCL than they had under the ABCA in certain circumstances. See "The Domestication—Comparison of Shareholder Rights."

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         The proposed domestication will result in additional direct and indirect costs whether or not it is completed.

        The domestication will result in additional direct costs. We will incur attorneys' fees, accountants' fees, filing fees, mailing expenses and financial printing expenses in connection with the domestication. The domestication will also temporarily divert the attention of our management and employees from the day-to-day management of the business to a limited extent.

         The amount of corporate tax payable by us will be affected by the value of our property on the date of the domestication.

        For Canadian tax purposes, on the date of the domestication we will be deemed to have a year end and will also be deemed to have sold all of our property and received the fair market value for those properties. We expect that we will be subject to Cdn$4-5 million in Canadian taxation on this deemed disposition. We will also be subject to an additional corporate emigration tax equal to 5% of the amount by which the fair market value of our property, net of liabilities, exceeds the paid-in capital of our issued and outstanding shares. We have completed certain calculations of our tax accounts with the assistance of tax advisors, and we have estimated that the domestication would result in a tax liability of Cdn$4-5 million.

        Risks Relating to the Corporation

        Risks Related to Oil and Natural Gas Reserves

         Our business is dependent on oil and natural gas prices, and any fluctuations or decreases in such prices could adversely affect our results of operations and financial condition.

        Revenues, profitability, liquidity, ability to access capital and future growth prospects are highly dependent on the prices received for oil and natural gas. The prices of these commodities are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile, and this volatility may continue in the future. The volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements. Also, prices for crude oil and prices for natural gas do not necessarily move in tandem. Declines in oil or natural gas prices would not only reduce revenue, but could also reduce the amount of oil and natural gas that can be economically produced and therefore potentially lower oil and gas reserve quantities. If the oil and natural gas industry continues to experience low prices, we may, among other things, be unable to meet all of our financial obligations or make planned expenditures.

        Substantial and extended declines in oil and natural gas prices may result in impairments of proved oil and gas properties or undeveloped acreage and may materially and adversely affect our future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital expenditures. To the extent commodity prices received from production are insufficient to fund planned capital expenditures, spending will be required to be reduced, assets could be sold or funds may be borrowed to fund any such shortfall.

         Our long-term commercial success depends on our ability to find, acquire, develop and commercially produce oil and natural gas reserves, the failure of which could result in under-use of capital and in losses.

        Oil and natural gas operations involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. Our long-term commercial success depends on our ability to find, acquire, develop and commercially produce oil and natural gas reserves. Without the continual addition of new reserves, any existing reserves that we may have at any particular time and the production from those reserves will decline over time as those reserves are exploited. A

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future increase in our reserves will depend not only on our ability to explore and develop any properties we may have from time to time, but also on our ability to select and acquire suitable producing properties or prospects. We cannot assure you that we will be able to locate and continue to locate satisfactory properties for acquisition or participation. Moreover, if we do identify such acquisitions or participations, we may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic. We cannot assure you that we will discover or acquire further commercial quantities of oil and natural gas.

        Future oil and natural gas exploration may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not ensure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.

        Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, cratering, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or in personal injury. In accordance with industry practice, we are not fully insured against all of these risks, nor are all such risks insurable. Although we maintain liability insurance in an amount that we consider consistent with industry practice, the nature of these risks is such that liabilities could exceed policy limits, in which event we could incur significant costs that could have a material adverse effect upon our financial condition. Oil and natural gas production operations are also subject to all the risks typically associated with such operations, including encountering unexpected formations or pressures, premature decline of reservoirs and the invasion of water into producing formations, and the loss of the ability to use hydraulic fracturing (see risk factor regarding government legislation). Losses resulting from the occurrence of any of these risks could have a material adverse effect on our future results of operations, liquidity and financial condition.

         Our proved reserve estimates may be inaccurate, and future net cash flows as well as our ability to replace any reserves are uncertain.

        There are numerous uncertainties inherent in estimating quantities of oil and natural gas reserves and cash flows to be derived thereof, including many factors beyond our control. The reserve and associated cash flow information set forth herein represents estimates only. In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows thereof are based upon a number of variable factors and assumptions such as historical oil and natural gas prices, production levels, capital expenditures, operating and development costs, the effects of regulation, the accuracy and reliability of the underlying engineering and geologic data, and the availability of funds; all of which may vary from actual results. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected thereof and prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.

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        In accordance with applicable securities laws, the technical report on our oil and natural gas reserves prepared by DeGolyer and MacNaughton, independent petroleum consultants, as of December 31, 2016 and 2015, or the DeGolyer Reserve Reports, used SEC guideline prices and cost estimates in calculating net cash flows from oil and natural gas reserve quantities included within the report. Actual future net revenue will be affected by other factors such as actual commodity prices, production levels, supply and demand for oil and natural gas, curtailments or increases in consumption by oil and natural gas purchasers, changes in governmental regulation or taxation and the impact of inflation on costs. Actual production and revenues derived thereof will vary from the estimates contained in the DeGolyer Reserve Report, and such variations could be material. The DeGolyer Reserve Report is based in part on the assumed success of activities that we intend to undertake in future years. The oil and natural gas reserves and estimated cash flows to be derived therefrom contained in the DeGolyer Reserve Report will be reduced to the extent that such activities do not achieve the level of success assumed in the DeGolyer Reserve Report.

        Our future oil and natural gas reserves, production, and derived cash flows are highly dependent on our successfully acquiring or discovering and developing new reserves. Without the continual addition of new reserves, any of our existing reserves and their production will decline as such reserves are exploited. A future increase in our reserves will depend not only on our ability to develop any properties we may have from time to time, but also on our ability to select and acquire suitable producing properties or prospects. There can be no assurance that our future exploration and development efforts will result in the discovery and development of additional commercial accumulations of oil and natural gas.

        Risks Related to Stage of Development and Capital Resources

         Currently, our activity is highly concentrated to one product in one area. Although we are attempting to expand our operations to other areas with multiple products, we may not be successful in these other areas.

        An investment in us is subject to certain risks. There are numerous factors that may affect the success of our business that are beyond our control including local, national and international economic and political conditions. Our business involves a high degree of risk, which a combination of experience, knowledge and careful evaluation may not overcome. Through September 30, 2017, our primary source of revenue originated from natural gas production and gathering system revenues in the state of Pennsylvania. Our asset in Pennsylvania has not yet reached the mature stage, but at some point we may need to acquire and develop other producing assets to maintain our current level or to grow. To this end, we have begun to acquire leases in the Anadarko basin and to expand our holdings in Pennsylvania. Our future depends on being able to successfully fund and develop these assets. There can be no assurance that our business will be successful or that profitability will continue or that we will discover additional commercial quantities of crude oil or natural gas.

         If there is a sustained economic downturn or recession in the United States or globally, oil and gas prices may fall and may become and remain depressed for a long period of time, which may adversely affect our results of operations. We may be unable to obtain additional capital required to implement our business plan, which could restrict our ability to grow.

        Operations could also be adversely affected by general economic downturns, changes in the political landscape or limitations on spending. An economic downturn and uncertainty may have a negative impact on our business. In 2008, the financial markets collapsed causing the capital markets for the oil and gas sector substantial setbacks. As recently as 2015 and 2016, oil and gas prices decreased to a point as to make almost all investment in oil and gas projects uneconomic. There can be no assurance that we will be able to access capital markets to provide funding for future operations that would require additional capital beyond our current existing available capital on terms acceptable to us.

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         Substantial capital, which may not be available to us in the future, is required to replace and grow reserves.

        We anticipate making capital expenditures for the acquisition, exploration, development and production of oil and natural gas reserves in the future. If our revenues or reserves decline, we may have limited ability to expend the capital necessary to undertake or complete future drilling programs. There can be no assurance that debt or equity financing or cash generated by operations will be available or sufficient to meet these requirements, or for other corporate purposes. If debt or equity financing is available, there is no assurance that it will be on terms acceptable to us. Moreover, future activities may require us to alter our capitalization significantly. Additional capital raised through the issuance of common shares or other securities convertible into common shares may result in a change of control of us and dilution to shareholders. Our inability to access sufficient capital for our operations could have a material adverse effect on our financial condition and results of operations.

        Our cash flow from our reserves may not be sufficient to fund our ongoing activities at all times. From time to time, we may require additional financing in order to carry out our oil and natural gas acquisition, exploration and development activities. Failure to obtain such financing on a timely basis could cause us to forfeit our interest in certain properties, miss certain acquisition opportunities, or reduce or terminate our operations. If our revenues from our reserves decrease as a result of lower oil and natural gas prices or otherwise, it will affect our ability to expend the necessary capital to replace our reserves or to maintain our production. If our cash flow from operations is not sufficient to satisfy our capital expenditure requirements, there can be no assurance that additional debt, equity financing or the proceeds from the sale of a portion or all of our interest in one or more projects will be available to meet these requirements or available on terms acceptable to us.

         The borrowing base under our credit facility may be reduced in light of commodity price declines, which could limit us in the future.

        Lower commodity volumes and prices may reduce the amount of our borrowing base under our credit agreement, which is determined at the discretion of our lenders based on the collateral value of our proved reserves that have been mortgaged to the lenders, and is subject to twice yearly redeterminations, as well as special redeterminations described in the credit agreement. Upon a redetermination, if borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of the debt outstanding under our credit agreement. In addition, we may be unable to access the equity or debt capital markets to meet our obligations, including any such debt repayment obligations.

         The terms of our revolving credit facility may restrict our operations, particularly our ability to respond to changes or to take certain actions.

        The contract that governs our revolving credit facility contains covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability, subject to satisfaction of certain conditions, to incur additional indebtedness, sell assets, enter into transactions with affiliates, and enter into or refrain from entering into hedging contracts.

        In addition, the restrictive covenants in our revolving credit facility require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.

        A breach of the covenants or restrictions under the contract that governs our revolving credit facility could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt. In the event our lenders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness.

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         Depending on forces outside our control, we may need to allocate our available capital in ways that we did not anticipate.

        Because of the volatile nature of the oil and natural gas industry, we regularly review our budgets in light of past results and future opportunities that may become available to us. In addition, our ability to carry out operations may depend upon the decisions of other working interest owners in our properties. Accordingly, while we anticipate that we will have the ability to spend the funds available to us, there may be circumstances where, for sound business reasons, a reallocation of funds may be prudent.

         We may issue debt to acquire assets or for working capital.

        From time to time, we may enter into transactions to acquire assets or shares of other corporations. These transactions may be financed partially or wholly with debt, which may increase our debt levels. Depending on future exploration and development plans, we may require additional equity and/or debt financing that may not be available or, if available, may not be available on favorable terms. Neither our articles nor our by-laws limit the amount of indebtedness that we may incur. The level of our indebtedness, from time to time, could impair our ability to obtain additional financing in the future on a timely basis to take advantage of business opportunities that may arise.

        Our potential lenders will likely require security over substantially all of our assets. If we become unable to pay our debt service charges or otherwise commit an event of default, such as bankruptcy, these lenders may foreclose on or sell our properties. The proceeds of any such sale would be applied to satisfy amounts owed to our lenders and other creditors, and only the remainder, if any, would be available to us.

         Future equity transactions could result in dilution to existing stockholders.

        We may make future acquisitions or enter into financing or other transactions involving the issuance of securities or the sale of a portion or all of an interest in one or more of our projects, all of which may be dilutive to existing security holders.

         Competition in the natural gas and oil industry is intense, which may hinder our ability to contract for drilling equipment, and we may not be able to control the scheduling and activities of contracted drilling equipment.

        Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment in the particular areas where such activities will be conducted. Demand for such limited equipment or access restrictions may affect the availability of such equipment to us and may delay exploration and development activities. Past industry conditions have led to periods of extreme shortages of drilling equipment in certain areas of the United States. On the oil and natural gas properties that we do not operate, we will be dependent on such operators for the timing of activities related to such properties and may be largely unable to direct or control the activities of the operators.

         Results of our drilling are uncertain, and we may not be able to generate high returns.

        Our operations involve utilizing the latest drilling and completion techniques in order to maximize cumulative recoveries and generate high returns. However, high returns are not guaranteed, and the results of drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas have limited or no production history and, consequently, a less predictable future of drilling results in these areas. Ultimately, the success of drilling and completion techniques can only be evaluated as more wells are drilled and production profiles are established over a sufficiently long

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time period. If drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems and limited takeaway capacity or otherwise, or if crude oil and natural gas prices decline, the return on our investment in these areas may not be as attractive as anticipated. Further, as a result of less than desirable results in developments we could incur material write-downs of our oil and natural gas properties and the value of undeveloped acreage could decline in the future.

         Extensive government legislation and regulatory initiatives could increase costs and impose burdensome operating restrictions that may cause operational delays.

        Hydraulic fracturing, which involves the injection of water, sand and chemicals under pressure into deep rock formations to stimulate crude oil or natural gas production, is often used in the completion of unconventional crude oil and natural gas wells. Currently, hydraulic fracturing is primarily regulated in the United States at the state level, which generally focuses on regulation of well design, pressure testing, and other operating practices.

        However, some states and local jurisdictions across the United States, such as the State of New York, have begun adopting more restrictive regulation. Some members of the U.S. Congress and the EPA are studying environmental contamination related to hydraulic fracturing and the impact of fracturing on public health. In March 2015, the U.S. Congress introduced legislation to regulate hydraulic fracturing and require disclosure of the chemicals used in the hydraulic fracturing process, and may implement more stringent regulations in the future. Additionally, some states, such as the State of New York, have adopted, and others are considering, regulations that could restrict hydraulic fracturing. The ultimate status of such regulation is currently unknown. Any federal or state legislative or regulatory changes with respect to hydraulic fracturing could cause us to incur substantial compliance costs or result in operational delays, and the consequences of any failure to comply by us or our third-party operating partners could have a material adverse effect on our financial condition and results of operations.

        Because of the extensive oil and gas activity in Pennsylvania and Oklahoma, and the states' dependence upon the revenue generated from oil and gas activities, the likelihood of adverse hydraulic fracturing legislation is minimal.

         Our operations are currently geographically concentrated and therefore subject to regional economic, regulatory and capacity risks.

        Approximately 99% of our production during fiscal 2016 and 2015 was derived from our properties in the Marcellus region of Pennsylvania. As a result of this geographic concentration, we may be disproportionately exposed to the effect of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, weather events or interruption of the processing or transportation of crude oil or natural gas. Additionally, we may be exposed to additional risks, such as changes in field-wide rules and regulations that could cause us to permanently or temporarily shut-in many or all of our wells within the Marcellus.

         Delays in business operations may reduce cash flows and subject us to credit risks.

        In addition to the usual delays in payments by purchasers of oil and natural gas to us or to the operators, and the delays by operators in remitting payment to us, payments from these parties may be delayed by restrictions imposed by lenders, accounting delays, delays in the sale or delivery of products, delays in the connection of wells to a gathering system, adjustment for prior periods, or recovery by the operator of expenses incurred in the operation of the properties. In addition, the transition of one operator to another as the result of an operator being bought or sold could cause additional

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operational delays beyond our control. Any of these delays could reduce the amount of cash flow available for our business in a given period and expose us to additional third-party credit risks.

         We depend on the successful acquisition, exploration and development of oil and natural gas properties to develop any future reserves and grow production and revenue in the future, and assessments of our assets may be subject to uncertainty.

        Acquisitions of oil and natural gas companies and oil and natural gas assets are typically based on engineering and economic assessments made by independent engineers and our own assessments. These assessments will include a series of assumptions regarding such factors as recoverability and marketability of oil and natural gas, future prices of oil and natural gas and operating costs, future capital expenditures and royalties and other government levies which will be imposed over the producing life of the reserves. Many of these factors are subject to change and are beyond our control. In particular, the prices of, and markets for, oil and natural gas products may change from those anticipated at the time of making such assessment. In addition, all such assessments involve a measure of geologic and engineering uncertainty which could result in lower production and reserves than anticipated. Initial assessments of acquisitions may be based on analysis by our internal engineers or reports by a firm of independent engineers that are not the same as the firm that we use for our year-end reserve evaluations. Because each of these firms may have different evaluation methods and approaches, these initial assessments may differ significantly from the assessments of the firm that we use. Any such instance may offset the return on and value of the common shares.

         We depend on third-party operators and our key personnel, and competition for experienced, technical personnel may negatively affect our operations.

        On the oil and natural gas properties that we do not operate, we will be dependent on such operators for the timing of activities related to such properties and will largely be unable to direct or control the activities of the operators. The objectives and strategy of those operators may not always be consistent with ours, and we have a limited ability to exercise influence over, and control the risks associated with, operations of these properties. The failure of an operator of our wells to adequately perform operations, an operator's breach of the applicable agreements or an operator's failure to act in ways that are in our best interests could reduce our production and revenues from our conventional assets or could increase costs or create liability for the operator's failure to properly maintain the well and facilities and to adhere to applicable safety and environmental standards.

        In addition to the operator, our success will depend in large measure on certain key personnel. The loss of the services of such key personnel could have a material adverse effect on us. We do not have key-person insurance in effect for management. The contributions of these individuals to our immediate operations are likely to be of central importance. In addition, the competition for qualified personnel in the oil and natural gas industry is intense, and there can be no assurance that we will be able to continue to attract and retain all personnel necessary for the development and operation of our business. Certain of our directors and officers are also directors of other companies and as such may, in certain circumstances, have a conflict of interest requiring them to abstain from certain decisions. Conflicts, if any, will be subject to the procedures and remedies of the Conflicts Committee.

         Our leasehold interests are subject to termination or expiration under certain conditions.

        Our properties are held in the form of leases and working interests in leases, collectively referred to as "leasehold interests." If we or the holder of our leasehold interests fails to meet the specific requirement(s) of a particular leasehold interest, the leasehold interest may terminate or expire. There can be no assurance that any of the obligations required to maintain each leasehold interest will be met. The termination or expiration of a particular leasehold interest may have a material adverse effect on our financial condition and results of operations.

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         We may incur losses as a result of title deficiencies.

        Although title reviews will be done according to industry standards before the purchase of most oil- and natural gas—producing properties or the commencement of drilling wells, such reviews do not guarantee or certify that an unforeseen defect in the chain of title will not arise to defeat our claim, which could result in a reduction in our ownership interest or of the revenue that we receive.

         We may be exposed to third-party credit risk, and defaults by third parties could adversely affect us.

        We are or may be exposed to third-party credit risk through our contractual arrangements with current or future joint venture partners, marketers of our petroleum and natural gas production, derivative counterparties and other parties. In the event such entities fail to meet their contractual obligations to us, such failures could have a material adverse effect on us and our cash flow from operations.

         We may not be insured against all of the operating risks to which we are exposed.

        Our involvement in the exploration for and development of oil and natural gas properties may result in our becoming subject to liability for pollution, blow outs, property damage, personal injury or other hazards. Although before drilling we plan to obtain insurance in accordance with industry standards to address certain of these risks, such insurance may not be available, be price-prohibitive, or contain limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not in all circumstances be insurable, or, in certain circumstances, we may elect not to obtain insurance to deal with specific risks because of the high premiums associated with such insurance or other reasons. The payment of such uninsured liabilities would reduce the funds available to us. The occurrence of a significant event that we are not fully insured against, or the insolvency of the insurer of such event, could have a material adverse effect on our financial position and our results of operations.

        Risks Related to Commodity Prices, Hedging and Marketing

         Natural gas and oil prices fluctuate widely, and low prices for an extended period would likely have a material adverse impact on our business.

        Our revenues, profitability and future growth and the carrying value of our oil and natural gas properties are substantially dependent on prevailing prices of oil and natural gas. Our ability to borrow and to obtain additional capital on attractive terms is also substantially dependent upon oil and natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors beyond our control. These factors include economic conditions in the United States, the Middle East and elsewhere in the world; the actions of OPEC; governmental regulation; political stability in the Middle East and elsewhere; the foreign supply of oil and natural gas; the price of foreign imports; and the availability of alternative fuel sources. Any substantial and extended decline in the price of oil and natural gas would have an adverse effect on the carrying value of our proved reserves, borrowing capacity, revenues, profitability and cash flows from operations. There can be no assurance that recent commodity prices can be sustained over the life of our operations. There is substantial risk that commodity prices may decline in the future, although it is not possible to predict the time or extent of such decline.

        Volatile oil and natural gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and natural gas producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects.

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        In addition, bank borrowings that may be available to us are in part determined by our borrowing base. A sustained material decline in prices from historical average prices could reduce our borrowing base, thereby reducing the bank credit available to us, which could require that a portion, or all, of our bank debt be repaid.

         Hedging transactions may limit our potential gains or cause us to lose money.

        From time to time, we may enter into agreements to receive fixed prices on our oil and natural gas production to offset the risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels set in such agreements, we will not benefit from such increases.

        We are exposed to risks of loss in the event of nonperformance by our counterparties to our hedging arrangements. Some of our counterparties may be highly leveraged and subject to their own operating and regulatory risks. Despite our analysis, we may experience financial losses in our dealings with these and other parties with whom we enter into transactions as a normal part of our business activities. Any nonpayment or nonperformance by our counterparties could have a material adverse impact on our business, financial condition and results of operations.

        Additionally we may, due to circumstances beyond our control, be put in a position of over-hedging. If this occurs, our revenue could be adversely affected due to the necessity of buying gas at the current market rate in order to fulfill hedging sales obligations.

         Market conditions or operation impediments may hinder our access to natural gas and oil markets or delay our production.

        The marketability and price of oil and natural gas that we may produce, acquire or discover will be affected by numerous factors beyond our control. Our ability to market our natural gas may depend upon our ability to acquire space on pipelines that deliver crude oil and natural gas to commercial markets. This risk is somewhat mitigated by our 35% ownership of a gathering system in the Marcellus in Pennsylvania. We may also be affected by extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, and many other aspects of the oil and natural gas business.

         If we are unable to successfully compete with the large number of oil and natural gas producers in our industry, we may not be able to achieve profitable operations.

        Oil and natural gas exploration is intensely competitive in all its phases and involves a high degree of risk. We compete with numerous other participants in the search for, and the acquisition of, oil and natural gas properties and in the marketing of oil and natural gas, as well as, for the hiring of skilled industry personnel, contractors and equipment. Our competitors include oil and natural gas companies that have substantially greater financial resources, staff and facilities than we do. Our ability to increase reserves in the future will depend not only on our ability to explore and develop our present properties, but also on our ability to select and acquire suitable producing properties or prospects for exploratory drilling. Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery. Competition may also be presented by alternate fuel sources.

         We are subject to complex laws and regulations, including environmental regulations, that can have a material adverse effect on the cost, manner and feasibility of doing business.

        Oil and natural gas operations (exploration, production, pricing, marketing and transportation) are subject to extensive controls and regulations imposed by various levels of government that may be amended from time to time. Our operations may require licenses and permits from various governmental authorities. There can be no assurance that we will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development at our projects. It is not expected that any of these controls or regulations will affect our operations in a manner materially different than they would affect other oil and natural gas companies of similar size.

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         Environmental and health and safety risks may adversely affect our business.

        All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, state and local laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills and releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such discharge. Although we believe that we are in material compliance with current applicable environmental regulations, we cannot assure you that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect our financial condition, results of operations or prospects.

        We must also conduct our operations in accordance with various laws and regulations concerning occupational safety and health. Currently, we do not foresee expending material amounts to comply with these occupational safety and health laws and regulations. However, since such laws and regulations are frequently changed, we are unable to predict the future effect of these laws and regulations.

        Risks Related to Internal Controls

         For as long as we are an "emerging growth company," we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to some other public companies.

        As an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of:

    the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more;

    the last day of the fiscal year following the fifth anniversary of this offering;

    the date on which we have, during the previous 3-year period, issued more than $1 billion in non- convertible debt; or

    the date on which we are deemed a "large accelerated filer" as defined under the federal securities laws.

        For so long as we remain an "emerging growth company," we will not be required to:

    have an auditor report on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

    comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis);

    submit certain executive compensation matters to shareholders parachute" provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive

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      advisory votes pursuant to the "say on frequency" and "say on pay" provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the "say on golden officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and

    include detailed compensation discussion and analysis in our filings under the Exchange Act and instead may provide a reduced level of disclosure concerning executive compensation.

        In addition, the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period for complying with new or revised accounting standards. We have elected to take advantage of the extended transition period, which allows us to delay the adoption of new or revised accounting standards until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to public companies that comply with new or revised accounting standards.

        Because of these exemptions, some investors may find our common stock less attractive, which may result in a less active trading market for our common stock, and our stock price may be more volatile.

         If we fail to establish and maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

        As we grow, we may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to manage growth effectively will require us to continue to implement and improve our operational and financial systems and to expend, train and manage our employee base.

        We must maintain effective internal controls over financial reporting or, at the appropriate time, our independent auditors will be unwilling or unable to provide us with an unqualified report on the effectiveness of our internal controls over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act. If this were to occur, investors may lose confidence in our operating results, the price of our common stock could decline and we may be subject to litigation or regulatory enforcement actions.

        Risks Related to Gathering System

         Because of the natural decline in production from existing wells, our success depends on the anchor shippers' economically developing the remaining Marcellus reserves.

        Our natural gas gathering system is dependent upon the level of production from natural gas wells, from which production will naturally decline over time. In order to maintain or increase throughput levels on our gathering system and compression facility, we must continually obtain new supplies. The primary factors affecting our ability to obtain new supplies of natural gas is the level of successful drilling activity from the anchor shippers, of which Epsilon is one, as well as our ability to compete for volumes from successful new wells drilled by third parties proximate to our system. If we are not able to obtain new supplies of natural gas to replace the natural decline in volumes from existing wells, throughput on our pipelines and the utilization rates of our compression facility would decline, which could have an adverse effect on our business, results of operations, financial position and cash flows.

         The gathering rate on the Auburn Gas Gathering System is subject to a Cost of Service model which could result in a non-competitive gathering rate and reduced throughput.

        The gathering rate charged by the Auburn gas gathering system ("Auburn GGS") is determined by a cost of service model whereby the anchor shippers in the system, of which Epsilon is one, dedicate acreage and reserves to the gas gathering system in exchange for the Auburn GGS owners agreeing to a contractual rate of return on invested capital. The term of this arrangement is 15 years commencing in 2012 and expiring in 2026 with an 18% rate of return. Each year, the Auburn GGS historical and

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forecast throughput, revenue, operating expenses and capital expenditures are entered into the cost of service model. The model then computes the new gathering rate that will yield the contractual rate of return to the Auburn GGS owners. In 2026, prior to the end of the initial period on December 31, a new agreement governing rates will be negotiated between the Anchor Shippers and the gathering system owners. All else being equal, if total throughput on the system is lower than forecasted, the gathering rate will increase. If the gathering rate on the Auburn GGS increases, it could render drilling uneconomic for shippers or result in shippers allocating capital to more competitive areas which could result in further increases in the gathering rate. Although the anchor shippers have dedicated their reserves to the Auburn GGS, they are under no obligation to develop reserves if they determine that development is uneconomic.

         Because of the large supply of gas, and limited availability of transportation out of the Marcellus area, our gas is subject to a price differential.

        Differential is an energy industry term that refers to the discount or premium received for the sale of a petroleum product at a specific location relative to a nationally recognized sales hub. In the Marcellus, natural gas is significantly discounted to Henry Hub and the size of the differential can be volatile. Many factors influence the size and duration of differentials including local supply / demand imbalances, seasonal fluctuations in demand, transportation availability and cost, as well as the regulatory environment as it pertains to constructing new transportation pipelines. In Northeast Pennsylvania, negative differentials have persisted for many years due to rapid increases in supply as a result of advances in well completion techniques. Despite substantial increases in local demand for natural gas coupled with pipeline expansions, optimizations, and new pipelines that have been brought into service, the natural gas differential in Northeast Pennsylvania remains significant. There is no guarantee that future demand or pipeline transportation projects will eliminate this differential, and it will therefore remain a significant risk to Epsilon's revenues and cash flows.

         We compete with other operators in our gas gathering energy businesses.

        Although the anchor shippers have dedicated their acreage and reserves to the Auburn GGS, the Auburn GGS may not be chosen by other producers in these areas to gather and compress the natural gas extracted. We compete with other companies, including co-owners of the Auburn gas gathering system who operate other systems, for any such production from non-anchor shippers on the basis of many factors, including but not limited to geographic proximity to the production, costs of connection, available capacity, rates and access to markets. Competition in natural gas gathering is based in large part on reputation, efficiency, system reliability, gathering system capacity and pricing arrangements. Our key competitors in the natural gas gathering business include independent gas gatherers and major integrated energy companies. Alternate gathering facilities are available to non-anchor shippers we serve, and those producers may also elect to construct proprietary gas gathering systems. A significant increase in competition in the gas gathering industry could have a material adverse effect on our financial position, results of operations and cash flows.

         Several of our assets have been in service for many years and require significant expenditures to maintain them. As a result, our maintenance or repair costs may increase in the future.

        Our gathering lines and compression facility are generally long-lived assets, and many of such assets have been in service for many years. The age and condition of our assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our gathering rate and competitive position.

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         We are exposed to the credit risk of our customers and counterparties, and our credit risk management will not be able to completely eliminate such risk.

        We are subject to the risk of loss resulting from nonpayment and/or nonperformance by our customers and counterparties in the ordinary course of our business. Generally, our customers are rated investment grade, are otherwise considered creditworthy, or may be required to make prepayments or provide security to satisfy credit concerns. However, our credit procedures and policies cannot completely eliminate customer and counterparty credit risk. Our customers and counterparties include natural gas producers whose creditworthiness may be suddenly and disparately impacted by, among other factors, commodity price volatility, deteriorating energy market conditions, and public and regulatory opposition to energy producing activities. In a low commodity price environment certain of our customers could be negatively impacted, causing them significant economic stress including, in some cases, to file for bankruptcy protection or to renegotiate contracts. To the extent one or more of our key customers commences bankruptcy proceedings, our contracts with the customers may be subject to rejection under applicable provisions of the United States Bankruptcy Code, or may be renegotiated. Further, during any such bankruptcy proceeding, prior to assumption, rejection or renegotiation of such contracts, the bankruptcy court may temporarily authorize the payment of value for our services less than contractually required, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. If we fail to adequately assess the creditworthiness of existing or future customers and counterparties or otherwise do not take or are unable to take sufficient mitigating actions, including obtaining sufficient collateral, deterioration in their creditworthiness, and any resulting increase in nonpayment and/or nonperformance by them could cause us to write down or write off accounts receivable. Such write-downs or write-offs could negatively affect our operating results in the periods in which they occur, and, if significant, could have a material adverse effect on our business, results of operations, cash flows, and financial condition.

         Prices for natural gas in northeast Pennsylvania are volatile and are subject to significant discounts from pricing at Henry Hub. This discount and volatility has and could continue to adversely affect our financial results, cash flows, access to capital and ability to maintain our existing businesses.

        Our revenues, operating results, and future rate of growth depend primarily upon the price of natural gas in northeast Pennsylvania which is currently volatile and significantly discounted to natural gas at Henry Hub due to insufficient interstate pipeline capacity out of the region. This volatility and discount has adversely impacted reserve development in the past, and could do so again in the future. A slowing pace or complete halt to the development of reserves will impact our financial results, cash flows, access to capital and ability to maintain our gas gathering system.

         The financial condition of our natural gas gathering businesses is dependent on the continued availability of natural gas supplies and demand for those supplies in the markets we serve.

        Our ability to maintain and expand our natural gas gathering businesses depends on the level of drilling and production by anchor shippers and third parties in our gathering area. Production from existing wells with access to our gathering systems will naturally decline over time. The amount of natural gas reserves underlying these existing wells may also be less than anticipated, and the rate at which production from these reserves declines may be greater than anticipated. We do not obtain independent evaluations of the other anchor shippers or third-party natural gas reserves connected to our systems and compression facilities. Accordingly, we do not have independent estimates of total reserves dedicated to our systems or the anticipated life of such reserves. Demand for our services is dependent on the demand for gas in the markets we serve. Alternative fuel sources such as electricity, coal, fuel oils, or nuclear energy could reduce demand for natural gas in our markets and have an adverse effect on our business. A failure to obtain access to sufficient natural gas supplies or a reduction in demand for our services in the markets we serve could result in impairments of our assets

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and have a material adverse effect on our business, financial condition, results of operations, and cash flows.

         We may not be able to replace, extend, or add additional customer contracts or contracted volumes on favorable terms, or at all, which could affect our financial condition, and our ability to grow.

        We rely on a limited number of producers for a significant portion of our revenues and supply of natural gas. Although most of our producers are subject to long-term contracts, if we are unable to replace or extend such contracts, add additional customers, or otherwise increase the contracted volumes of natural gas provided to us by current producers, in each case on favorable terms, if at all, our financial condition and growth plans could be adversely affected. Our ability to replace, extend, or add additional producer contracts, or increase contracted volumes of natural gas from current producers, on favorable terms, or at all, is subject to a number of factors, some of which are beyond our control, including:

    The level of existing and new competition in our businesses or from alternative fuel sources, such as electricity, coal, fuel oils, or nuclear energy;

    Natural gas prices, demand, availability, and margins in our markets.

    General economic, financial markets, and industry conditions;

    The effects of regulation on us and our producers;

    Our ability to understand our customers' expectations, efficiently and reliably deliver high quality services and effectively manage customer relationships. The results of these efforts will impact our reputation and positioning in the market.

         Our gas gathering system is exposed to producer concentration risk arising from dependence on a limited number of producers.

        The Auburn GGS is exposed to producer concentration risk as there are only three anchor shippers with dedicated acreage and reserves to the system. If a producer on which we depend were to fail or become sufficiently distressed as to be insufficiently capitalized to develop reserves, we may not be able to replace the reserves in a timely manner or otherwise on favorable terms or at all. If we are unable to adequately diversify or otherwise mitigate such producer concentration risks and such risks were realized, we could be subject to reduced revenues, which could have a material adverse effect on our financial condition, results of operation, and cash flows.

         Our operations are subject to operational hazards and unforeseen interruptions.

        There are operational risks associated with gathering and compression of natural gas, including:

    Aging infrastructure and mechanical problems;

    Damages to pipelines and pipeline blockages or other pipeline interruptions;

    Uncontrolled releases of natural gas, brine, or industrial chemicals;

    Operator error;

    Damage caused by third-party activity, such as operation of construction equipment;

    Pollution and other environmental risks;

    Fires, explosions, craterings, and blowouts;

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DESCRIPTION OF THE BUSINESS

        Epsilon Energy Ltd. was incorporated March 14, 2005, pursuant to the ABCA. The Corporation is extra-provincially registered in Ontario pursuant to the Business Corporations Act (Ontario). We are engaged in the acquisition, development, gathering and production of primarily natural gas reserves with operations in the United States, where we have leasehold rights to approximately 76,171 gross (11,522 net) acres. We generally employ the strategy of acquiring leasehold rights near areas of existing established production, with the goal of converting the acquired leasehold rights into proved natural gas reserves, followed by production that optimizes cash flow and return on investment. We conduct our natural gas production operations from our joint venture in Pennsylvania with Chesapeake Energy Corp. We have also added oil and natural gas production from our recent acquisitions in the Anadarko Basin in Oklahoma.

        At our inception in 2005, we initially focused our efforts on developing low-risk natural gas properties in the Appalachian Basin. Management believed it was one of the largest established gas resources in the United States, yet, at the time, was one of the least technologically advanced basins in terms of the application of drilling, completion and production techniques. Currently we are focusing our efforts on the development of our non-operated position in the Marcellus Shale and our recent leasehold acquisitions in the Anadarko Basin in Oklahoma. Our initial public offering occurred in October 2007.

        We conduct operations in the United States through our wholly owned subsidiaries Epsilon Energy USA Inc., an Ohio corporation, or Epsilon Energy USA; Epsilon Midstream, LLC, a Pennsylvania limited liability company, or Epsilon Midstream; Epsilon Operating, LLC, a Delaware limited liability company, Dewey Energy GP LLC, a Delaware limited liability company, and Dewey Energy Holdings LLC, a Delaware limited liability company.

        Epsilon Energy USA is the 100% owner of Epsilon Midstream, which owns a 35% undivided interest in the Auburn Gas Gathering System, or the Auburn GGS, located in Susquehanna County, Pennsylvania, with partners Appalachia Midstream Services, LLC (43.875%) and Statoil Pipelines, LLC (21.125%). Anchor Shippers, Epsilon Energy, Statoil USA Onshore Properties, Inc., and Chesapeake Energy, Inc. dedicated approximately 18,000 mineral acres to the Auburn GGS for a term of 15 years under a cost of service agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction of the system.

        Our principal executive office is located at 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060, and our telephone number at that address is (281) 670-0002. Our registered office in Alberta, Canada is located at 14505 Bannister Road SE, Suite 300, Calgary, AB, Canada T2X 3J3.

    Business highlights of 2015

    Marcellus Shale—Pennsylvania

        During 2015, we produced 9.3 Bcf of natural gas net to our revenue interest. We commenced production from 6 gross (.15 net) Lower Marcellus wells in the first quarter of 2015. In addition, during the second quarter, 4 gross (.12 net) wells were partially fracked, flow-tested and shut-in. At year end, we had 41 gross (11.04 net) wells shut-in due to the poor price environment for natural gas. In addition, at year end, we had 6 gross (.13 net) wells, inclusive of the aforementioned partially completed wells, waiting on completion operations. The timing of the completion operations was suspended at year end 2015 awaiting improvement in natural gas prices.

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    Business highlights of 2016

    Marcellus Shale—Pennsylvania

        In 2016, we produced 11.0 Bcf of natural gas net to our revenue interest. During the first quarter of 2016, we returned 31 gross (8.96 net) wells to production that were previously shut-in as a result of weak regional natural gas pricing. In addition, in the second quarter, we returned an additional 5 gross (1.98 net) wells to production. During the fourth quarter of 2016, we participated in the drilling of 2 gross (.01 net) upper Marcellus wells, although these wells were not completed until August, 2017. At year end, we had 91 gross (24.11 net) producing wells. In addition, at year end, we had 9 gross (.13 net) wells, inclusive of the aforementioned upper Marcellus wells, waiting on completion operations.

    Business highlights of 2017

    Marcellus Shale—Pennsylvania

        In 2017 through September 30, we produced 6.8 Bcf of natural gas net to our revenue interest. We participated in the completion of 2 gross (.01 net) upper Marcellus wells in August, which were turned to production in September. In November, we also resumed the completion of the 6 gross (.13 net) lower Marcellus wells which were drilled in December 2014 and partially completed in 2015.

    NW Stack Trend—Oklahoma

        In the first quarter of 2017, we commenced efforts to acquire a strategic position in the Anadarko Basin of Oklahoma. During the year ended, December 31, 2017, we closed multiple acquisitions in the Anadarko Basin which include varying interests in over 88 sections of land, all held by minor production from shallower intervals, including operations covering 21 sections. The leasehold position includes rights to the prospective and deeper Meramec, Osage and Woodford formations. This position covers a wide footprint encompassing oil, condensate and liquids rich gas prone areas in the over-pressured window of the Basin.

    Properties

        Epsilon's 76,171 gross (11,522 net) acres are all located in the United States and include 258 gross (55.00 net) wells.

    Acreage

        As of the date of this Circular, our leasehold inventory consisted of the following acreage amounts, rounded to the nearest hundredths:

 
  Leasehold Acres  
 
  Gross(1)   Net(2)  

United States:

             

Pennsylvania

    8,276     4,138  

Oklahoma

    67,268     7,008  

Mississippi

    627     376  

Total acres

    76,171     11,522  

(1)
"Gross" means one-hundred percent of the working interest ownership in each leasehold tract of land.

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(2)
"Net" means the Corporation's fractional working interest share in each leasehold tract of land.

    Business Segments

        Our operations are conducted by three operating segments for which information is provided in our consolidated financial statements for the nine months ended September 30, 2017 and 2016, and the years ended December 31, 2016 and 2015.

        The three segments are as follows:

        Upstream:    Activities include acquisition, exploration, development and production of oil and natural gas reserves on properties within the United States.

        Gathering System:    We partner with two other companies to operate a natural gas gathering system.

        Canada:    Activities include our corporate listing and governance functions.

        For information about our segment's revenues, profits and losses, total assets, and total liabilities, see Note 12, "Operating Segments," of the Notes to Consolidated Financial Statements and Note 11, "Operating Segments," of the Notes to Unaudited Condensed Consolidated Financial Statements.

    Oil and Natural Gas Production and Revenues and Gathering System Revenues

        A summary of our net oil and natural gas production, average oil and natural gas prices and related revenues and our gathering system revenues for the nine-month periods ending September 30, 2017 and 2016 and for the years ended December 31, 2016 and 2015, respectively, follows:

 
  Nine months ended
September 30,
  Twelve months ended
December 31,
 
Revenues ($000)
  2017   2016   2016   2015  

Natural gas revenue

  $ 15,148   $ 10,216   $ 15,263   $ 11,266  

Volume (MMCF)

    6,809     8,047     11,016     9,343  

Avg. Price ($/MCF)

  $ 2.22   $ 1.27   $ 1.39   $ 1.21  

Exit Rate (MMCFPD)

    21.4     37.7     32.5     20.3  

Oil revenue

 
$

20
 
$

 
$

 
$

3
 

Volume (MBO)

    0.46             0.07  

Avg. Price ($/Bbl)

  $ 44.23   $   $   $ 45.92  

Gathering system revenue

 
$

4,889
 
$

6,293
 
$

8,437
 
$

10,868
 

Total Revenues

 
$

20,057
 
$

16,509
 
$

23,700
 
$

22,137
 

    Gathering System Operations

        Epsilon Energy USA is the 100% owner of Epsilon Midstream, which owns a 35% undivided interest in the Auburn Gas Gathering System, or the Auburn GGS, located in Susquehanna County, Pennsylvania, with partners Appalachia Midstream Services, LLC (43.875%) and Statoil Pipelines, LLC (21.125%). Anchor Shippers, Epsilon Energy, Statoil USA Onshore Properties, Inc., and Chesapeake Energy, Inc. dedicated approximately 18,000 mineral acres to the Auburn GGS for an initial term of 15 years under a cost of service agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction of the system.

        The gathering rate of the Auburn gas gathering system ("Auburn GGS") is determined by a cost of service model whereby the anchor shippers in the system dedicate acreage and reserves to the gas

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gathering system in exchange for the Auburn GGS owners agreeing to a contractual rate of return on invested capital. The term of this arrangement is 15 years commencing in 2012 and expiring in 2026 with an 18% rate of return. Each year, the Auburn GGS historical and forecast throughput, revenue, operating expenses and capital expenditures are entered into the cost of service model. The model then computes the new gathering rate that will yield the contractual rate of return to the Auburn GGS owners. In 2026, prior to the end of the initial period on December 31, a new agreement governing rates will be negotiated between the Anchor Shippers and the gathering system owners.

        The Auburn GGS consists of 43.9 miles of gathering pipelines, a small auxiliary compression facility and a main compression facility with three dehydration units and three Caterpillar 3612 compression units. Design capacity of the Auburn compression facility, or the Auburn CF, is approximately 360,000 thousand cubic feet, or Mcf, per day. The Auburn CF delivers processed natural gas into the Tennessee Gas Pipeline at the Shoemaker Dehy receipt meter. The Auburn GGS is connected with the adjacent Rome GGS, which allows for the receipt of additional natural gas to maximize utilization of the Auburn CF and Tennessee Gas Pipeline meter capacity.

        Revenues from the Auburn GGS are earned primarily from Anchor Shippers, Epsilon Energy USA, Statoil USA Onshore Properties, Inc. and Chesapeake Energy, Inc. Additional but less significant revenues are earned from Chief Oil & Gas LLC. Revenues derived from Epsilon's production which have been eliminated from gathering system revenues amounted to $0.9 million and $1.3 million, respectively, for the nine months ended September 30, 2017 and 2016. For the years ended 2016 and 2015, amounts were, $1.7 million and $1.7 million, respectively.

        During the nine months ended September 30, 2017, the Auburn GGS delivered 68 Bcf of natural gas, or 249,000 Mcf per day. During years ended December 31, 2016 and 2015, the Auburn GGS delivered 88 Bcf and 97 Bcf respectively, of natural gas, or 241,000 and 266,000 Mcf per day.

    Proved Reserves

        Per our reserve report prepared by independent petroleum consultants, DeGolyer and MacNaughton, our estimated proved reserves as of December 31, 2016, are summarized in the table below. See Risk Factors for information relating to the uncertainties surrounding these reserve categories.

 
  Natural Gas
Mmcf
 

Pennsylvania-Marcellus Shale

       

Proved developed producing

    48,463.2  

Proved undeveloped

    933.6  

Total proved reserves at December 31, 2016

    49,396.8  

        We have not engaged in any exploration capital spending in 2015, 2016 or in the nine months ended September 30, 2017. Our development capital spending to convert proved undeveloped reserves to proved developed reserves for the periods indicated is as follows:

    In 2015 in Pennsylvania, 4 gross (.12 net) wells were partially completed, but completion operations were aborted due to poor natural gas pricing. (Development capital $1.7 million)

    In 2016 in Pennsylvania, 2 gross (.01 net) wells were drilled, but not completed. (Development capital $0.05 million)

    In 2017 in Pennsylvania, 8 gross (.14 net) wells were completed. (Development capital $0.03 million)

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    Marketing and Major Customers

        Natural gas marketing is extremely competitive in northeast Pennsylvania because of the limited interstate transportation capacity and ample natural gas supply. We do not currently own any firm transportation on interstate pipelines that would enable us to diversify our natural gas sales to downstream customers. As a result, all of our gas sales occur in Zone 4 of the Tennessee Gas Pipeline at the Shoemaker Dehy meter, which is the receipt point from the Auburn Compression Facility.

        For the year ended December 31, 2016, we sold natural gas to 22 unique customers. DTE Energy Trading, Inc., Repsol Energy North America Corporation and Twin Eagle Resource Management, LLC each accounted for 10% or more of our total revenue. For the nine months ended September 30, 2017, we sold natural gas to 20 unique customers. South Jersey Resources Group, LLC, Repsol Energy North America Corporation and Twin Eagle Resource Management, LLC each accounted for 10% or more of our total revenue.

    Competition

        In both the Marcellus Basin and the Anadarko Basin, we operate in an extremely competitive environment for acquiring leases, developing reserves and marketing production. In most instances, we are a substantially smaller organization than our competitors both in terms of our personnel as well as our financial capability. This size differential relative to our competitors could disadvantage us, particularly in regard to accessing capital markets, acquiring technical expertise, and attracting and retaining talented personnel.

        We are affected by industry competition for drilling rigs, completion rigs and availability of related equipment and services. It is not uncommon in the oil and natural gas industry to experience shortages of drilling and completion rigs, equipment, pipe, services and personnel, which can cause both delays in development drilling activities and significant cost increases. We are not immune to these risks.

        In our gas gathering activity in the Marcellus, the competition for customer shippers on our Auburn GGS is intense. Although the Auburn GGS has three dedicated shippers (of which we are one), there is non-dedicated acreage within the footprint of the gathering system. However, the Auburn GGS currently serves only one non-anchor shipper, and there is no guarantee that we will be able to attract other customers to the system.

    Our Status as an Emerging Growth Company

        We are an "emerging growth company," as defined in the JOBS Act. Certain specified reduced reporting and other regulatory requirements are available to public companies that are emerging growth companies. These provisions include:

    an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting required by Section 404 of the Sarbanes—Oxley Act of 2002;

    an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

    an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about our audit and our financial statements; and

    reduced disclosure about our executive compensation arrangements.

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        We have elected to take advantage of the exemption from the adoption of new or revised financial accounting standards until they would apply to private companies.

        We will continue to be an emerging growth company until the earliest of:

    the last day of our fiscal year in which we have total annual gross revenues of $1.07 billion (as such amount is indexed for inflation every five years by the SEC to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest $1 million) or more;

    the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended;

    the date on which we have, during the prior three-year period, issued more than $1 billion in non-convertible debt; or

    the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or SEC, which means the market value of our common stock that is held by non-affiliates (or public float) exceeds $700 million as of the last day of our second fiscal quarter in our prior fiscal year.

    Employees

        As of January 31, 2018, we had eight full-time employees (including executive officers) in Houston, Texas. None of our employees are subject to a collective bargaining agreement or represented by a union.

    Legal Proceedings

        We are not a party to any pending or threatened legal proceedings. From time to time, we may become involved in litigation related to claims arising from the ordinary course of our business.

    Regulation

    United States

    Environmental Regulation

        Epsilon is subject to various federal, state and local laws and regulations covering the discharge of materials into the environment or otherwise relating to the protection of the environment. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations to implement and enforce such laws, which often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties or that may result in injunctive relief for failure to comply. These laws and regulations may:

    require the acquisition of various permits before drilling commences;

    restrict the types, quantities and concentrations of various substances, including water and waste, that can be released into the environment;

    limit or prohibit activities on lands lying within wilderness, wetlands and other protected areas; and

    require remedial measures to mitigate pollution from former and ongoing operations, such as requirements to close pits and plug abandoned wells.

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        Compliance with environmental laws and regulations increases Epsilon's overall cost of business, but has not had, to date, a material adverse effect on Epsilon's operations, financial condition or results of operations. In addition, it is not anticipated, based on current laws and regulations, that Epsilon will be required in the near future to expend amounts (whether for environmental control facilities or otherwise) that are material in relation to its total exploration and development expenditure program in order to comply with such laws and regulations. However, given that such laws and regulations are subject to change, Epsilon is unable to predict the ultimate cost of compliance or the ultimate effect on Epsilon's operations, financial condition and results of operations.

    Climate Change

        Local, state, national and international regulatory bodies have been increasingly focused on GHG emissions and climate change issues. In August 2015, the EPA issued final rules outlining the Clean Power Plan ("CPP"), which was developed in accordance with the Administration's Climate Action Plan announced the previous year. Under the CPP, carbon pollution from power plants must be reduced over 30% below 2005 levels by 2030. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations that limit emissions of GHGs could adversely affect demand for the oil and natural gas that production operators produce, some of whom are our customers, which could thereby reduce demand for our gas gathering services. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts and floods and other climatic events; if any such effects were to occur, it is uncertain if they would have an adverse effect on our financial condition and operations.

        Epsilon is unable to predict the timing, scope and effect of any currently proposed or future investigations, laws, regulations or treaties regarding climate change and GHG emissions, but the direct and indirect costs of such investigations, laws, regulations and treaties (if enacted) could materially and adversely affect Epsilon's operations, financial condition and results of operations.

    Hydraulic Fracturing

        Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. The process is typically regulated by state oil and natural gas commissions. However, the EPA has asserted federal regulatory authority over certain hydraulic fracturing practices and has finalized a study of the potential environmental impacts of hydraulic fracturing activities. In 2014, the EPA issued an advanced notice of proposed rulemaking under the Toxic Substances Control Act of 1976 requesting comments related to disclosure for hydraulic fracturing chemicals. Further, the Department of the Interior has released final regulations governing hydraulic fracturing on federal and Native American oil and natural gas leases which require lessees to file for approval of well stimulation work before commencement of operations and require well operators to disclose the trade names and purposes of additives used in the fracturing fluids. Legislation has been introduced, but not adopted, in Congress to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process. In addition, some states have adopted, and other states are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances.

        Epsilon is unable to predict the timing, scope and effect of any currently proposed or future laws or regulations regarding hydraulic fracturing in the United States, but the direct and indirect costs of such laws and regulations (if enacted) could materially and adversely affect Epsilon's operations, financial condition and results of operations.

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    Gathering System Regulation

        Regulation of gathering facilities may affect certain aspects of Epsilon's business and the market for Epsilon's services. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated by agencies of the U.S. federal government, primarily the Federal Energy Regulatory Commission, or the FERC. The FERC regulates interstate natural gas transportation rates, terms and conditions of service, which affects the marketing of natural gas produced by Epsilon, as well as the revenues received for sales of Epsilon's natural gas.

        The transportation and sale for resale of natural gas in interstate commerce is regulated primarily under the Natural Gas Act, or the NGA, and by regulations and orders promulgated under the NGA by the FERC. In certain limited circumstances, intrastate transportation, gathering, and wholesale sales of natural gas may also be affected directly or indirectly by laws enacted by the U.S. Congress and by FERC regulations.

    Market for Our Common Equity and Related Stockholder Matters

        Market Information.    The following table sets forth the high and low closing prices per share, denominated in Canadian dollars, for our common stock for the periods indicated as reported on the Toronto Stock Exchange. The prices reflect inter-dealer prices without regard to retail markups, markdowns or commissions and do not necessarily reflect actual transactions. As of January 26, 2018, the Federal Reserve Bank of New York noon buying rate was $1.23 Canadian dollars per U.S. dollar.

 
  CDN$  
 
  High   Low  

Year Ended December 31, 2018

             

First Quarter (through February 7, 2018)

  $ 2.98   $ 2.30  

Year Ended December 31, 2017

   
 
   
 
 

Fourth Quarter

  $ 3.35   $ 2.92  

Third Quarter

  $ 3.20   $ 2.90  

Second Quarter

  $ 3.20   $ 2.75  

First Quarter

  $ 3.45   $ 2.91  

Year Ended December 31, 2016

   
 
   
 
 

Fourth Quarter

  $ 3.05   $ 2.87  

Third Quarter

  $ 3.39   $ 2.88  

Second Quarter

  $ 3.40   $ 3.15  

First Quarter

  $ 3.40   $ 2.28  

Year Ended December 31, 2015

   
 
   
 
 

Fourth Quarter

  $ 3.01   $ 2.30  

Third Quarter

  $ 3.49   $ 2.55  

Second Quarter

  $ 4.09   $ 3.38  

First Quarter

  $ 4.20   $ 3.76  

        Shareholders.    We had approximately 1,400 shareholders of record as of January 31, 2018.

        Dividends.    We have not declared or paid any cash or stock dividends on our common shares since our inception and do not anticipate declaring or paying any cash or stock dividends in the foreseeable future.

        Securities Authorized for Issuance under Equity Incentive Plans.    At January 31, 2018, we were authorized to issue options covering up to 2,000,000 common shares. As of that date, we had issued options to purchase 686,500 common shares, leaving a maximum amount of 1,313,500 common shares

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available for future option issuances. The following table sets out the number of common shares to be issued upon exercise of outstanding options issued pursuant to our equity compensation plans and the weighted average exercise price of outstanding options for the periods indicated:

 
  Nine months
ended
September 30, 2017
  Year ended
December 31, 2016
 
Exercise price in Cdn$
  Number of
Options
Outstanding
  Weighted
Average
Exercise
Price
  Number of
Options
Outstanding
  Weighted
Average
Exercise
Price
 

Balance beginning of period

    511,000   $ 3.33     511,000   $ 3.33  

Granted

    241,500   $ 3.35          

Exercised

    (40,000 ) $ 1.63          

Expired

    (26,000 ) $ 3.25          

Balance end of period

    686,500   $ 3.44     511,000   $ 3.33  

Exercisable end of period

    348,333   $ 3.44     317,667   $ 3.12  

        As of January 31, 2018, we had no warrants or other common share-related rights outstanding.

    Selected Financial Data

        The table below presents our selected historical consolidated financial data as of September 30, 2017 and for the nine-month periods ended September 30, 2017 and 2016 and as of and for the years ended December 31, 2016 and 2015. The selected historical consolidated financial data as of and for the years ended December 31, 2016 and 2015 have been derived from our audited consolidated financial statements, which have been audited by BDO USA, LLP, an independent registered public accounting firm. The data for the nine-month periods ended September 30, 2017 and 2016 and as of September 30, 2017 was derived from our unaudited consolidated financial statements. The selected historical consolidated financial data set forth below should be read in conjunction with the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" for such periods and our consolidated financial statements and related notes. Our financial statements included in and incorporated by reference into this Circular have been prepared in accordance with

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United States generally accepted accounting principles, or GAAP. Amounts are expressed in thousands of dollars, except share and per-share amounts.

 
  Nine months ended
September 30,
  Years ended
December 31,
 
 
  2017   2016   2016   2015  

Income statement Data

                         

Operating revenues

  $ 20,057   $ 16,509   $ 23,700   $ 22,137  

Cost of revenues

    4,617     5,408     7,356     8,257  

Depreciation, depletion, amortization and accretion

    9,015     17,047     20,967     15,729  

Bad debt expense

                525  

General and administrative expense

    2,743     1,595     2,048     1,968  

Income from operations

    3,682     (7,541 )   (6,671 )   (4,342 )

Other income (expense)

    1,364     (2,443 )   (3,593 )   (2,560 )

Income tax provision

    2,317     (2,623 )   (2,696 )   (1,231 )

Net income (loss) attributable to Epsilon

  $ 2,729   $ (7,361 ) $ (7,568 ) $ (5,671 )

Net income (loss) available to shareholders

  $ 2,729   $ (7,361 ) $ (7,568 ) $ (5,671 )

Net income (loss) per share, basic

  $ 0.05   $ (0.16 ) $ (0.16 ) $ (0.12 )

Net income (loss) per share, diluted

  $ 0.05   $ (0.16 ) $ (0.16 ) $ (0.12 )

Weighted average number of shares outstanding, basic

    51,294,292     45,896,859     45,882,030     47,049,955  

Weighted average number of shares outstanding, diluted

    51,321,026     45,896,859     45,882,030     47,049,955  

 

 
   
  As of December 31,  
 
  As of
September 30,
2017
 
 
  2016   2015  

Balance sheet data

                   

Cash and cash equivalents

  $ 7,809   $ 31,487   $ 16,955  

Oil and gas properties

    57,770     46,099     61,402  

Gathering system properties

    15,166     17,498     22,750  

Total assets

    84,017     100,143     104,463  

Total long-term liabilities

    20,327     29,165     54,126  

Total shareholders' equity(1)

    58,944     37,541     46,241  

(1)
No cash dividends were declared or paid during the periods presented.

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION

        The following discussion is intended to assist in the understanding of trends and significant changes in or results of operations and the financial condition of Epsilon Energy Ltd. and its subsidiaries for the periods presented. This section should be read in conjunction with the audited consolidated financial statements as at December 31, 2016 and 2015 and for the years then ended together with accompanying notes, and with the unaudited interim financial statements and notes for the three and nine months ended September 30, 2017 and 2016.

        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.

Overview

        We are a North American on-shore focused independent oil and gas company engaged in the acquisition, development, gathering and production of oil and gas reserves. Our primary areas of operation are Pennsylvania and Oklahoma. Our assets are concentrated in areas with known hydrocarbon resources, which are conducive to multi-well, repeatable drilling programs.

        We are the 100% owner of Epsilon Midstream, which owns a 35% undivided interest in the Auburn Gas Gathering System, or the Auburn GGS, located in Susquehanna County, Pennsylvania, with partners Appalachia Midstream Services, LLC (43.875%) and Statoil Pipelines, LLC (21.125%). Anchor Shippers Epsilon Energy, Statoil USA Onshore Properties, Inc., and Chesapeake Energy, Inc. dedicated approximately 18,000 mineral acres to the Auburn GGS for a term of 15 years under a cost of service agreement whereby the Auburn GGS owners receive a fixed percentage rate of return on the total capital invested in the construction of the system.

        Our common shares trade on the TSX under the ticker symbol "EPS."

        At December 31, 2016, our total estimated net proved reserves were 49,397 million cubic feet (Mcf) of natural gas reserves and leasehold rights to approximately 76,171 gross (11,522 net) acres. We have natural gas production from our joint venture in Pennsylvania with Chesapeake Energy Corp.

Business Strategy

        Our ongoing business strategy involves focused targeting of natural gas and oil properties within the United States with the goal of converting our leasehold interests into proved natural gas and oil reserves, followed by production that optimizes cash flow and return on investment

        Since assuming control of us in July 2013, our management team, employees and Board of Directors have accomplished many goals. First, we have narrowed our strategic focus to our core upstream and gathering system assets in the Marcellus shale, and the Anadarko Basin, and have divested all non-core properties. Second, the organization has been downsized and high-graded with annual G&A costs staying consistent at a current rate of approximately $2 million. Third, and most important, our balance sheet and liquidity have improved significantly, which is proving to be very constructive in today's environment. In mid-2013, we had minimal cash, were free cash flow (operating cash flows less capital expenditures) negative, had a negative working capital balance and had no access

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to a revolving line of credit. As of December 31, 2016, we had $31 million in cash, and $0.6 million available on our revolver. Fourth, we have implemented a number of initiatives operationally that have enhanced the value of core assets in the Marcellus. These initiatives include working with the operator of our upstream asset to encourage improvements in completion productivity. In addition, we maintain an active dialogue with our gathering system partners with a view toward maximizing the long term value of our gathering assets.

        With our financial position strengthened, our strategy will be twofold: maximize the value of our integrated Marcellus and Anadarko assets, and evaluate investment opportunities in non-Marcellus petroleum basins with attractive economics at the current commodity strip. When natural gas pricing improves in the Marcellus, we intend to invest capital to increase production from both the lower and upper Marcellus reservoirs. We believe the upper Marcellus has the potential to meaningfully increase our current reserve value. Therefore, this investment will increase our cash flows while simultaneously proving upper Marcellus reserves.

        The operating environment remains challenging in our operating area of Pennsylvania. The Marcellus Shale has proven to be one of the most attractive dry gas resources in the lower United States and, therefore, has attracted significant drilling capital. Over the past several years, completion productivity has improved dramatically, resulting in increasing initial production rates and gas recoveries. In many areas, the increase in natural gas deliverability has significantly outpaced the development of the infrastructure necessary to transport the gas to downstream markets. This phenomenon has resulted in local natural gas prices with abnormally large differentials to the benchmark NYMEX Henry Hub. Our preference is to produce less natural gas in this unfavorable pricing environment as our acreage is largely held by production, and our operating partner shares this view. Our expectation is that production will decline over the course of 2017, but the completion of large infrastructure projects will begin to have a positive impact on the local natural gas price. A major project is scheduled to commence service June, 2018.

        We realized a net loss of $7.6 million during 2016 as compared to net loss of $5.7 million for 2015. At December 31, 2016, our total estimated net proved reserves of natural gas were 49,397 million cubic feet, or MMcf, an increase of 9,409 MMcf from December 31, 2015. Our standardized measure of discounted future net cash flows as of December 31, 2016 and 2015 was $16.4 million and $6.9 million, respectively.


Nine Months ended September 30, 2017 Highlights

    Operational Highlights

    Marcellus ShalePennsylvania

    During the nine months ended September 30, 2017, Epsilon's realized natural gas price was $2.22 per Mcf, a 75% increase from the nine months ended, September 30, 2016.

    Total nine months ended September 30, 2017 production of 6.8 Bcf, as compared to 8.0 Bcf in 2016.

    Participated in the completion of 2 gross (.01 net) upper Marcellus wells in August which were turned to production in September.

    Gathered and delivered 67 Bcf gross (23.6 Bcf net to Epsilon's interest) during the first three quarters of 2017 through the Auburn System which represents approximately 50% of maximum throughput.

    In November, we also resumed the completion of the 6 gross (.13 net) lower Marcellus wells which were drilled in December 2014 and partially completed in 2015.

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    NW Stack Trend—Oklahoma

        In the first quarter of 2017, the Corporation commenced efforts to acquire a strategic position in the Anadarko Basin of Oklahoma. Year-to-date, the Corporation closed multiple acquisitions in the Basin which include varying interests in over 88 sections of land, all held by minor production from shallower intervals, including operations covering 21 sections. The leasehold position includes rights to the prospective and deeper Meramec, Osage and Woodford formations. This position covers a wide footprint encompassing oil, condensate and liquids rich gas prone areas in the over-pressured window of the Basin.

    Financing Highlights

      Convertible Debentures

        On February 28, 2012, we completed a public offering of Cdn$40 million aggregate principal amount of convertible, unsecured subordinated debentures, or the Convertible Debentures, at a price of Cdn$1,000 per Debenture. The Convertible Debentures bore interest at the rate of 7.75% per annum, payable commencing September 30, 2012 and semi-annually thereafter and matured March 31, 2017, or the Maturity Date. The Convertible Debentures were convertible into common shares at the holder's option at any time prior to the Maturity Date at a conversion price equal to Cdn$4.45 per common share. Upon redemption or maturity, we had the option to repay the outstanding principal of the Convertible Debentures through the issuance of common shares. We repaid the outstanding principal and accrued interest in February 2017 for Cdn$ 39,951,435. This amount includes the original Cdn$40 million debentures, less Cdn$36,000 in conversions, less Cdn$1.5 million repurchased by Epsilon for a payoff of Cdn$38,464,000 (US$ 29,464,190) of principle and Cdn$1,487,435 (US$1,139,405) of interest.

    Results of Operations

        The following review of operations for the periods presented below should be read in conjunction with our consolidated financial statements and the notes thereto.

    Revenues

        During the nine months ended September 30, 2017, revenues increased $3.2 million, or 18%, to $21.0 million from $17.8 million during the same period in 2016.

        Revenue and volume statistics for the years ended December 31, 2016 and 2015, and the nine months ended September 30, 2017 and 2016 were as follows:

 
  Nine months
ended
September 30,
  Twelve months
ended
December 31,
 
Revenues ($000)
  2017   2016   2016   2015  

Natural gas revenue

  $ 15,148   $ 10,216   $ 15,263   $ 11,266  

Volume (MMCF)

    6,809     8,047     11,016     9,343  

Avg. Price ($/MCF)

  $ 2.22   $ 1.27   $ 1.39   $ 1.21  

Exit Rate (MMCFPD)

    21.4     37.7     32.5     20.3  

Oil revenue

 
$

20
 
$

 
$

 
$

3
 

Volume (MBO)

    0.46             0.07  

Avg. Price ($/Bbl)

  $ 44.23   $   $   $ 45.92  

Gathering system revenue

 
$

4,889
 
$

6,293
 
$

8,437
 
$

10,868
 

Total Revenues

 
$

20,057
 
$

16,509
 
$

23,700
 
$

22,137
 

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        We earn gathering system revenue as a 35% owner of the Auburn Gas Gathering system. This revenue consists of fees paid by Anchor Shippers and third-party customers of the system to transport gas from the wellhead to the compression facility, and then to the delivery meter at Tennessee Gas Pipeline. For the year ended December 31, 2016, approximately 88% of the Auburn GGS revenues earned are gathering fees, while 12% are compression fees. Third-party customers represent approximately 12% of gathering revenues and 7% of compression revenues. For the nine months ended September 30, 2017, approximately 80% of the Auburn GGS revenues earned are gathering fees, while 20% are compression fees. Third party customers represent approximately 10% of gathering revenues and 5% of compression revenues. Revenues derived from Epsilon's production which have been eliminated from gathering system revenues amounted to $0.9 million and $1.3 million respectively for the nine months ended September 30, 2017 and 2016. For the years ended 2016 and 2015, amounts were, $1.7 million and $1.7, million respectively.

        Upstream revenue for the nine months ended September 30, 2017 increased by $4.9 million, or 48.3%, over 2016 as a result of higher natural gas prices, offset somewhat by lower volumes. Volumes were lower during 2017 because no wells were drilled or completed during 2016 or the nine months ended September 30, 2017 and the natural decline of production rates over time occurred.

        Gathering system revenue decreased $1.4 million, or 22.3%, during the nine months ended September 30, 2017, due to a decrease in the gathering and compression rate charged. The Auburn GGS is subject to a cost of service model, whereby the Anchor Shippers dedicate acreage and reserves to the Auburn GGS. In exchange for this dedication, the owners of the Auburn system agree to a fixed rate of return on capital invested which cannot be exceeded. Therefore, rather than being subject to a fixed gathering rate, the Shippers are subject to a fluctuating gathering rate which is re-determined annually in order to produce the contractual return on capital to the Auburn GGS owners. The term of the model is fixed from 2012 to 2026. Each year, actual throughput, revenue, operating expenses and capital are captured in the model, and the remaining years are forecasted. The model then iterates for a gathering rate that yields the contractual rate of return. All else being equal, to the extent that throughput is higher or capital is lower than the preceding year's forecast, the gathering rate will decline.

        Upstream revenue for the year ended December 31, 2016 increased by $4.0 million, or 35.5%, over 2015 as a result of higher natural gas production volumes along with higher average prices. Volumes increased as the operator took advantage of the higher gas prices and turned wells back on line that had been temporarily shut in due to low prices during 2015. The end of the year daily production exit rate for gas was 32.5 MMcf. During 2016 there were two upper Marcellus wells drilled; however, our working interest in these wells was minimal. Gathering system revenue decreased by $2.4 million, or 22.4%, for the year ended December 31, 2016, due to a decrease in the gathering rate charged and a decrease in the gas flowing through the system.

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    Operating Costs

        The following table presents the costs per Mcf for the years ended December 31, 2016 and 2015 and the nine months ended September 30, 2017 and 2016:

 
  Nine months
ended
September 30,
  Years ended
December 31,
 
(in thousands of dollars)
  2017   2016   2016   2015  

Lease operating costs

  $ 4,134   $ 4,823   $ 6,582   $ 7,107  

Gathering system operating costs

    483     585     774     1,150  

  $ 4,617   $ 5,408   $ 7,356   $ 8,257  

Upstream operating costs $ / Mcf

  $ 0.60   $ 0.60   $ 0.60   $ 0.76  

Gathering system operating costs $ / Mcf

    0.04     0.04     0.04     0.06  

        Upstream operating costs consist of lease operating expenses necessary to extract gas and oil, including transporting it to a sales point and production taxes assessed by the state in which production occurs. These expenses vary directly with the level of oil and natural gas production and related expenses.

        Gathering system operating costs consist primarily of rental payments for the natural gas fueled compression units. Other significant gathering system operating costs include chemicals (to prevent corrosion and to reduce water vapor in the gas stream), saltwater disposal, measurement equipment / calibration and general project management. The gathering system operating costs and the associated $/Mcf reported include the effects of elimination entries to remove the gas gathering fees billed by the gas gathering system operator to Epsilon's upstream operations. The elimination entries amounted to $0.9 million and $1.3 million for the nine months ended September 30, 2017 and 2016 respectively and $1.7 million and $1.7 million for the years ended December 31, 2016 and 2015, respectively (see Note 12, "Operating Segments," of the Notes to Consolidated Financial Statements and Note 11, "Operating Segments," of the Notes to Unaudited Condensed Consolidated Financial Statement).

        Total operating costs for the nine months ended September 30, 2017 decreased by $0.8 million, or 14.6%, from the cost incurred in the nine months ended September 30, 2016 due primarily to a decrease in production volumes.

        For the year ended December 31, 2016, operating costs decreased by $0.9 million, or 10.9%, and upstream cost per Mcf decreased by $0.16, or 21.1%, from 2015 levels in spite of an increase in production. This was mainly due to a decrease in the gathering charge and an overall decrease in spending by the operator during 2016.

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

 
  Nine months
ended
September 30,
  Years ended
December 31,
 
(in thousands of dollars)
  2017   2016   2016   2015  

Depletion, depreciation, amortization and accretion

  $ 9,015   $ 17,047   $ 20,967   $ 15,729  

        Oil and natural gas 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 oil and gas development and gathering system costs, the reserve base used to calculate depletion and depreciation is proved developed reserves. A reserve report is prepared as of December 31, each year. The depletion for the first three quarters of 2015, 2016 and

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2017 is based on the reserve report prepared at the end of the previous year, taking into consideration the limited development of the reserves over these time periods. The fourth quarter depletion is calculated using the reserve volumes from the reserve report prepared as of December 31 of the current year.

        Depreciation expense includes amounts pertaining to our office furniture and fixtures, computer hardware and software. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 5 years.

        Accretion expense is related to the asset retirement costs.

        For the nine months ended September 30, 2017, DD&A expense decreased $8.0 million, a 47% decrease, from $17.0 million for the same period in 2016. This decrease was primarily due to an increase in the amount of reserves reported in the December 31, 2016 reserve report and a decrease in production. The increased reserve volumes in the December 31, 2016 reserve report were primarily due to an increase in natural gas prices during 2016, making more wells economical.

        During the year ended December 31, 2016, DD&A expense increased by $5.2 million, or 33.3%, compared to the same period in 2015 mainly due to a large decrease in the amount of reserves reported in the December 31, 2015 reserve report as compared to the December 31, 2014 reserve report. This decrease resulted from the loss of proved reserves primarily as a result of lower natural gas prices in 2015.

    General and Administrative ("G&A")

 
  Nine months
ended
September 30,
  Years ended
December 31,
 
(in thousands of dollars)
  2017   2016   2016   2015  

General and administrative

  $ 2,743   $ 1,595   $ 2,048   $ 1,968  

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

        The G&A expenses increased by $1.1 million, or 71.9%, during the nine months ended September 30, 2017 from the same period in 2016, mainly due to increased personnel costs related to the hiring of a COO and increased consulting and legal costs required for the effort to obtain a listing on a major U.S. stock exchange.

        G&A expenses stayed consistent during the 12 months ended December 31, 2016 and 2015 at $2.0 million.

    Interest Expense

 
  Nine months
ended
September 30,
  Years ended
December 31,
 
(in thousands of dollars)
  2017   2016   2016   2015  

Interest expense

  $ 855   $ 2,148   $ 2,762   $ 2,756  

Debenture fee amortization

    53     243     322     305  

Interest expense

  $ 908   $ 2,391   $ 3,084   $ 3,061  

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        Interest expense relates to the interest payable and amortization of the underwriter and administrative fees related to the convertible debentures issued in 2012, and interest on the revolving line of credit.

        Interest expense decreased during the nine months ended September 30, 2017 from $2.4 million for the nine months ended September 30, 2016 to $0.91 million, or 62.1%. This was due to the maturing and payoff of the convertible debentures in February 2017.

        Interest expense at December 31, 2016 represents 12 months of interest paid or payable on the convertible debentures. Additionally included in interest expense is $0.3 million of amortization of the underwriter and administrative fees and $0.5 million of interest paid or payable on revolving line of credit. The balance of interest payable at December 31, 2016 is $0.6 million.

Net gain (loss) on commodity contracts

 
  Nine months
ended
September 30,
  Years ended
December 31,
 
(in thousands of dollars)
  2017   2016   2016   2015  

Net gain (loss) on commodity contracts

  $ 2,220   $   $ (488 ) $  

        During 2016, we entered into fixed price swap derivative contracts. During the period, contracts were settled for a loss of $151,198.

        For the nine months ended September 30, 2017, we entered into fixed price swap, basis swap, and two-way costless collar derivative contracts. During this period, contracts were settled for a net gain of $1,912,905.

    Miscellaneous Income (Expense)

 
  Nine months
ended
September 30,
  Years ended
December 31,
 
(in thousands of dollars)
  2017   2016   2016   2015  

Miscellaneous income (expense)

  $ 52   $ (52 ) $ (21 ) $ (25 )

        Miscellaneous income (expense) consists primarily of interest income, and gains and losses on foreign currency transactions.

        For the nine months ended September 30, 2017 and 2016, miscellaneous income (expense) consisted primarily of foreign currency gains and (losses).

        For the year ended December 31, 2016, miscellaneous income consisted mainly of gains and losses on foreign currency transactions. For the year ended December 31, 2015, miscellaneous income consisted primarily of a legal settlement from Talisman Energy USA, Inc. offset by the writing off of an uncollectible receivable.

    Capital Resources and Liquidity

    Cash Flow

        Our primary source of cash during the two-year period ended December 31, 2016, was funds generated from operations. During the nine-month period ended September 30, 2017, we completed a rights offering that generated $18.0 million of cash in addition to cash generated from operations. The primary uses of cash during the two-year period ended December 31, 2016, were funds used in operations, development expenditures, the buyback of Epsilon common stock, and the buyback of

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Epsilon convertible debentures. The primary uses of cash during the nine months ended September 30, 2017 were funds used in operations, development expenditures, the payoff of Epsilon's convertible debentures, payments on the revolving line of credit, and the purchase of 67,268 gross (7,008 net) acres of oil and gas properties in the Anadarko Basin in Oklahoma.

        At September 30, 2017, we had a working capital surplus of $5.7 million, an increase of $3.1 million over the $2.6 million surplus at December 31, 2016. The surplus increased over the last year because of the completion of the rights offering, a consistent increase of revenues due to higher natural gas prices, and the reduction of large interest payments due to the payoff of the convertible debentures in February 2017.

        At December 31, 2016, we had a working capital surplus of $2.6 million, versus a surplus of $16.2 million at December 31, 2015. The decrease in working capital surplus was primarily the result of the reclassification of the convertible debentures to a current liability during the first quarter of 2016, offset by an increase in cash flows from operations during 2016.

Nine months ended September 30, 2017 compared to September 30, 2016 and years of 2016 compared to 2015

        During the nine months ended September 30, 2017, $14.3 million was provided by our operating activities, compared to $7.0 million during the nine months ended September 30, 2016. The $7.3 million, or 105.6% increase was due to increased revenue from higher natural gas prices.

        During the year ended December 31, 2016, $11.2 million was provided by our operating activities, compared to $10.5 million in 2015, a $0.7 million, or 6.2%, increase. The increase was from increased revenue due to higher production rates and higher natural gas prices.

        We used $18.3 million for investing activities during the nine months ended September 30, 2017 primarily for the acquisition of oil and gas properties in the Anadarko basin. During the same period of 2016, we used $1.1 million, mainly for further development of the gathering system.

        We used $1.3 million cash for investing activities during the year ended December 31, 2016. This was primarily due to additional gathering system expenditures in Pennsylvania. This decrease from $5.1 million used during 2015 was related to the decrease in the rate of development in Pennsylvania.

        The $21.1 million of cash used for financing activity during the nine months ended September 30, 2017 included the redemption of the convertible debentures totalling $29.5 million and the payoff of our line of credit totaling $9.6 million. This was offset by the completion of a rights offering, which increased our cash by $18.0 million.

        During the year ended December 31, 2016, financing activities provided us net cash of $4.3 million primarily due to a net draw of $5.5 million on our revolving line of credit. This was offset by the buyback of our common stock. During 2015, we had outflows of $2.9 million primarily due to the buyback of our common stock and convertible debentures.

    Credit Agreement

        Effective July 30, 2013, our wholly owned subsidiary Epsilon Energy USA entered into a senior secured revolving credit facility. The terms of this agreement include a total commitment of up to $100 million with an initial borrowing base of $20 million available as long as we are in compliance with the loan covenants. Upon each advance, interest is charged at the rate of LIBOR plus an applicable margin. The applicable margin ranges from 2.75% to 3.75% and is based on the percent of the line of credit utilized.

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        The bank has a first priority security interest in the tangible and intangible assets of Epsilon Energy USA to secure any outstanding amounts under the agreement. Under the terms of the agreement, we must maintain the following covenants:

    Interest coverage ratio greater than 3 based on income adjusted for interest, taxes and non-cash amounts.

    Current ratio, adjusted for line of credit amounts used and available and non-cash amounts, greater than 1.

    Leverage ratio less than 3.5 based on income adjusted for interest, taxes and non-cash amounts.

        We were in compliance with the financial covenants of the agreement as of September 30, 2017, December 31, 2016 and December 31, 2015.

 
  Balance as at December 31,    
   
 
 
  Borrowing
Base
31-Dec-16
  Interest
Rate
 
 
  2016   2015  

Revolving line of credit

  $ 12,460,000   $ 7,000,000   $ 13,000,000     3 mo. LIBOR + 3.75 %

 

 
  Balance as of
September 30,
2017
  Borrowing Base
30-Sep-17
  Interest
Rate
 

Revolving line of credit

  $ 2,900,000   $ 15,000,000     1 mo. LIBOR + 2.75 %

        In December 2017 our borrowing base was reduced to $13.5 million, resulting in available borrowing capacity under the credit agreement of $10.6 million as of January 31, 2018.

    Derivative Transactions

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

        As of December 31, 2016, our outstanding natural gas commodity contracts consisted of the following:

 
   
   
  Fair Value
as at December 31,
 
 
  Volume
(Mmbtu)
  Weighted
Average Price
($/Mcf)
 
Derivative Type
  2016   2015  

Fixed price swaps

    490,000   $ 3.38   $ (336,352 ) $  

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        At September 30, 2017, our outstanding natural gas commodity swap and collar contracts consisted of the following:

 
   
  Weighted Average Price ($/Mmbtu)    
 
Derivative Type
  Volume
(Mmbtu)
  Swaps   Ceiling
Price
  Floor
Price
  Basis
Differential
  Fair Value
September 30, 2017
 

2017

                                     

Fixed price swap

    457,500   $ 3.16   $   $   $   $ 29,543  

Basis swap

    457,500   $   $   $   $ (0.79 )   (28,744 )

2018

                                     

Fixed price swap

    2,337,500   $ 2.93   $   $   $     (102,217 )

Basis swap

    3,102,500   $   $   $   $ (0.49 )   82,734  

Two-way costless collar

    765,000   $   $ 4.36   $ 2.70   $     (11,419 )

                                $ (30,103 )

    Contractual Obligations

        The following table summarizes our contractual obligations at December 31, 2016:

 
  Payments Due by Period  
 
  Total   Less than
1 Year
  1 - 3
Years
  Greater than
3 Years
 

Revolving line of credit

  $ 12,460,000   $   $ 12,460,000   $  

Derivative Liabilities

    336,352     336,352          

Convertible debenture interest payments

    1,110,138     1,110,138          

Convertible debenture principle payment

    28,648,732     28,648,732          

Asset retirement obligation

    8,449,640             8,449,640  

Operating leases

    243,111     77,299     159,083     6,729  

Total future commitments

  $ 51,247,973   $ 30,172,521   $ 12,619,083   $ 8,456,369  

        The following table summarizes our contractual obligations at September 30, 2017:

 
  Payments Due by Period  
 
  Total   Less than
1 Year
  1 - 3
Years
  Greater than
3 Years
 

Revolving line of credit

  $ 2,900,000   $   $ 2,900,000   $  

Derivative Liabilities

    97,794     11,419     86,375      

Asset retirement obligation

    8,450,621             8,450,621  

Operating leases

    184,965     77,989     106,976      

Total future commitments

  $ 11,633,380   $ 89,408   $ 3,093,351   $ 8,450,621  

        The revolving line of credit amount included in commitments is principal only as the interest rate is variable. At September 30, 2017, the rate was 4.4%.

        We enter into commitments for capital expenditures in advance of the expenditures being made. At a given point in time, it is estimated that we have committed to capital expenditures equal to approximately one quarter of our capital budget by means of giving the necessary authorizations to incur the expenditures in a future period. This commitment has not been included in the commitment table above as it is of a routine nature and is part of normal course of operations for active oil and gas companies. As of September 30, 2017, we have no material commitments for capital expenditures.

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

        The convertible debentures were scheduled to mature on March 31, 2017. The debentures were fully funded with cash holdings in Canada and were paid off in February 2017 for Cdn$ 39,951,435.

    Off-Balance Sheet Arrangements

        As of December 31, 2016 and September 30, 2017, we had no off-balance sheet arrangements.

    Foreign Currency Exchange Rate Risk

        We are exposed to risks arising from fluctuations in foreign currency exchange rates, primarily between Canadian and U.S. dollars. We do not utilize any foreign currency based derivatives. In order to manage this risk and to defer the realization of any resulting currency loss from converting Canadian dollars to U.S. dollars, we retain cash balances in both U.S. and Canadian dollars.

    Summary of Critical Accounting Policies and Estimates

        The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and accompany notes, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and SEC rules which require management to make estimates and assumptions about future events that affect the reported amounts in the financial statements and the accompanying notes. We identify certain accounting policies as critical based on, among other things, their impact on the portrayal of our financial condition, results of operations or liquidity, and the degree of difficulty, subjectivity and complexity in their application. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. Management routinely discusses the development, selection and disclosure of each of the critical accounting policies. Described below are the most significant accounting policies we apply in preparing our consolidated financial statements. We also describe the most significant estimates and assumptions we make in applying these policies.

    Successful Efforts Accounting

        We use the successful efforts method of accounting for oil and gas operations. Under this method, the fair value of property acquired and all costs associated with successful exploratory wells and all development wells are capitalized. The costs of exploratory wells are initially capitalized pending a determination of whether proved reserves have been found. At the completion of drilling activities, the costs of exploratory wells remain capitalized if a determination is made that proved reserves have been found. If no proved reserves have been found, the costs of each of the related exploratory wells are charged to expense. In some cases, a determination of proved reserves cannot be made at the completion of drilling, requiring additional testing and evaluation of the wells. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized.

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    Gathering System

        We hold an undivided interest in a gas gathering system asset that supports our Pennsylvania operations. We account for the costs and revenue from this system using the proportionate consolidation method.

    Proved Oil and Gas Reserves

        Our engineers estimate proved oil and gas reserves in accordance with SEC regulations, which directly impact financial accounting estimates, including depreciation, depletion and amortization and impairments of proved properties and related assets. Proved reserves represent estimated quantities of crude oil and condensate, NGLs and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil and gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. There are uncertainties inherent in the interpretation of such data, as well as the projection of future rates of production and timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation, and judgment. Accordingly, there can be no assurance that ultimately, the reserves will be produced, nor can there be assurance that the proved undeveloped reserves will be developed within the period anticipated. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. We cannot predict the types of reserve revisions that will be required in future periods. For related discussion, see the sections titled "Risk Factors" and "Supplemental Information to Consolidated Financial Statements."

    Unproved Oil and Gas Properties

        Unproved properties generally consist of costs incurred to acquire unproved leases. Unproved lease acquisition costs are capitalized until the leases expire or when we specifically identify leases that will revert to the lessor, at which time we expense the associated unproved lease acquisition costs. The expensing of the unproved lease acquisition costs is recorded as an impairment of oil and gas properties in the consolidated statements of operations and comprehensive income (loss). Unproved oil and gas property costs are transferred to proved oil and gas properties if the properties are subsequently determined to be productive or are assigned proved reserves. Unproved oil and gas properties are assessed periodically for impairment based on remaining lease terms, drilling results, reservoir performance, future plans to develop acreage, and other relevant factors.

    Depreciation, Depletion and Amortization of Oil and Gas Properties and Gathering Systems

        The quantities of estimated proved oil and gas reserves are a significant component of our calculation of depreciation, depletion and amortization expense, and revisions in such estimates may alter the rate of future expense. Holding all other factors constant, if reserves were revised upward or downward, earnings would increase or decrease, respectively.

        Oil and natural gas 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

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

        Depreciation, depletion and amortization rates are updated quarterly to reflect the addition of capital costs, reserve revisions (upwards or downwards) and additions, property acquisitions and/or property dispositions and impairments.

        Depreciation and amortization of other property, plant and equipment is calculated on a straight-line basis over the estimated useful life of the asset.

    Impairments

        The carrying value of unproved and proved oil and natural gas properties and gathering system assets are reviewed for impairment whenever events indicate that the carrying amounts for those assets may not be recoverable. Such indicators include changes in our business plans, changes in commodity prices leading to unprofitable performance, and, for oil and gas properties, significant downward revisions of estimated proved reserve quantities or significant increases in the estimated development costs.

        We compare expected undiscounted future cash flows at a depreciation, depletion and amortization group level to the unamortized capitalized cost of the asset. If the expected undiscounted future cash flows, based on our estimates of (and assumptions regarding) future oil and natural gas prices, operating costs, development expenditures, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income Approach described in the Fair Value Measurement Topic of the ASC based on estimated discounted net cash flows. Estimates of future cash flows require significant judgment, and the assumptions used in preparing such estimates are inherently uncertain. In addition, such assumptions and estimates are reasonably likely to change in the future. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices and (iv) a market-based weighted average cost of capital rate.

        Under ASC 360, we evaluate impairment of proved and unproved oil and gas properties on an area basis. On this basis, certain fields may be impaired because they are not expected to recover their entire carrying value from future net cash flows. The basis for future depletion, depreciation, amortization, and accretion will take into account the reduction in the value of the asset as a result of any accumulated impairment losses.

        When circumstances indicate that the gathering system properties may be impaired, Epsilon compares expected undiscounted future cash flows related to the gathering system to the unamortized capitalized cost of the asset. If the expected undiscounted future cash flows are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income Approach described in the Fair Value Measurement Topic of the ASC, which considers estimated discounted future cash flows.

    Derivative Financial Instruments

        Derivative financial instruments are used to hedge exposure to changes in commodity prices arising in the normal course of business. The principal derivatives that may be used are commodity price swap and collar contracts. The use of these instruments is subject to policies and procedures as approved by the Board. Derivative financial instruments are not traded for speculative purposes. No derivative contracts have been designated as cash flow hedges for accounting purposes. Derivative financial instruments are initially recognized at cost, if any, which approximates fair value. Subsequent to initial recognition, derivative financial instruments are recognized at fair value. The derivatives are valued on

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a mark-to-market valuation, and the gain or loss on re-measurement to fair value is recognized through the consolidated statements of operations and comprehensive income (loss). The estimated fair value of derivative instruments requires substantial judgment. These values are based upon, among other things, option pricing models, futures prices, volatility, time to maturity, and credit risk. The values reported in Epsilon's financial statements change as these estimates are revised to reflect actual results, changes in market conditions or other factors.

        The counterparties to our derivative instruments are not known to be in default on their derivative positions. However, we are exposed to credit risk to the extent of nonperformance by the counterparty in the derivative contracts. We believe credit risk is minimal and do not anticipate such nonperformance by such counterparties.

    Asset Retirement Obligation ("ARO")

        We recognize asset retirement obligations under ASC 410, Asset Retirement and Environmental Obligations. ASC 410 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. These obligations consist of estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and land restoration in accordance with applicable local, state and federal laws. The discounted fair value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and gas or gathering system asset. The initial recognition of an ARO fair value requires that management make numerous assumptions regarding such factors as the amounts and timing of settlements; the credit-adjusted risk-free discount rate; and the inflation rate. In periods subsequent to the initial measurement of an ARO, period-to-period changes are recognized in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Increases in the ARO liability due to the passage of time impact net income as accretion expense. The related capitalized cost, including revisions thereto, is charged to expense through DD&A over the life of the oil and gas property or gathering system asset.

    Income Taxes

        Tax regulations and legislation in the U.S. and Canada are subject to change and differing interpretations requiring judgment. Deferred tax assets are recognized when it is considered probable that deductible temporary differences will be recovered in future periods, which requires judgment. Deferred tax liabilities are recognized when it is considered probable that temporary differences will be payable to tax authorities in future periods, which requires judgment. Income tax filings are subject to audits and re-assessments. Changes in facts, circumstances, and interpretations of the standards may result in a material increase or decrease in our provision for income taxes.

        On December 22, 2017, the United States enacted tax reform legislation known as the Tax Cuts and Jobs Act (the "Act"), resulting in significant modifications to existing law. We are considering the accounting for the effects of the Act during 2017. Our financial statements for the nine months ended September 30, 2017, are not affected by the Act, which includes a reduction in the corporate tax rate from 35% to 21%.

    Recently Issued Accounting Standards

        The Corporation, an emerging growth company ("EGC"), has elected to take advantage of the benefits of the extended transition period provided for in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards which allows the Corporation to defer adoption of certain accounting standards until those standards would otherwise apply to private companies.

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        In January 2017, the FASB issued Accounting Standards Update (ASU) 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business" (ASU 2017-01), which clarifies the definition of a business to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 provides a screen to determine when a set of assets is not a business, requiring that when substantially all fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. A framework is provided to assist in evaluating whether both an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. No disclosures are required at transition and early adoption is permitted. Epsilon is evaluating ASU 2017-01 to determine the impact on its consolidated financial statements and related disclosures.

        In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). This ASU amends ASC Topic 230, Statement of Cash Flows, to clarify guidance on the classification and presentation of restricted cash in the Statement of Cash Flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and must be applied retrospectively. Early adoption is permitted. Epsilon expects to elect to adopt ASU 2016-18 as of December 31, 2017 on a retrospective basis, and as a result will include its restricted cash with cash and cash equivalents in the Statement of Cash Flows.

        In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments" (ASU 2016-15). ASU 2016-15 reduces existing diversity in practice by providing guidance on the classification of eight specific cash receipts and cash payments transactions in the Statement of Cash Flows. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. Epsilon does not intend to early adopt ASU 2016-15. Epsilon does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements and related disclosures.

        In June 2016, the FASB issued ASU 2016-13 "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans, and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowances for losses. The guidance also requires increased disclosures. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. ASU 2016-13 requires varying transition methods for the different categories of amendments. Epsilon does not expect ASU 2016-13 to have a significant impact on our financial statements.

        In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" (ASU 2016-09), which amends certain aspects of accounting for share-based payment arrangements. ASU 2016-09 revises or provides alternative accounting for the tax impacts of share-based payment arrangements, forfeitures and minimum statutory tax withholdings and prescribes certain disclosures to be made in the period the new standard is adopted. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018, and early application is permitted. Epsilon will adopt ASU 2016-09 effective January 1, 2018. There will be no impact to accumulated deficit with respect to excess tax benefits.

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        In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" (ASU 2016-02), which significantly changes accounting for leases by requiring that lessees recognize a right-of-use asset and a related lease liability representing the obligation to make lease payments, for all lease transactions with terms greater than one year. Additional disclosures about an entity's lease transactions will also be required. ASU 2016-02 defines a lease as "a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration." ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. Epsilon is reviewing the provisions of ASU 2016-02 to determine the impact on its consolidated financial statements and related disclosures.

        In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" (ASU 2015-17), which simplifies the presentation of deferred taxes in a classified balance sheet by eliminating the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. Instead, ASU 2015-17 requires that all deferred tax liabilities and assets be shown as noncurrent in a classified balance sheet. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018, early application is permitted. Epsilon adopted ASU 2015-17 effective January 1, 2017, but this will have no effect on the Balance Sheet as all of Epsilon's taxes are deferred and non-current.

        In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which will require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will supersede most current guidance related to revenue recognition when it becomes effective. The new standard also will require expanded disclosures regarding the nature, amount, timing and certainty of revenue and cash flows from contracts with customers. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers" ("ASU 2015-14"), which approved a one-year delay of the standard's effective date. In accordance with ASU 2015-14, the standard is effective for the Corporation for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The new standard permits adoption through the use of either the full retrospective approach or a modified retrospective approach. In May 2016, the FASB issued ASU 2016-11 which rescinds certain SEC guidance in the ASC, including guidance related to the use of the "entitlements" method of revenue recognition. Epsilon does not intend to early-adopt ASU 2014-09. Epsilon is currently determining the impacts of the new standard on our sales contract portfolio. Our approach includes performing a detailed review of key contracts representative of our business and comparing historical accounting policies and practices to the new standard. Also, in May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" (ASU 2016-12). The amendments under this ASU provide clarifying guidance in certain narrow areas and adds some practical expedients. These amendments are also effective at the same date that ASU 2014-09 is effective. Additionally, in March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)."

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    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 oil and natural gas can fluctuate widely and are influenced by numerous factors such as demand, production levels, and world political and economic events and the strength of the US dollar relative to other currencies. Should the price of oil or natural gas decline substantially, the value of our assets could fall dramatically, impacting our future options 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 for all or a portion of the principal balance for a period up to three months. To the extent that the interest rate is fixed, interest rate changes affect the instrument's fair market value but do not affect results of operations or cash flows. Conversely, for the portion of the credit agreement that has a floating interest rate, interest rate changes will not affect the fair market value but will affect future results of operations and cash flows.

        At September December 31, 2016, the outstanding principal balance under the credit agreement was $12.5 million, and the weighted average interest rate on the outstanding principal balance was 4.1%. At September 30, 2017, the carrying amount approximated fair market value. Assuming a constant debt level of $12.5 million, the cash flow impact resulting from a 100-basis-point change in interest rates during periods when the interest rate is not fixed would be $0.03 million over a 12-month time period. At December 31, 2016, the outstanding principal balance under the credit agreement was $12.6 million, and the weighted average interest rate on the outstanding principal balance was 4.36%. At December 31, 2016, the carrying amount approximated fair market value. Assuming a constant debt level of $12.6 million, the cash flow impact resulting from a 100-basis-point change in interest rates during periods when the interest rate is not fixed would be $0.12 million over a 12-month time period. Changes in interest rates did not affect the amount of interest paid on the convertible debentures, but changes in interest rates did affect the fair values of those notes.

    Commodity Contracts

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

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    Financial Statements and Supplementary Data

        Our consolidated balance sheet as of September 30, 2017, and the consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity and cash flows for the nine-month periods ended September 30, 2017 and 2016 included in this Circular are unaudited but in the opinion of our management, have been prepared in accordance with U.S. GAAP and contain all required disclosures.

    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        There were no changes in or disagreements with the registrant's accountants on accounting and financial disclosure during the year.

        On July 20, 2017, Epsilon engaged a new independent registered public accounting firm for the re-audit of the financial statements under US GAAP for the years ended December 31, 2015 and 2016. A new firm was engaged as we intend to redomicile in the United States and so need US accountants. The change of the Corporation's independent registered public accounting firm was approved unanimously by our Board of Directors. We continue to engage our Canadian public accounting firm to perform audits and reviews of our financial statements prepared in accordance with IFRS for purposes of maintaining our listing on the TSX.


DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        Directors and Executive Officers.    The names, ages, business experience (for at least the past five years) and positions of our directors and executive officers as of [    ·    ], 2018, are set out below. Our Board of Directors consisted of seven members at such date. All directors serve until the next annual meeting of shareholders or until their successors are elected or appointed and qualified. The Board of Directors appoints the executive officers annually.

Director or Executive Officer
  Age   Position with the Corporation
Michael Raleigh   61   Chief Executive Officer and Director
B. Lane Bond   59   Chief Financial Officer
Henry Clanton   55   Chief Operating Officer
John Lovoi   56   Chairman of the Board and Director
Matthew Dougherty   36   Director
Adrian Montgomery   44   Director
Ryan Roebuck   32   Director
Jacob Roorda   60   Director
Tracy Stephens   57   Director

    Biographies of Corporate Directors and Executive Officers.

        Michael Raleigh.    Mr. Raleigh has served as our chief executive officer and a director since July 2013. Before becoming our chief executive officer, he acted in various positions in the global oil and gas business for 35 years, primarily holding positions in the areas of reservoir development strategy, property valuations, completions and production. He has also been managing investments with Domain Energy Advisors since January 2005. We believe that Mr. Raleigh is qualified to serve as a member of our board of directors as a result of his background in engineering, including reserve, acquisitions and valuation engineering, and his experience in the development and appraisal of oil and gas fields.

        B. Lane Bond.    Mr. Bond has served as our chief financial officer since January 2012. He has served as the chief financial officer of Epsilon Energy USA and Epsilon Energy Midstream since January 2012. He has also been serving as the chief financial officer of Dewey Energy Holdings and Dewey Energy GP since March 2017. Mr. Bond's financial career spans over 30 years with extensive

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management and oil and gas experience domestically and internationally. Mr. Bond holds a Master of Business Administration from the University of Tulsa and a Bachelor of Science in Accounting from the University of Arkansas.

        Henry N. Clanton.    Mr. Clanton joined the Company as its Chief Operating Officer in January, 2017. He has over 30 years of experience in the upstream E&P sector. His experience includes financial and technical management over all phases of drilling, completions, production, and field operations. Before joining Epsilon, he spent 14 years with a private E&P start-up which he co-founded and served as a Managing Partner. Previous to that time Mr. Clanton worked with Schlumberger, ARCO Permian, and Coastal Management Corporation. He holds a MBA and a BS in Petroleum Engineering from Texas A&M University.

        John Lovoi.    Mr. Lovoi has been chairman of our board of directors since July 2013. Mr. Lovoi has been the managing partner of JVL Advisors, LLC, a private oil and gas investment advisor, since November 2002. He is the manager of Lobo Baya, LLC, a Director of Helix Energy Solutions Group, an operator of offshore oil and gas properties and production facilities and the Chairman of Dril-Quip, Inc., a provider of subsea, surface and offshore rig equipment. We believe that Mr. Lovoi is qualified to serve as a member of our board of directors as a result of his background in investment banking and equity research with an emphasis on the global oil and gas practice.

        Matthew Dougherty.    Mr. Dougherty has been a director since July 2013 and serves as the chair of the Compensation, Nominating and Governing Committee. He has been the Managing Director of Advisory Research, Inc., an investment management firm since June 2003, where he oversees the firm's investments in oil and natural gas producers. He has served as the Portfolio Manager of the Advisory Research Energy Fund, LP since 2005. We believe that Mr. Dougherty is qualified to serve as a member of our board of directors because of his background in oil and gas and finance industries.

        Adrian Montgomery.    Mr. Montgomery has been a director and a member of our Compensation, Nominating and Governance, and Audit Committees since July 2013. Mr. Montgomery has served as the president of Aquilini Entertainment since September 2017. Mr. Montgomery was the CEO of QM Environmental, one of Canada's largest environmental services companies, from February 2015 to September 2017. He was the President and Chief Information Officer of Tuckamore Capital Management Inc., a Toronto Stock Exchange—listed company that invests in private businesses from February 2012 to March 2016. He is also a member of the Young Presidents' Organization and a member of the New York bar. We believe that Mr. Montgomery is qualified to serve as a member of our board of directors because of his management experience in both public and private companies.

        Ryan Roebuck.    Mr. Roebuck has been a director since July 2011. He has also been serving as the chair of our Audit Committee, a member of our Compensation, Nomination and Governance Committee since July 2011, and a member of our Conflicts Committee since February 2017. Mr. Roebuck has been an investment manager of XDR Capital Group, a private investment firm located in Toronto, Canada, since August 2011. Mr. Roebuck has been the Chief Financial Officer of NextBlock Global Limited, a leading blockchain investment company since July 2017. He currently serves as a director of Apollo Acquisition Corporation and has served as a director and member of the Audit Committee of Cronos Group. He previously worked in investment banking as a research analyst covering North American equities. We believe that Mr. Roebuck is qualified to serve as a member of our board of directors as a result of his background in the investment banking industry as an investment manager and financial analyst.

        Jacob Roorda.    Mr. Roorda has been a director since March 2016. He has also been a member of our Audit Committee since March 2016, and the chair of our Conflicts Committee since February 2017. Mr. Roorda is the managing director and chief executive officer of Windward Capital Limited, a private investment company, serving from October 2011 to January 2015, and again since July 2017. He was

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the Chief Executive Officer of Todd Energy International Ltd. from November 2016 to July 2017, and the Chief Executive Officer of Todd Energy Canada Ltd. from January 2015 to November 2016. Mr. Roorda currently serves on the Audit and Reserves Committees of Petroshale Inc., Argosy Energy Inc. and Angle Energy Inc. He also currently serves on the boards of Wolf Minerals Limited, Northcliff Resources Ltd., South Louisiana Methanol GP LLC and TSL Methanol LLC. Mr. Roorda has also served on the board of Todd Energy Canada Ltd. He has been certified as a Professional Engineer by the Association of Professional Engineers and Geoscientists of Alberta since 1981. We believe that Mr. Roorda is qualified to serve as a member of our board of directors as a result of his experience in the oil and gas industry, including his oil and gas business development and engineering experience, and his financial industry experience.

        Tracy Stephens.    Mr. Stephens has been a director since May 2017. He has also been a member of our Conflicts Committee since February 2018. He is the founder of Westminster Advisors, a CEO advisory services company, and served as its Chief Executive Officer from January 2017 to October 2017. He previously employed by Resources Global Professionals, a large business consulting company, from July 2001 to December 2016, and was the Chief Operating Officer the last three years. We believe that Mr. Stephens is qualified to serve as a member of our board of directors as a result of his extensive experience with public companies.

    Corporate Governance Practices and Policies

        Our corporate governance practices and policies are administered by the board of directors and by committees of the board appointed to oversee specific aspects of our management and operations, pursuant to written charters and policies adopted by the board and such committees.

The Board of Directors

        The Board is committed to a high standard of corporate governance practices. The Board believes that this commitment is not only in the best interests of the shareholders but that it also promotes effective decision-making at the Board level. The Board is of the view that its approach to corporate governance is appropriate and complies with the objectives and guidelines relating to corporate governance set out in National Instrument 58-201 adopted by the Canadian securities administrators, or NI 58-201, as well as the governance requirements of the NASDAQ Capital Market. In addition, the Board monitors and considers for implementation the corporate governance standards that are proposed by various Canadian regulatory authorities or that are published by various non-regulatory organizations in Canada. The Board has also established a Compensation Committee and Nominating and Corporate Governance Committee and has adopted a Compensation Committee Charter, and Nominating and Corporate Governance Charter to ensure the objectives of NI 58-201 and the NASDAQ Capital Market are met.

        The Board is currently composed of seven directors who provide us with a wide diversity of business experience. Our Board has determined that Messrs. Jacob Roorda, Tracy Stephens, Adrian Montgomery and Ryan Roebuck are independent in accordance with the listing requirements of the NASDAQ Capital Market, representing over 50% of the Board. Each of the independent directors has no direct or indirect material relationship with us, including any business or other relationship, that could reasonably be expected to interfere with the director's ability to act with a view to our best interests or that could reasonably be expected to interfere with the exercise of the director's independent judgment.

        Mr. Lovoi is the Managing Partner of JVL Advisors, LLC, owner of 19.99% of our common shares. Mr. Dougherty is the Managing Director of Advisory Research, Inc., owner of 12.04% of our common shares. Mr. Raleigh is our Chief Executive Officer.

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        The Board held nine meetings during 2016, and four meetings during the first three quarters of 2017. All Board members were in attendance at all meetings. The Board meetings held in 2017 were conducted with open and candid discussions. As such, the independent directors did not hold any separate meetings, other than Audit and Compensation, Nominating and Corporate Governance Committee meetings that excluded directors who were not independent. The chairman of the Board is not an independent director. The independent members of the Board have the ability to meet on their own and are authorized to retain independent financial, legal and other experts as required whenever, in their opinion, matters come before the Board that require an independent analysis by the independent members of the Board. The Board intends to hold at least four regular meetings each year, as well as additional meetings as required. The Board has not established any required attendance levels for the Board and committee meetings. In setting the regular meeting schedule, care is taken to ensure that meeting dates are set to accommodate directors' schedules so as to encourage full attendance.

        The Board has stewardship responsibilities, including responsibilities with respect to oversight of our investments, management of the Board, monitoring of our financial performance, financial reporting, financial risk management and oversight of policies and procedures, communications and reporting and compliance. In carrying out its mandate, the Board meets regularly and a broad range of matters are discussed and reviewed for approval. These matters include overall plans and strategies, budgets, internal controls and management information systems, risk management as well as interim and annual financial and operating results. The Board is also responsible for the approval of all major transactions, including property acquisitions, property divestitures, equity issuances and debt transactions, if any. The Board strives to ensure that our corporate actions correspond closely with the objectives of its shareholders. The Board will meet at least once annually to review in depth our strategic plan and review our available resources required to carry out our growth strategy and to achieve its objectives. The mandate of the Board is to be reviewed by the Board annually.

        Position Descriptions.    The Board has outlined the responsibilities in respect to our Chief Executive Officer, or CEO. The Board and CEO do not have a written position description for the CEO; however, the CEO's principal duties and responsibilities are planning our strategic direction, providing leadership, acting as our spokesperson, reporting to shareholders, and overseeing our executive management in particular with respect to operations and finance.

        The charter for each of the Board committees outlines the duties and responsibilities of the members of each of the committees, including the chair of such committees. See "Board Committees" below.

        Orientation and Continuing Education.    We have not adopted a formalized process of orientation for new Board members. However, all directors have been provided with a base line of knowledge about us that serves as a basis for informed decision making. This includes a combination of written material, in person meetings with our senior management, site visits and other briefings and training, as appropriate.

        Directors are kept informed as to matters affecting, or that may affect, our operations through reports and presentations at the quarterly Board meetings. Special presentations on specific business operations are also provided to the Board.

        Ethical Business Conduct and Whistleblower Policy.    Our Code of Ethics and Whistleblower Policy are available on our website at http://www.epsilonenergyltd.com/. Each director is expected to disclose all actual or potential conflicts of interest and refrain from voting on matters in which such director has a conflict of interest. In addition, a director must recuse himself from any discussion or decision on any matter of which the director is precluded from voting as a result of a conflict of interest. The Board has reviewed and approved a disclosure and insider trading policy for us, in order to promote

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consistent disclosure practices aimed at informative, timely and broadly disseminated disclosure of material information to the market in accordance with applicable securities legislation. The disclosure policy promotes, among other things, the disclosure and reporting of any serious weaknesses which may affect the financial stability and assets of us and our operating entities.

        National Instrument 52-110 adopted by the Canadian securities administrators, the listing standards of the Toronto Stock Exchange [and the listing standards of the NASDAQ Capital Market] require the Audit Committee to establish formal procedures for (a) the receipt, retention, and treatment of complaints received by us and our subsidiaries regarding accounting, internal accounting controls, or auditing matters and (b) the confidential, anonymous submission by our consultants or employees of concerns regarding questionable accounting or auditing matters. We are committed to achieving compliance with all applicable securities laws and regulations, accounting standards, accounting controls and audit practices. In addition, we post on our website all disclosures that are required by law or the listing standards of the NASDAQ Capital Market concerning any amendments to, or waivers from, any provision of the code.

        Assessments.    The Board does not conduct regular assessments of the Board, its committees or individual directors, however, the Board does periodically review and satisfy itself at meetings that the Board, its committees and its individual directors are performing effectively.

        Board Diversity.    Our Compensation, [Nominating and Corporate Governance] Committee is responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current members), the nominating and corporate governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies, appointing) such candidates, will take into account many factors, including the following:

    personal and professional integrity, ethics and values;

    experience in corporate management, such as serving as an officer or former officer of a publicly held company;

    experience as a board member or executive officer of another publicly held company;

    strong finance experience;

    diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;

    diversity of background and perspective, including, but not limited to, with respect to age, gender, race, place of residence and specialized experience;

    experience relevant to our business industry and with relevant social policy concerns; and

    relevant academic expertise or other proficiency in an area of our business operations.

Currently, our Board evaluates each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

    Board Committees

        The Board has three committees. The committees are the Audit Committee, the Compensation, Nominating and Corporate Governance Committee, and the Conflicts Committee. Each committee has been constituted with independent directors.

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        Audit Committee.    The Audit Committee consists of Ryan Roebuck (Chairman), Jacob Roorda, and Adrian Montgomery. All members of the Audit Committee are independent and financially literate under the applicable rules and regulations of the SEC and the NASDAQ Capital Market.

        The Audit Committee meets at least on a quarterly basis to review and approve our consolidated financial statements before the financial statements are publicly filed.

        The Audit Committee reviews our interim unaudited consolidated financial statements and annual audited consolidated financial statements and certain corporate disclosure documents including the Annual Information Form, Management's Discussion and Analysis, and annual and interim earnings press releases before they are approved by the Board. The Audit Committee reviews and makes a recommendation to the Board in respect of the appointment and compensation of the external auditors and it monitors accounting, financial reporting, control and audit functions. The Audit Committee meets to discuss and review the audit plans of external auditors and is directly responsible for overseeing the work of the external auditors with respect to preparing or issuing the auditors' report or the performance of other audit, review or attest services, including the resolution of disagreements between management and the external auditors regarding financial reporting. The Audit Committee questions the external auditors independently of management and reviews a written statement of its independence. The Audit Committee must be satisfied that adequate procedures are in place for the review of our public disclosure of financial information extracted or derived from its consolidated financial statements and it periodically assesses the adequacy of those procedures. The Audit Committee must approve or pre-approve, as applicable, any non-audit services to be provided to us by the external auditors. In addition, it reviews and reports to the Board on our risk management policies and procedures and reviews the internal control procedures to determine their effectiveness and to ensure compliance with our policies and avoidance of conflicts of interest. The Audit Committee has established procedures for dealing with complaints or confidential submissions which come to its attention with respect to accounting, internal accounting controls or auditing matters. To date, neither the Board nor the Audit Committee has formally assessed any individual director with respect to their effectiveness and contribution to us in their capacity as a director. Instead, members of the Board have relied on informal conversations among themselves to adequately cover such matters.

        The Audit Committee operates under a written charter that satisfies the applicable standards of the SEC and The NASDAQ Capital Market. A copy of the Audit Committee Charter can be found on our website at www.epsilonenergyltd.com.

        Compensation, Nominating and Corporate Governance Committee.    The Compensation, Nominating and Corporate Governance Committee comprises Matthew Dougherty (chairman), Adrian Montgomery and Ryan Roebuck, two of whom, Messrs. Montgomery and Roebuck, are independent directors. Before July 2013, we had separate compensation committee and nominating and corporate governance committee. Both committees' mandates were approved by the Board on December 10, 2009. In July 2013, the Board consolidated the functions of the two committees for efficiency purposes.

        The Compensation, Nominating and Corporate Governance Committee's mandate is to:

    1.
    Assist and advise the Board regarding its responsibility for oversight of our compensation policy; provided that all determinations on officer compensation will be subject to review and approval by the Board;

    2.
    Study and evaluate appropriate compensation mechanisms and criteria;

    3.
    Develop and establish appropriate compensation policies and practices for the Board and our senior management, including our security-based compensation arrangements;

    4.
    Evaluate senior management;

    5.
    Serve in an advisory capacity on organizational and personnel matters to the Board;

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    6.
    Assist the Board by identifying individuals qualified to serve on the Board and its committees;

    7.
    Recommend to the Board the director nominees for the next annual meeting;

    8.
    Recommend to the Board members and chairpersons for each committee;

    9.
    Develop and recommend to the Board and review from time to time, a set of corporate governance principles and monitor compliance with such principles; and

    10.
    Serve in an advisory capacity on matters of governance structure and the conduct of the Board.

        These responsibilities include reporting and making recommendations to the Board for their consideration and approval. Corporate governance also relates to the activities of the Board, the members of which are elected by and are accountable to the shareholders, and takes into account the role of the individual members of management who are appointed by the Board and who are charged with the day-to-day management of the Corporation. The Board is committed to sound corporate governance practices, which are both in the interest of its shareholders and contribute to effective and efficient decision making.

        The Compensation, Nominating and Corporate Governance Committee operates under a written charter that satisfies the applicable standards of the SEC and The NASDAQ Capital Market. A copy of such charter can be found on our website at www.epsilonenergyltd.com.

        Conflicts Committee.    The Conflicts Committee comprises Jacob Roorda (Committee Chairman), Tracy Stephens and Ryan Roebuck, all of whom are independent directors.

        The Conflicts Committee has the power to advise the Board with respect to any matters or issues of concern to the Conflicts Committee in connection with any corporate opportunity and the interests of a related or conflicted party that the Conflicts Committee considers necessary or advisable.

Communications to the Board.

        Shareholders may communicate directly with our Board of Directors or any director by writing to the board or a director in care of the corporate secretary at Epsilon Energy Ltd., 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060, or by faxing their written communication to AeRayna Flores at (281) 668-0985. Shareholders may also communicate to the Board of Directors or any director by calling Ms. Flores at (281) 670-0002. Ms. Flores will review any communication before forwarding it to the board or director, as the case may be.

Employment Agreements

        The named executive officers, excluding Michael Raleigh, have executed employment contracts with the Corporation. Mr. Henry Clanton's employment contract calls for a base pay of US$250,000 per year and contains provisions for severance payments equal to six-months of current annual salary in the event that a change of control occurred. Mr. B. Lane Bond's employment contract calls for a base pay of US$200,000 per year and contains provisions for severance payments equal to six-months of current annual salary in the event that a change of control occurred.

        Mr. Michael Raleigh does not take a salary for his efforts with Epsilon and as such does not have an employment contract.

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EXECUTIVE COMPENSATION

    Summary Compensation Table

        In April 2017 the Board amended and restated the 2007 Plan, which is currently called the Amended and Restated 2017 Stock Option Plan. The following table sets out information concerning the compensation paid to our principal executive officer and our two most highly compensated executive officers other than our principal executive officer, or our named executive officers for the two years ended December 31, 2016 and 2015. Compensation amounts in the following table are in U.S. dollars unless stated otherwise.

 
   
   
  Share-based
awards (d)
  Option- based
awards (e)
  Non-equity incentive
plan compensation
($) (f)
   
   
   
 
 
   
   
   
  Bonuses
and
director fees
($) (h)
   
 
Name and principal position
(a)
  Year
(b)
  Salary
($) (c)
  Share-based
awards
($) (d)
  Option-based
awards
($) (e)
  Annual
incentive
plans (f1)
  Long-term
Incentive
Plans (f2)
  Pension
value
($) (g)
  Total
compensation
($) (i)
 

Michael Raleigh, CEO(1)

    2017   $   $ 775,000   $   $   $   $   $   $ 775,000  

    2016   $   $   $   $   $   $   $   $  

    2015   $   $   $ 188,830   $         $   $   $ 188,830  

Henry Clanton, COO(2)

    2017   $ 250,000   $   $ 68,627   $   $   $   $   $ 318,627  

    2016   $   $   $   $   $   $   $   $  

    2015   $   $   $   $   $   $   $   $  

B. Lane Bond, CFO(3)

    2017   $ 200,000   $   $ 66,079   $   $   $   $ 70,000   $ 336,079  

    2016   $ 198,077   $   $   $   $   $   $ 50,000   $ 248,077  

    2015   $ 150,000   $   $ 84,974   $   $   $   $ 50,000   $ 284,974  

(1)
Mr. Raleigh is currently working without a salary from us; however, he was granted options during 2015. The dollar amount of these options in column (e) reflect values derived from using the Trinomial Hull White option pricing to value option-based awards. A summary of the options granted:

      2017—No stock options were granted.

      2016—No stock options were granted.

      2015—Options to purchase 100,000 Common Shares at a price of $3.67 per Common Share with a term of three years and fully vested as of 6/05/2018.

(2)
Mr. Henry Clanton was hired as our chief operating officer in January 2017 with a base salary of US$250,000.

      2017—Options to purchase 60,000 Common Shares at a price of $3.27 per Common Share with a term of three years and fully vested as of 1/09/2020.

(3)
Mr. Bond's current base salary is $200,000. The dollar amounts in column (e) reflect values derived from using the Trinomial Hull White option pricing to value option-based awards. A summary of the options granted by year follows:

      2017—Options to purchase 55,000 Common Shares at a price of $3.40 per Common Share with a term of three years and fully vested as of 1/26/2020.

      2016—No stock options were granted.

      2015—Options to purchase 45,000 Common Shares at a price of $3.67 per Common Share with a term of three years and fully vested as of 6/05/2018.

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    Incentive Plan Awards for Named Executive Officers

        Outstanding Share-Based Awards and Option-Based Awards as of January 31, 2018 are as follows:

Option-based Awards   Share-based Awards  
Name (a)
  Number of
securities
underlying
unexercised
options (#)
(b)
  Option
exercise
price ($) (c)
  Option
expiration
date (d)
  Value of
unexercised
in-the-money
options ($)
(e)
  Number of
shares or units
of shares that
have not
vested
(#) (f)
  Market or
payout value
of share-based
awards that
have not
vested ($) (g)
 

Michael Raleigh

    100,000   $ 3.67   06/05/22   $     250,000   $ 775,000  

Henry Clanton

    60,000   $ 3.27   01/09/24   $       $  

B. Lane Bond

    45,000   $ 3.67   06/05/22   $       $  

    55,000   $ 3.40   01/26/24   $       $  

    Incentive Plan Awards—Value Vested or Earned for Named Executive Officers

        The values of incentive plan awards that were vested or earned during the year ended December 31, 2017 are as follows:

Name (a)
  Option-based awards—Value
vested during the year
($) (b)
  Share-based awards—Value
vested during the year
($) (c)
  Non-equity incentive plan
compensation—Value earned
during the year
($) (d)
 

Michael Raleigh

    N/A     N/A     N/A  

Henry Clanton

    N/A     N/A     N/A  

B. Lane Bond

    N/A     N/A     N/A  

        We have adopted the 2018 Plan as an incentive-based stock option award plan applicable to all named executive officers and employees.

    Termination and Change of Control Benefits

        All of our named executive officers have entered into employment contracts with us.

        Mr. B. Lane Bond's employment contract calls for a base pay of US$200,000 per year and contains provisions for severance payments equal to six months of current annual salary amount in the event of a change of control.

        Mr. Henry Clanton's employment contract calls for a base pay of US$250,000 per year and contains provisions for severance payments equal to six months of current annual salary amount in the event of a change of control.

        Change of control is defined as any event whereby any person acquires at least 50% of the Company's stock or if a group of shareholders causes at least 50% of the board members to change.

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DIRECTOR COMPENSATION

        The following table contains compensation earned in the nine months ended September 30, 2017 by our independent directors who are not named executive officers:

Amounts Shown in Cdn$
Name (a)
  Fees earned
($) (b)
  Share-based
awards ($) (c)
  Option-based
($) (d)
  Non-equity
incentive plan
compensation
($) (e)
  Pension
value ($) (f)
  All other
compensation
($) (g)
  Total
($) (h)
 

John Lovoi*

  $   $ 43,800   $   $   $   $   $ 43,800  

Michael Raleigh*

  $   $   $   $   $   $   $  

Matthew Dougherty*

  $   $   $   $   $   $   $  

Adrian Montgomery

  $ 38,000   $ 43,800   $   $   $   $   $ 81,800  

Jacob Roorda

  $ 35,250   $ 43,800   $ 28,595   $   $   $   $ 107,645  

Ryan Roebuck

  $ 40,750   $ 43,800   $   $   $   $   $ 84,550  

Tracy Stephens

  $ 26,666   $ 43,800   $   $   $   $   $ 70,466  

*
The three directors who are not independent, Messrs. Lovoi, Raleigh and Dougherty, choose not to receive payment for their service as board members.

        On a biannual basis, we compensate each director for services rendered (unless a director elects not to receive payment) and reimburse reasonable out-of-pocket travel expenses when incurred.

        For the four months ended April 30, 2017, the independent directors were compensated in cash for their services as follows:

Annual Retainer Fee (Cdn)

       

Board member fees

  $ 27,000  

Committee chair fees (except audit)

  $  

Audit committee chair fee

  $ 7,500  

Committee membership (except audit)

  $ 5,000  

Audit committee membership

  $ 4,000  

Attendance Fees (Cdn)

   
 
 

Chairman of the Board

  $  

Director

  $ 12,000  

Committee chair fees (except audit)

  $  

Audit committee chairman

  $ 6,000  

Committee member (except audit)

  $ 3,000  

Audit committee member

  $ 4,000  

        On April 13, 2017, the Board of Directors revised the requirements for compensation of independent directors. As of May 1, 2017, independent board member compensation is fixed at an annual fee of Cdn $40,000, paid semi-annually in July and January.

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    Incentive Plan Awards—Value Vested or Earned During the Year for Directors (Other Than Named Executive Officers)

        Outstanding Share-Based Awards and Option-Based Awards as of December 31, 2017 are as follows:

 
   
   
   
   
  Share-based Awards  
Option-based Awards  
   
  Market or
payout value
of share-based
awards that
have not
vested
($)
(g)
 
Name
(a)
  Number of
securities
underlying
unexercised
options
(#)
(b)
  Option
exercise
price
($)
(c)
  Option
expiration
date
(d)
  Value of
unexercised
in-the-money
options
($)
(e)
  Number of
shares or units
of shares that
have not
vested
(#)
(f)
 

John Lovoi

    20,000   $ 3.67     6/5/2022   $     15,000   $ 43,800  

Adrian Montgomery

    20,000   $ 3.67     6/5/2022   $     15,000   $ 43,800  

Ryan Roebuck

    20,000   $ 3.67     6/5/2022   $     15,000   $ 43,800  

Jacob Roorda

    25,000   $ 3.27     1/9/2024   $     15,000   $ 43,800  

Tracy Stephens

      $         $     15,000   $ 43,800  

        The values of incentive plan awards that were vested or earned during the year ended December 31, 2017are as follows:

Name
(a)
  Option-based
awards—Value
vested during
the year
($)
(b)
  Share-based
awards—Value
vested during
the year
($)
(c)
  Non-equity
incentive plan
compensation—Value
earned during
the year
($)
(d)

John Lovoi

  N/A   N/A   N/A

Adrian Montgomery

  N/A   N/A   N/A

Ryan Roebuck

  N/A   N/A   N/A

Jacob Roorda

  N/A   N/A   N/A

    Directors and Officers Liability Insurance

        We maintain directors' and officers' liability insurance for the protection of our directors and officers against liability incurred by them in their capacities as our directors and officers. The policy provides an aggregate limit of liability of Cdn$20,000,000 with a deductible to us of Cdn$25,000 per loss. The annual premium for the Directors' and Officers' liability insurance was Cdn$50,000 and is renewed annually. The premium is not allocated between Directors and Officers as separate groups.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

        The table set forth below is information with respect to beneficial ownership of common shares as of December 31, 2017, by our named executive officers, by each of our directors, by all our current executive officers and directors as a group, and by each person known to us who beneficially own 5% or more of the outstanding common shares. To our knowledge, each person named in the table has sole voting and investment power with respect to the common shares identified as beneficially owned.

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        Unless otherwise indicated, the address of each of the individuals named below is c/o Epsilon Energy Ltd., 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060.

Name of Beneficial Owner
  Number of
Shares of
Common Stock
  Percentage of
Common Stock
Owned
 

5% Stockholders

             

Advisory Research, Inc.(1)

    6,621,026     12.04 %

JVL Advisors, LLC(2)

    10,996,837     19.99 %

Oakview Capital Management, L.P.(3)

    6,319,465     11.49 %

Azvalor Asset Management SGIIC SA(4)

    10,126,974     18.41 %

Named Executive Officers and Directors

   
 
   
 
 

Matthew Dougherty(5)

    6,816,326     12.39 %

Jacob Roorda(6)

    108,300     *  

Bruce Lane Bond(7)

    183,300     *  

John Lovoi(8)

    11,010,137     20.01 %

Ryan Roebuck(9)

    127,350     *  

Tracy Stephens(10)

    0     *  

Adrian Montgomery(11)

    13,300     *  

Henry Clanton(12)

    20,000     *  

Michael Raleigh(13)

    100,000     *  

All executive officers and directors as a group (9 persons)(14)

    18,378,713     33.28 %

*
Indicates beneficial ownership of less than 1% of outstanding shares.

(1)
The address of Advisory Research, Inc., or ARI, is 180 North Stetson Avenue, Chicago, Illinois 60601. Matthew Dougherty, a member of our board of directors, is a managing director of ARI.

(2)
The address of JVL Advisors, LLC, or JVL, is 10000 Memorial Drive, Houston, Texas 77024. John Lovoi, the chairman of our board of directors, is the managing partner of JVL and thus may be deemed to beneficially own the shares held by JVL.

(3)
The address of Oakview Capital Management, L.P. is 3879 Maple Avenue, Suite 300, Dallas, Texas 75219.

(4)
The address of Azvalor Asset Management SGIIC SA is Paseo de la Castellana 10, 3rd, Madrid, 28046, Spain.

(5)
Includes the shares held by ARI and 195,300 shares held by Mr. Dougherty individually. Mr. Dougherty is a member of our board of directors.

(6)
Mr. Roorda is a member of our board of directors. Includes 50,000 shares held by Mr. Roorda's spouse.

(7)
Includes 48,300 shares issuable upon the exercise of options exercisable within 60 days of December 31, 2017. Mr. Bond is our chief financial officer.

(8)
Includes the shares held by JVL. Includes 13,300 shares issuable upon the exercise of options held by Mr. Lovoi and exercisable within 60 days of December 31, 2017. Mr. Lovoi is the chairman of our board of directors.

(9)
Includes 13,300 shares issuable upon the exercise of options exercisable within 60 days of December 31, 2017. Mr. Roebuck is a member of our board of directors.

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(10)
Mr. Stephens is a member of our board of directors.

(11)
Includes 13,300 shares issuable upon the exercise of options exercisable within 60 days of December 31, 2017. Mr. Montgomery is a member of our board of directors.

(12)
Includes 20,000 shares issuable upon the exercise of options exercisable within 60 days of December 31, 2017. Mr. Clanton is our chief operating officer.

(13)
Includes 100,000 shares issuable upon the exercise of options exercisable within 60 days of December 31, 2017. Mr. Raleigh is our chief executive officer and a member of our board of directors.

(14)
Includes 74,900 shares issuable upon the exercise of options exercisable within 60 days of December 31, 2017.

        Changes in Control.    We do not know of any arrangement, the operation of which may at a subsequent date result in a change in control of us.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Since the beginning of fiscal 2016, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeded or exceeds $120,000 and in which any of our directors, executive officers, holders of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest, except for the compensation and other arrangements described in "Executive Compensation" and "Director Compensation" elsewhere in this Circular and the transactions described below.

Indemnification of Officers and Directors

        As permitted by Delaware law, our proposed certificate of incorporation will provides that, to the fullest extent permitted by Delaware law, no director will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Pursuant to Delaware law such protection would be not available for liability:

    for any breach of a duty of loyalty to us or our stockholders;

    for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

    for any transaction from which the director derived an improper benefit; or

    for an act or omission for which the liability of a director is expressly provided by an applicable statute, including unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law.

        Our proposed certificate of incorporation provides that if Delaware law is amended after the approval by our stockholders of the amended and restated certificate of incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law. In addition, the proposed bylaws of Epsilon provide that we are required to advance expenses to our directors and officers as incurred in connection with legal proceedings against them for which they may be indemnified and that the rights conferred in the amended and restated bylaws are not exclusive.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

        Fees paid to BDO USA, LLP for audit services during the year ended December 31, 2017 were $414,335.

FORWARD-LOOKING STATEMENTS

        From time to time, we may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and forward-looking information within the meaning of applicable Canadian securities legislation. We generally identify forward-looking statements and information with the words "plan," "expect," "anticipate," "estimate," "may," "will," "should" and similar expressions. We base these forward-looking statements and information on our current expectations and projections about future events.

        We caution readers that a variety of factors could cause our actual results to differ materially from those discussed in, or implied by, these forward-looking statements and information. These risks and uncertainties, many of which are beyond our control, include, but are not limited to, the risk factors described in the section titled "Risk Factors" on page 22. Many factors could cause our actual results, performance or achievements to be materially different from any results, performance or achievements that may be expressed or implied by such forward-looking statements, including those set forth under

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the headings "Risk Factors" and "Description of the Business." Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements or information prove incorrect, actual results may vary materially from those described in this Circular as intended, planned, anticipated, believed, estimated or expected. We do not intend, and do not assume, any obligation to update these forward-looking statements or information.


THE SPECIAL MEETING

Solicitation of Proxies

        This Circular is forwarded to our Shareholders in connection with the solicitation of proxies by our management for use at our Special Meeting to be held on [DATE], 2018, at [TIME] (Houston, Texas time) at our executive offices, 16701 Greenspoint Park Drive, Suite 195, Houston, Texas and at any postponements or adjournments thereof for the purposes set forth in the Notice of Special Meeting, which accompanies this Circular. This Circular is dated [DATE], 2018, and is first being mailed to shareholders on or about [DATE], 2018.

        The Record Date for the determination of Shareholders entitled to receive notice of the Special Meeting is [DATE], 2018. In accordance with the provisions of the ABCA, we will prepare a list of the Shareholders as of the Record Date, all of whom will be entitled to vote their common shares to approve the special resolution for the domestication and the certificate of incorporation of Epsilon Energy, Inc. (Proposal 1 in the Notice of Special Meeting), the adoption of the 2018 Plan (Proposal 2 in the Notice of Special Meeting) and any other matter properly submitted for Shareholder vote at the Special Meeting.

        It is planned that the solicitation will be initially by mail, but proxies may also be solicited by our employees by telephone or email. In accordance with National Instrument 54-101—Communication With Beneficial Owners of Securities of a Reporting Issuer, or NI 54-101, arrangements have been made with brokerage houses and other intermediaries, clearing agencies, custodians, nominees and fiduciaries to forward solicitation materials to the beneficial owners of the common shares held of record by such persons and we may reimburse such persons for reasonable fees and disbursements incurred by them in doing so. The costs thereof will be borne by us.

        No person is authorized to give any information or to make any representations other than those contained in this Circular and, if given or made, such information or representations should not be relied upon as having been authorized by us. The delivery of this Circular shall not, under any circumstances, create an implication that there has not been any change in the information set forth herein since the date of this Circular. Except as otherwise stated, the information contained in this Circular is given as of [DATE], 2018.

Advice to Beneficial Shareholders

        The information set forth in this section is of significant importance to many Shareholders, as a substantial number of Shareholders do not hold common shares in their own name. Shareholders who hold their common shares through their brokers, intermediaries, trustees or other persons, or who otherwise do not hold their common shares in their own name (referred to in this Circular as "Beneficial Shareholders") should note that only proxies deposited by Shareholders who appear on the records maintained by the Corporation's registrar and transfer agent as registered holders of common shares will be recognized and acted upon at the Special Meeting. If common shares are listed in an account statement provided to a Beneficial Shareholder by a broker, those common shares will, in all likelihood, not be registered in the shareholder's name. Such common shares will more likely be registered under the name of the shareholder's broker or an agent of that broker. In Canada, the vast majority of such shares are registered under the name of CDS & Co. (the registration name for The Canadian Depositary for Securities, which acts as nominee for many Canadian brokerage firms).

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Common shares held by brokers (or their agents or nominees) on behalf of a broker's client can only be voted (for or against resolutions) at the direction of the Beneficial Shareholder. Without specific instructions, brokers and their agents and nominees are prohibited from voting shares for the broker's clients. Therefore, each Beneficial Shareholder should ensure that voting instructions are communicated to the appropriate person well in advance of the Special Meeting.

        Existing regulatory policy requires brokers and other intermediaries to seek voting instructions from Beneficial Shareholders in advance of shareholders' meetings. The various brokers and other intermediaries have their own mailing procedures and provide their own return instructions to clients, which should be carefully followed by Beneficial Shareholders in order to ensure that their common shares are voted at the Special Meeting. The form of proxy supplied to a Beneficial Shareholder by its broker (or the agent of the broker) is substantially similar to the Instrument of Proxy provided directly to registered shareholders by the Corporation. However, its purpose is limited to instructing the registered shareholder (i.e., the broker or agent of the broker) how to vote on behalf of the Beneficial Shareholder. The vast majority of brokers now delegate responsibility for obtaining instructions from clients to Broadridge Financial Solutions, Inc. ("Broadridge") in Canada. Broadridge typically prepares a machine-readable voting instruction form, mails those forms to Beneficial Shareholders and asks Beneficial Shareholders to return the forms to Broadridge, or otherwise communicate voting instructions to Broadridge (by way of the Internet or telephone, for example). Broadridge then tabulates the results of all instructions received and provides appropriate instructions respecting the voting of shares to be represented at the Special Meeting. A Beneficial Shareholder who receive a Broadridge voting instruction form cannot use that form to vote common shares directly at the Special Meeting. The voting instruction forms must be returned to Broadridge (or instructions respecting the voting of common shares must otherwise be communicated to Broadridge) well in advance of the Special Meeting in order to have the common shares voted. If you have any questions respecting the voting of common shares held through a broker or other intermediary, please contact that broker or other intermediary for assistance.

        Although a Beneficial Shareholder may not be recognized directly at the Special Meeting for the purposes of voting common shares registered in the name of his broker, a Beneficial Shareholder may attend the Special Meeting as proxyholder for the registered shareholder and vote the common shares in that capacity. Beneficial Shareholders who wish to attend the Special Meeting and indirectly vote their common shares as proxyholder for the registered shareholder, should enter their own names in the blank space on the form of proxy provided to them and return the same to their broker (or the broker's agent) in accordance with the instructions provided by such broker.

        All references to Shareholders in this Circular and the accompanying Instrument of Proxy and Notice of Meeting are to registered Shareholders unless specifically stated otherwise.

        This Circular and the accompanying Instrument of Proxy and Notice of Meeting may have been sent directly by the Corporation, rather than through an intermediary, to non-objecting beneficial owners under NI 54-101. These securityholder materials are being sent to both registered and non-registered owners of the securities. If you are a non-registered owner, and the Corporation or its agent has sent these materials directly to you, your name and address and information about your holdings of securities, have been obtained in accordance with applicable securities regulatory requirements from the intermediary holding on your behalf. By choosing to send these materials to you directly, the Corporation (and not the intermediary holding on your behalf) has assumed responsibility for (i) delivering these materials to you, and (ii) executing your proper voting instructions. Please return your voting instructions as specified in the request for voting instructions.

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Voting of Proxies

        Each Shareholder may instruct his proxy how to vote his common shares by completing the blanks on the Instrument of Proxy. All common shares represented at the Special Meeting by properly executed proxies will be voted or withheld from voting (including the voting on any ballot), and where a choice with respect to any matter to be acted upon has been specified in the Instrument of Proxy, the common shares represented by the proxy will be voted in accordance with such specification. In the absence of any such specification as to voting on the Instrument of Proxy, the Management Designees (as defined below), if named as proxy, will vote in favour of the matters set out therein. In the absence of any specification as to voting on any other form of proxy, the common shares represented by such form of proxy will be voted in favour of the matters set out therein.

        The enclosed Instrument of Proxy confers discretionary authority upon the Management Designees, or other persons named as proxy, with respect to amendments to or variations of matters identified in the Notice of Meeting and any other matters which may properly come before the Special Meeting. As of the date hereof, the Corporation is not aware of any amendments to, variations of or other matters which may come before the Special Meeting. In the event that other matters come before the Special Meeting, then the Management Designees intend to vote in accordance with the judgment of management of the Corporation.

Our Common Shares

        Our Shareholders are entitled to one vote at all meetings of Shareholders for each common share held as of the Record Date for the Special Meeting. As of the Record Date for the Special Meeting, 55,045,705 common shares were issued and outstanding.

        Pursuant to the ABCA, the holders of at least two thirds of our common shares present at the Special Meeting in person or by proxy (and assuming a quorum of our outstanding common shares are represented at the Special Meeting in person or by proxy) must vote to approve the domestication proposal. A quorum will be present at the Special Meeting if there are at least two persons present holding or representing by proxy in the aggregate not less than 5% of the common shares entitled to be voted at the Special Meeting.

Appointment and Revocation of Proxies

        Michael Raleigh and, failing him, B. Lane Bond, have been appointed by the Board of Directors to serve as proxies for the Shareholders at the Special Meeting (the "Management Designees"). Shareholders have the right to appoint persons, other than Mr. Raleigh and Mr. Bond, who need not be Shareholders, to represent them at the Special Meeting. To exercise this right, the Shareholder may insert the name of the desired person in the blank space provided in the form of proxy accompanying this Circular or may submit another form of proxy.

        Proxies must be deposited in the manner and by the time specified in the Notice of Special Meeting.

        Common shares represented by properly executed proxies will be voted by the persons appointed to serve as proxies for the Shareholders on any ballot that may be called for, unless the Shareholder has directed otherwise, for the proposal to approve the special resolution authorizing the change of jurisdiction and approval of the certificate of incorporation of Epsilon Energy, Inc. (Proposal 1 in the Notice of Special Meeting) and the adoption of the 2018 Plan (Proposal 2 in the Notice of Special Meeting).

        Each form of proxy confers discretionary authority with respect to amendments or variations to matters identified in the Notice of Special Meeting to which the proxy relates and other matters that may properly come before the Special Meeting. Management knows of no matters to come before the

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Special Meeting other than the matters referred to in the Notice of Special Meeting. However, if matters that are not known to management should properly come before the Special Meeting, the proxies will be voted on such matters in accordance with the best judgment of the person or persons voting the proxies.

        A Shareholder who has given a proxy has the power to revoke it by depositing an instrument in writing executed by the Shareholder or by the Shareholder's attorney authorized in writing either at our registered office at any time up to and including the last business day preceding the day of the Special Meeting, or any postponement or adjournment thereof, or with the chairman of the Special Meeting on the day of the Special Meeting or any adjournment thereof, or in any other manner permitted by law. A Shareholder who has given a proxy may also revoke it by signing a form of proxy bearing a later date and depositing it by the time specified in the Notice of Special Meeting or by delivering a written statement revoking the proxy. The written statement must be delivered to the Corporate Secretary of the Corporation at 16701 Greenspoint Park Drive, Suite 195, Houston, Texas 77060, no later than 5:00 p.m. (Houston, Texas time) on the last business day prior to the date of the Special Meeting or any postponement or adjournment of the Special Meeting, or to the chairman of the Special Meeting on the day of the Special Meeting or any postponement or adjournment thereof.

        Abstentions and broker non-votes will have no effect with respect to the matters to be acted upon at the Special Meeting.

        The Company's four largest shareholders representing roughly 62% of the outstanding shares support the domestication.

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THE DOMESTICATION
(PROPOSAL NO. 1 ON THE NOTICE OF SPECIAL MEETING AND THE ACCOMPANYING PROXY)

General

        The Board of Directors is proposing to change our jurisdiction of incorporation from the Province of Alberta in Canada to the State of Delaware in the United States through a transaction called a "continuance" under Section 189 of the ABCA and a "domestication" under Section 388 of the DGCL (collectively referred to as a "domestication" herein), and approve a new certificate of incorporation to be effective on the date of the domestication. We will become subject to the DGCL on the date of our domestication, but will be deemed for the purposes of the DGCL to have commenced our existence in Delaware on the date we originally commenced our existence in Canada. Under the DGCL, a corporation becomes domesticated in Delaware by filing a certificate of corporate domestication and a certificate of incorporation for the corporation being domesticated. The Board of Directors has unanimously approved our domestication and the related certificate of incorporation of Epsilon Energy, Inc., believes it to be in our best interests, and unanimously recommends approval of the domestication and the approval of the certificate of incorporation of Epsilon Energy, Inc. to our Shareholders.

        The domestication will be effective on the date set forth in the certificate of corporate domestication and the certificate of incorporation, as filed with the office of the Secretary of State of the State of Delaware. Thereafter, we will be subject to the certificate of incorporation filed in Delaware, a copy of which is attached to this Circular as Exhibit C. We will be discontinued in Alberta as of the date shown on the certificate of discontinuance issued by the Director appointed under the ABCA, which we expect to be the date of domestication in Delaware.

        The domestication will not interrupt our corporate existence or operations or the trading markets of our common shares. Each outstanding common share at the time of the domestication will remain issued and outstanding as a share of common stock of Epsilon Energy, Inc. after our corporate existence is continued out of the Province of Alberta in Canada under the ABCA and into the State of Delaware in the United States under the domestication procedures of the DGCL. The common shares will continue to be listed on the Toronto Stock Exchange under the trading symbol "EPS," and we intend to apply to list our common stock on the Nasdaq Capital Market under the trading symbol EPSN. Upon the listing of our shares on the Nasdaq Capital Market, we intend to apply to delist our shares from the Toronto Stock Exchange.

        We will continue to be subject to the rules and regulations of these exchanges and the obligations imposed by each securities regulatory authority in Canada and the United States, including the SEC. In addition, we will file periodic reports with the SEC pursuant to the Exchange Act. Upon our domestication, our Board of Directors intends to adopt bylaws, copies of which are attached to this Circular as Exhibit D. A copy of Section 191 of the ABCA addressing dissenters' rights in connection with the continuance is attached to this Circular as Exhibit E.

Principal Reasons for the Domestication

        We are pursuing the domestication for a number of reasons. Our domestication is intended to enhance shareholder value over the long-term by, among other things, improving our ability and flexibility to meet future equity and debt financing needs and enhancing the marketability of our capital stock by raising our profile in the United States capital markets. In addition, our corporate offices and operations are located in the United States and a large percentage of our shareholders are located there.

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        Our Board of Directors chose the State of Delaware to be our domicile because the DGCL expressly accommodates continuances under Section 189 of the ABCA and because the provisions of the DGCL, specifically those dealing with the duties and obligations of directors of a Delaware corporation, have been interpreted by a substantial body of case law in the Delaware courts.

        In considering its recommendation in favor of the domestication, our Board of Directors weighed the estimated tax liability to us arising from this transaction. See "The Domestication—United States and Canadian Income Tax Considerations." With the assistance of professional advisors, we have reviewed our assets, liabilities, paid-in capital and other tax balances. We estimate that we will incur a tax liability of Cdn$4-5 million upon our exit from Canada.

Effects of the Domestication

        There are material differences between Alberta corporate law and Delaware corporate law with respect to shareholders rights, and Delaware law may offer shareholders more or less protection depending on the particular matter. A detailed overview of the material differences is set forth below.

        Applicable Law.    As of the effective date of the domestication, our legal jurisdiction of incorporation will be Delaware, and we will no longer be subject to the provisions of the ABCA. All matters of corporate law will be determined under the DGCL. We will retain our original incorporation date in Alberta as our date of incorporation for purposes of the DGCL.

        Assets, Liabilities, Obligations, Etc.    Under Delaware law, as of the effective date of the domestication, all of our assets, property, rights, liabilities and obligations immediately prior to the domestication will continue to be our assets, property, rights, liabilities and obligations. Alberta corporate law will cease to apply to us on the date shown on the certificate of discontinuance to be issued by the Registrar appointed under the ABCA, which we expect to be the date of domestication in Delaware. We will be thereafter become subject to the obligations imposed under Delaware corporate law.

        Business and Operations.    The domestication, if approved, will effect a change in the legal jurisdiction of incorporation as of the effective date of the domestication, but our business and operations will remain the same.

        Officers and Directors.    Our Board currently consists of seven members: John Lovoi, Matthew Dougherty, Adrian Montgomery, Michael Raleigh, Ryan Roebuck, Jacob Roorda, and Tracy Stephens. These directors will continue to serve as directors from and after the effective date of the domestication. Immediately following the domestication, our officers will also be unchanged. Our officers are Michael Raleigh, Chief Executive Officer, and Lane Bond, Chief Financial Officer.

        Balance Sheet.    Had the redomestication occurred on September 30, 2017, the pro forma balance sheet would have reflected a pro forma adjustment to increase deferred tax liability by Cdn$4-5 million (US$ 3-4 million) and reduce total shareholders' equity by Cdn$4-5 million (US$ 3-4 million). As of September 30, 2017, pro forma total liabilities and shareholders' equity would have been between $28.1 and $29.1 million, and $55.9 and $54.9 million, respectively.

Treatment of Outstanding Capital Stock and Options

        The existing share certificates representing our common shares will continue to represent the same number of the same class of our common stock after the domestication without any action on your part. You will not be required to exchange any share certificates. We will only issue new certificates to you representing shares of capital stock of Epsilon Energy, Inc. upon a transfer of your shares or at your request. Holders of our outstanding options will continue to hold the same securities, which will

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remain exercisable for an equivalent number of shares of the same class of common stock of Epsilon Energy, Inc., for the equivalent exercise price per share, without any action by the holder.

Shareholder Approval

        The domestication is subject to various conditions, including approval of the special resolution authorizing the domestication and the approval of the certificate of incorporation of Epsilon Energy, Inc. by our Shareholders at the Special Meeting. A copy of the special resolution is attached to this Circular as Exhibit A. Under the ABCA, the change of jurisdiction requires affirmative votes, whether in person or by proxy, of at least two thirds of the votes cast by the holders of our common shares at the Special Meeting where a quorum is present, being at least two persons present holding or representing by proxy in the aggregate not less than 5% of the common shares entitled to be voted at the Special Meeting. Assuming we receive the requisite Shareholder approval for the domestication, our Board of Directors will retain the right to terminate or abandon the domestication if it determines that consummating the domestication would be inadvisable or not in our best interests, or if all of the respective conditions to consummation of the domestication have not occurred. There are no time limits on the duration of the authorization resulting from a favorable shareholder vote.

Regulatory and Other Approvals

        The change of jurisdiction is subject to the authorization of the Registrar of corporations appointed under the ABCA. The Registrar is empowered to authorize the change of jurisdiction if, among other things, the Registrar is satisfied that the change of jurisdiction will not adversely affect our creditors or Shareholders.

        Subject to the authorization of the continuance by the Registrar appointed under the ABCA and the approval of our Shareholders, we anticipate that we will file a certificate of corporate domestication and a certificate of incorporation with the Secretary of State of the State of Delaware pursuant to the DGCL promptly following the Special Meeting, and that we will be domesticated in Delaware on the effective date of such filings. Promptly thereafter, we intend to give notice to the Registrar appointed under the ABCA that we have been domesticated under the laws of the State of Delaware and request that the Registrar of Corporations appointed under the ABCA issue us a certificate of discontinuance bearing the same date as the date of effectiveness of our certificate of corporate domestication and certificate of incorporation by the Secretary of State of the State of Delaware.

Comparison of Shareholder Rights

        The principal attributes of our capital stock before and after domestication are comparable; however, there will be material differences in the rights of our Shareholders under Delaware law.

        On the effective date of the domestication, we will be deemed, for purposes of the DGCL, to have been incorporated under the laws of the State of Delaware from our inception and we will be governed by the Delaware certificate of incorporation filed with the certificate of corporate domestication. Differences between Alberta corporate law and Delaware corporate law and between our current articles of incorporation and bylaws and the proposed Delaware certificate of incorporation and bylaws will result in various changes in the rights of our shareholders. The following summary comparison highlights provisions of applicable Alberta corporate law and our current Alberta articles of incorporation and bylaws and Delaware corporate law and the proposed certificate of incorporation and bylaws of Epsilon Energy, Inc. The proposed certificate of incorporation and bylaws of Epsilon Energy, Inc. are attached to this Circular as Exhibit C and Exhibit D, respectively. This summary is qualified in its entirety by reference to the DGCL, the ABCA and our governing corporate instruments.

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        Capital Structure.    Under our current Alberta articles of incorporation, we have the authority to issue an unlimited number of common shares and an unlimited number of preferred shares. Under Alberta law, there is no franchise tax on our authorized capital stock. Under our proposed Delaware certificate of incorporation, Epsilon Energy, Inc. will have the authority to issue a total of 160,000,000 shares of capital stock, consisting of 150,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share. Pursuant to Delaware law, Epsilon Energy, Inc. will initially be required to pay an annual corporate franchise tax of approximately $200,000 in order to maintain its good standing as a Delaware corporation. The amount of that annual franchise tax could change if Epsilon Energy, Inc.'s capital structure changes.

        Shareholder Approval; Vote on Extraordinary Corporate Transactions.    Under the ABCA, certain extraordinary corporate actions, such as a name change, amalgamations (other than with certain affiliated corporations), continuances to another jurisdiction and sales, leases or exchanges of all, or substantially all, of the property of a corporation (other than in the ordinary course of business), and other extraordinary corporate actions such as liquidations, dissolutions and arrangements (if ordered by a court), are required to be approved by a "special resolution" of shareholders.

        A "special resolution" is a resolution (1) passed by not less than two-thirds of the votes cast by the shareholders who voted in respect of the resolution at a meeting duly called and held for that purpose or (2) signed by all shareholders entitled to vote on the resolution. In specified cases, a special resolution to approve an extraordinary corporate action is also required to be approved separately by the holders of a class or series of shares, including in certain cases a class or series of shares not otherwise carrying voting rights (unless in certain cases the share provisions with respect to such class or series of shares provide otherwise).

        Under the DGCL, the affirmative vote of the holders of two thirds of the outstanding stock entitled to vote thereon (or the affirmative vote of the holders of a majority of such outstanding stock, if a statement to that effect was included in the articles at the time they were initially filed or is included in an amendment to the articles approved by the affirmative vote of the holders of two thirds of the then-outstanding stock entitled to vote thereon) is required to authorize any merger, share exchange, consolidation, dissolution, or sale of all or substantially all of the assets of the corporation, except that, unless required by its certificate of incorporation: no authorizing shareholder vote is required to approve a plan of merger or share exchange if (i) the articles of incorporation of the surviving corporation will not differ from the corporation's articles (other than certain inconsequential differences), (ii) each shareholder of the surviving corporation whose shares were outstanding immediately before the effective date of the transaction will hold the same number of shares, with identical designations, preferences, limitations and relative rights, immediately after the transaction, (iii) the number of voting shares outstanding immediately after the transaction plus the number of voting shares issuable as a result of the transaction, either by conversion or upon the exercise of rights and warrants issued pursuant to the transaction, will not exceed by more than 20 percent the total number of voting shares of the surviving corporation outstanding immediately before the transaction, and (iv) the number of participating shares (defined to mean shares that entitled their shareholders to participate without limitation in dividends) outstanding immediately after the transaction plus the number of participating shares issuable as a result of the transaction, either by the conversion or upon the exercise of rights and warrants issued pursuant to the transaction, will not exceed by more than 20 percent the total number of participating shares outstanding immediately before the transaction. In certain cases, a plan of merger or share exchange is also required to be approved separately by the holders of a class or series of shares.

        Amendments to the Governing Documents.    Under the ABCA, amendments to the articles of incorporation generally requires approval by special resolution of the voting shares. If the proposed amendment would affect a particular class of securities in certain specified ways, the holders of shares

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of that class would be entitled to vote separately as a class on the proposed amendment, whether or not the shares otherwise carry the right to vote.

        The ABCA allows the directors, by resolution, to make, amend or repeal any bylaws that regulate the business or affairs of the corporation. When directors make, amend or repeal a bylaw, they are required under the ABCA to submit the change to shareholders at the next meeting of shareholders. Shareholders may confirm, reject or amend the bylaw, the amendment or the repeal with the approval of a majority of the votes cast by shareholders who voted on the resolution. If a bylaw, or an amendment or a repeal of a bylaw, is rejected by the shareholders, or if the directors do not submit a bylaw, or an amendment or a repeal of a bylaw, to the shareholders, the bylaw, amendment or repeal ceases to be effective and no subsequent resolution of the directors to make, amend or repeal a bylaw having substantially the same purpose or effect is effective until it is confirmed or confirmed as amended by the shareholders.

        Under the DGCL, the Board of Directors must first recommend the amendment to the articles of incorporation to the shareholders unless the board determines that, because of conflict of interest or other special circumstances, it cannot make a recommendation. Unless a greater level of approval is required by the articles or by the board (which can condition its submission of a proposed amendment on any basis), the amendment must be approved by (i) a majority of the votes entitled to be cast on the amendment by any voting group with respect to which the amendment would create dissenters' appraisal rights and (ii) a majority of the votes cast by any other voting group entitled to vote on the amendment.

        The DGCL also provides that the Board of Directors may amend or repeal a corporation's bylaws unless the articles of incorporation reserve the power exclusively to the shareholders in whole or in part or unless the shareholders, in amending, adding or repealing a particular bylaw, provide expressly that the board may not amend or repeal that bylaw. The foregoing notwithstanding, the shareholders may amend or repeal a corporation's bylaws even though the bylaws may also be amended or repealed by the Board of Directors. The proposed bylaws of Epsilon Energy, Inc. are consistent with these DGCL provisions.

        Place of Meetings.    Pursuant to the ABCA, if the articles of the corporation so provide, meetings of shareholders may be held outside of Alberta. The Corporation's current articles provide that meetings of shareholders may be held outside of Alberta at any place within Canada or the United States as the Board so determines.

        The DGCL provides that meetings of the stockholders be held at any place in or outside of Delaware designated by, or in the manner provided in, the certificate of incorporation or bylaws. The proposed bylaws of Epsilon Energy, Inc. provide that meetings of the stockholders will be held at any place designated by the Board of Directors.

        Quorum of Shareholders.    The ABCA provides that, unless the bylaws provide otherwise, a quorum of shareholders is present at a meeting of shareholders (irrespective of the number of persons actually present at the meeting) if holders of a majority of the shares entitled to vote at the meeting are present in person or represented by proxy. The current bylaws provide that a quorum is present if there are at least two persons present holding or representing by proxy in the aggregate not less than 5% of the share entitled to be voted at the meeting.

        Under the DGCL, the certificate of incorporation or bylaws may specify the required quorum, but generally a quorum may consist of not less than one third of the total voting power. The proposed bylaws of Epsilon Energy, Inc. provide that the holders of not less than one third of the voting power of the outstanding shares entitled to vote at the meeting shall constitute a quorum at a meeting of stockholders.

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        Calling Meetings.    The ABCA provides that the directors shall call an annual meeting of shareholders not later than 15 months after the last preceding annual meeting, and may at any time call a special meeting of shareholders. The registered holders or beneficial owners of not less than 5% of the issued shares of a corporation that carry the right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition, but the beneficial owners of shares do not hereby acquire the direct right to vote at the meeting that is the subject of the requisition.

        The DGCL provides that a special meeting of the stockholders may be called by the Board of Directors or by any person or persons as may be authorized by the certificate of incorporation or bylaws. The proposed bylaws of Epsilon Energy, Inc. provide that a special meeting of stockholders may be called by the directors, by the chairman or by the president and chief executive officer.

        Shareholder Consent in Lieu of Meeting.    Under the ABCA, a resolution in writing signed by all of the shareholders entitled to vote on that resolution is as valid as if it had been passed at a meeting of shareholders. Under the DGCL, unless otherwise limited by the certificate of incorporation, stockholders may act by written consent without a meeting if holders of outstanding stock representing not less than the minimum number of votes that would be necessary to take the action at an annual or special meeting execute a written consent providing for the action. The proposed bylaws of Epsilon Energy, Inc. specifically allow the shareholders to take action by written resolution.

        Director Election, Qualification and Number.    The ABCA provides for the election of directors by a majority of votes cast at an annual meeting of shareholders. The ABCA states that a corporation shall have one or more directors but a distributing corporation whose shares are held by more than one person shall have not fewer than 3 directors, at least 2 of whom are not officers or employees of the corporation or its affiliates. Additionally, at least one fourth of the directors must be Canadian residents unless the corporation has fewer than four directors, in which case at least one director must be a Canadian resident.

        The DGCL has no similar requirements; however, the governance standards of both the Nasdaq Capital Market and the Toronto Stock Exchange require a majority of a listed company's directors to be independent. The proposed bylaws of Epsilon Energy, Inc. prescribe a minimum of 7 and a maximum of 7 directors.

        Vacancies on Board of Directors.    Under the ABCA, a vacancy among the directors created by the removal of a director may be filled at a meeting of shareholders at which the director is removed. The ABCA also allows a vacancy on the board to be filled by a quorum of directors, except when the vacancy is a result of a failure to elect the number or minimum number of directors required by the articles. In addition, the ABCA authorizes the directors to, if the articles so provide, between annual general meetings, appoint one or more additional directors of the corporation to serve until the next annual general meeting, so long as the number of additional directors shall not at any time exceed 1/3 of the number of directors who held office at the expiration of the last annual meeting of the corporation.

        Delaware law provides that a vacancy or a newly created directorship may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, unless otherwise provided in the certificate of incorporation or bylaws. Any newly elected director usually holds office for the remainder of the full term expiring at the annual meeting of stockholders at which the term of the class of directors to which the newly elected director has been elected expires.

        Removal of Directors; Terms of Directors.    Under the ABCA, provided that the articles of a corporation do not provide for cumulative voting, shareholders of the corporation may, by ordinary resolution passed at a special meeting, remove any director or directors from office. If holders of a class or series of shares have the exclusive right to elect one or more directors, a director elected by

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them may only be removed by an "ordinary resolution" at a meeting of the shareholders of that class or series.

        An "ordinary resolution" means a resolution (1) passed by a majority of the votes cast by the shareholders who voted in respect of that resolution, or (2) signed by all the shareholders entitled to vote on that resolution.

        Delaware law provides that, except in the case of a corporation with a classified board or with cumulative voting, any director or the entire board may be removed, with or without cause, by the holders of a majority of the shares entitled to vote at an election of directors.

        Fiduciary Duty of Directors.    Directors of a corporation incorporated under the ABCA have fiduciary obligations to the corporation. The ABCA requires directors and officers of an Alberta corporation, in exercising their powers and discharging their duties, to act honestly and in good faith with a view to the best interests of the corporation and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

        The fiduciary obligations of directors of corporations incorporated or organized under the DGCL are more expansive and run not just to the corporation but to the corporation's shareholders. These obligations fall into two broad categories: a duty of care and a duty of loyalty. The duty of care requires a director to act in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he or she believes to be in the best interests of the corporation. It is qualified by the business judgment rule, which protects a disinterested director from personal liability to the corporation and its shareholders if the director acted in good faith, was reasonably informed and rationally believed the action taken was in the best interests of the corporation. The duty of loyalty requires directors to exercise their powers in the interests of the corporation and not in the directors' own interests or in the interest of another person (including a family member) or organization. Stated more simply, the duty of loyalty precludes directors from using their corporate position to make a personal profit or gain, or for other personal advantage.

        The personal liability of a director under the DGCL for breach of his or her fiduciary duty is expansive and can be established by the corporation, through a derivative action brought on behalf of the stockholders, or by an aggrieved stockholder, in a separate action. The proposed certificate of incorporation of Epsilon Energy, Inc. seeks to limit such personal liability; however, these limitations are not effective with respect to the following proscribed conduct under the DGCL:

    any breach of the director's duty of loyalty to the corporation or its stockholders;

    acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

    an unlawful payment of a dividend or an unlawful stock purchase or redemption; and

    any transaction from which the director derived an improper personal benefit.

        Indemnification of Officers and Directors.    Under the ABCA and pursuant to the Corporation's current bylaws, the Corporation will indemnify present or former directors or officers against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment that is reasonably incurred by the individual in relation to any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of his or her association with us. In order to qualify for indemnification such directors or officers must:

    1)
    have acted honestly and in good faith with a view to the best interests of the corporation; and

    2)
    in the case of a criminal or administrative action or proceeding enforced by a monetary penalty, have had reasonable grounds for believing that his conduct was lawful.

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        The Corporation currently carries liability insurance for the Corporation's and its subsidiaries' officers and directors. This will continue following the domestication.

        The ABCA also provides that such persons are entitled to indemnity from the corporation in respect of all costs, charges and expenses reasonably incurred in connection with the defense of any such proceeding if the person was not judged by the court or other competent authority to have committed any fault or omitted to do anything that the person ought to have done, and otherwise meets the qualifications for indemnity described above.

        Delaware law permits a corporation to indemnify its present or former directors and officers, employees and agents made a party, or threatened to be made a party, to any third-party proceeding by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person:

    acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation; and

    with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful.

        In a derivative action, or an action by or in the right of the corporation, the corporation is permitted to indemnify directors, officers, employees and agents against expenses actually and reasonably incurred by them in connection with the defense or settlement of an action or suit if they acted in good faith and in a manner that they reasonably believed to be in or not opposed to the best interests of the corporation. However, in such a case, no indemnification shall be made if the person is adjudged liable to the corporation, unless and only to the extent that, the court in which the action or suit was brought or the Chancery Court of the State of Delaware shall determine upon application that such person is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability to the corporation.

        The DGCL allows the corporation to advance expenses before the resolution of an action, if in the case of current directors and officers, such persons agree to repay any such amount advanced if they are later determined not to be entitled to indemnification. The proposed bylaws of Epsilon Energy, Inc. generally provide for mandatory indemnification and advancement of expenses of our directors and officers to the fullest extent permitted under the DGCL; provided, however, that directors and officers shall not be entitled to indemnification for actions initiated by such parties unless the Board of Directors authorizes such action. Following the domestication, Epsilon Energy, Inc. will carry liability insurance for its and its subsidiaries' officers and directors.

        Dissent or Dissenters' Appraisal Rights.    The ABCA provides that shareholders of a corporation entitled to vote on certain matters are entitled to exercise dissent rights and demand payment for the fair value of their shares in connection with specified matters, including, among others:

    an amendment to our articles of incorporation to add, change or remove any provisions restricting the issue or transfer of shares;

    amend our articles to add, change or remove any restrictions on the business or businesses that the corporation may carry on;

    any amalgamation with another corporation (other than with certain affiliated corporations);

    a continuance under the laws of another jurisdiction; and

    a sale, lease or exchange of all or substantially all the property of the corporation other than in the ordinary course of business.

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        However, a shareholder is not entitled to dissent if an amendment to the articles is effected by a court order approving a reorganization or by a court order made in connection with an action for an oppression remedy.

        The DGCL grants the holder of any class or series of shares to dissent from and obtain payment of the fair value of his shares with respect to any plan of merger to which the corporation is a party (other than mergers with certain subsidiary corporations) requiring shareholder approval; any plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan; the sale or exchange of all or substantially all of the property of the corporation other than in the normal course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan through which all of the net proceeds of sale will be distributed to the shareholders within one year; an amendment to the articles that materially and adversely affects the dissenting shareholder because it (i) alters or abolishes a preferential right, (ii) creates, alters or abolishes a right in respect of redemption, (iii) alters or abolishes a preemptive right, (iv) excludes or limits the right of shares to be voted on any matter or to accumulate votes, or (v) reduces the number of shares owned by a shareholder to a fractional share if the fractional share so created is to be acquired for cash; and any corporate action taken pursuant to a shareholder vote to the extent the articles, bylaws or a resolution of the board provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares.

Oppression Remedy.

        The ABCA provides an oppression remedy that enables a court to make any order, whether interim or final, to rectify matters that are oppressive or unfairly prejudicial to or that unfairly disregard the interests of any security holder, creditor, director or officer of the corporation if an application is made to a court by a "complainant."

        A "complainant" with respect to a corporation means any of the following:

    a present or former registered holder or beneficial owner of a security of the corporation or any of its affiliates,

    a present or former director or officer of the corporation or of any of its affiliates,

    a creditor in respect of an application under a derivative action; or

    any other person who, in the discretion of the court, is a proper person to make the application.

        The oppression remedy provides the court with very broad and flexible powers to intervene in corporate affairs to protect shareholders and other complainants. While conduct that is in breach of fiduciary duties of directors or that is contrary to the legal right of a complainant will normally trigger the court's jurisdiction under the oppression remedy, the exercise of that jurisdiction does not depend on a finding of a breach of those legal and equitable rights.

        The DGCL does not contain a similar remedy, although causes of action seeking to obtain comparable remedies can be asserted against a corporation and its affiliates under any of several common law theories.

        Derivative Actions.    Under the ABCA, a complainant may also apply to the court for permission to bring an action in the name of, and on behalf of, the corporation, or to intervene in an existing action to which the corporation or its subsidiary is a party, for the purpose of prosecuting, defending or

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discontinuing an action on the corporation's behalf or on behalf of its subsidiary. Under the ABCA, no action may be brought and no intervention in an action may be made unless a court is satisfied that:

    (1)
    the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the complainant's intention to apply to the court if the directors of the corporation or its subsidiary do not bring, diligently prosecute, defend or discontinue the action,

    (2)
    the complainant is acting in good faith, and

    (3)
    it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.

        Under the ABCA, the court in a derivative action may make any order it sees fit including orders pertaining to the control or conduct of the lawsuit by the complainant or the making of payments to former and present shareholders and payment of reasonable legal fees incurred by the complainant.

        Similarly, under Delaware law a stockholder may bring a derivative action on behalf of the corporation to enforce a corporate right, including the breach of a director's duty to the corporation. Delaware law requires that the plaintiff in a derivative suit be a stockholder of the corporation at the time of the wrong complained of and remain so throughout the duration of the suit; that the plaintiff make a demand on the directors of the corporation to assert the corporate claim unless the demand would be futile; and that the plaintiff is an adequate representative of the other stockholders.

        Business Combinations.    Section 203 of the DGCL provides, with some exceptions, that a Delaware corporation may not engage in any business combination with a person, or an affiliate or associate of such person, who is an interested stockholder for three years from the time that person became an interested stockholder unless:

    the board of directors approved the transaction before the "interested stockholder" obtained such status;

    upon consummation of the transaction that resulted in the stockholder becoming an "interested stockholder," the "interested stockholder" owned at least 85% of a Delaware corporation's outstanding voting stock at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (i) by persons who are directors and are also officers and (ii) employee stock plans in which the participants do not have the right to determine confidentially whether shares held subject to the plans will be tendered in the tender or exchange offer; or

    on or subsequent to such date, the business combination or merger is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by two-thirds of the holders of the outstanding common stock not owned by the "interested stockholder."

        A "business combination" is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an "interested stockholder" is a person who, together with affiliates and associates, owns 15% or more of a corporation's voting stock or within three years did own 15% or more of a corporation's voting stock.

        A corporation may, at its option, exclude itself from the coverage of Section 203 by an appropriate provision in its certificate of incorporation. The proposed certificate of incorporation of Epsilon Energy, Inc. does not contain such an exclusion from Section 203 of the DGCL.

        Although there is no comparable provision relating to business combinations under the ABCA, restrictions on business combinations do exist under applicable Canadian provincial securities laws. Multilateral Instrument 61-101—Protection of Minority Security Holders in Special Transactions

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("MI 61-101") which is applicable to reporting issuers in Ontario, including the Corporation, contains detailed requirements in connection with "related party transactions." A "related party transaction" as defined under MI 61-101 means, generally, any transaction by which an issuer, directly or indirectly, consummates one or more specified transactions with a related party, including purchasing or disposing of an asset, issuing securities or assuming liabilities. A "related party" as defined in MI 61-101 includes (1) directors and senior officers of the issuer; (2) holders of voting securities of the issuer carrying more than 10% of the voting rights attached to all the issuer's outstanding voting securities; and (3) holders of a sufficient number of any securities of the issuer to materially affect control of the issuer.

        MI 61-101 requires, subject to certain exceptions, specific detailed disclosure in the proxy circular sent to securityholders in connection with a related party transaction where a meeting is required and, subject to certain exceptions, the preparation of a formal valuation of the subject matter of the related party transaction and any non-cash consideration offered in connection therewith, and the inclusion of a summary of the valuation in the proxy circular. MI 61-101 also requires, subject to certain exceptions, that an issuer not engage in a related party transaction unless the disinterested shareholders of the issuer have approved the related party transaction by a simple majority of the votes cast.

        Examination of Corporate Records.    Under the ABCA, upon payment of a reasonable fee, a person is entitled during usual business hours to examine certain corporate records, such as the securities register and a list of shareholders, and to make copies of or extracts from such documents.

        Under Delaware law, for any proper purpose, shareholders have the right to inspect, upon written demand under oath stating the purpose for such inspection, the corporation's stock ledger, list of stockholders and other specified books and records, and to make copies or extracts of the same. A proper purpose means a purpose reasonably related to a person's interest as a stockholder.

        Anti-Takeover Effects.    Some powers granted to companies under Delaware law may allow a Delaware corporation to make itself potentially less vulnerable to hostile takeover attempts. These powers include the ability to:

    implement a staggered board of directors, which prevents an immediate change in control of the board;

    require that notice of nominations for directors be given to the corporation prior to a meeting where directors will be elected, which may give management an opportunity to make a greater effort to solicit its own proxies;

    only allow the board of directors to call a special meeting of stockholders, which may deny a raider the ability to call a meeting to make disruptive changes;

    eliminate stockholders' action by written consent, which would require a raider to attend a meeting of stockholders to approve any proposed action by the corporation;

    remove a director from a staggered board only for cause, which gives some protection to directors on a staggered board from arbitrary removal;

    provide that the power to determine the number of directors and to fill vacancies be vested solely in the board, so that the incumbent board, not a raider, would control vacant board positions;

    provide for supermajority voting in some circumstances, including mergers and certificate of incorporation amendments; and

    issue "blank check" preferred stock, which may be used to make a corporation less attractive to a raider.

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        The proposed certificate of incorporation and bylaws of Epsilon Energy, Inc. include the following provisions, which may discourage a hostile takeover attempt:

    a requirement that stockholders provide prior notice to nominate directors;

    prohibitions on the ability of stockholders to call a special meeting of stockholders;

    provisions that give the board of directors the authority to determine the number of directors and fill vacancies on the board of directors; and

    provisions that give the board of directors the authority to issue preferred stock having rights, privileges, limitations and other characteristics that are established by the board of directors without shareholder approval.

        The ABCA does not restrict related party transactions; however, in Canada, takeovers and other related party transactions are addressed in provincial securities legislation and policies which may apply to us, including MI 61-101, as discussed above. In addition, neither the ABCA nor our articles restrict us from adopting a shareholder rights plan or a "poison pill" but the application and enforceability of such measures for Canadian issuers differ from those in effect for their Delaware counterparts.

Other Important Ownership and Exchange Controls

        There is no limitation imposed by applicable Alberta law or by our articles on the right of a non-resident to hold or vote our common shares, other than as discussed herein.

        Competition Act.    Limitations on the ability to acquire and hold our common shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition, or Commissioner, to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. This legislation grants the Commissioner jurisdiction, for up to one year after the acquisition has been substantially completed, to seek a remedial order, including an order to prohibit the acquisition or require divestitures, from the Canadian Competition Tribunal, which order may be granted where the Competition Tribunal finds that the acquisition substantially prevents or lessens, or is likely to substantially prevent or lessen, competition.

        This legislation also requires any person or persons who intend to acquire more than 20% of our voting shares or, if such person or persons already own more than 20% of our voting shares prior to the acquisition, more than 50% of voting our shares, to file a notification with the Canadian Competition Bureau if certain financial thresholds are exceeded. Where a notification is required, unless an exemption is available, the legislation prohibits completion of the acquisition until the expiration of the applicable statutory waiting period, unless the Commissioner either waives or terminates such waiting period.

        Investment Canada Act.    The Investment Canada Act requires each "non-Canadian" (as defined in the Investment Canada Act) who acquires "control" of an existing "Canadian business", where the acquisition of control is not a reviewable transaction, to file a notification in prescribed form with the responsible federal government department or departments not later than 30 days after closing. Subject to certain exemptions, a transaction that is reviewable under the Investment Canada Act may not be implemented until an application for review has been filed and the responsible Minister of the federal cabinet has determined that the investment is likely to be of "net benefit to Canada" taking into account certain factors set out in the Investment Canada Act.

        Under the Investment Canada Act, an investment in our common shares by a non-Canadian who is a World Trade Organization member country investor, including a United States investor would be reviewable only if it were an investment to acquire control of us pursuant to the Investment Canada Act and the enterprise value of our assets (as determined pursuant to the Investment Canada Act) was

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equal to or greater than $600 million. The Investment Canada Act contains various rules to determine if there has been an acquisition of control. For example, for purposes of determining whether an investor has acquired control of a corporation by acquiring shares, the following general rules apply, subject to certain exceptions: the acquisition of a majority of the undivided ownership interests in the voting shares of the corporation is deemed to be acquisition of control of that corporation; the acquisition of less than a majority, but one-third or more, of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is presumed to be acquisition of control of that corporation unless it can be established that, on the acquisition, the corporation is not controlled in fact by the acquirer through the ownership of voting shares; and the acquisition of less than one third of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is deemed not to be acquisition of control of that corporation.

        Under the Investment Canada Act, review on a discretionary basis may also be undertaken by the federal government in respect to a much broader range of investments by a non-Canadian to "acquire, in whole or part, or to establish an entity carrying on all or any part of its operations in Canada." No financial threshold applies to a national security review. The relevant test is whether such investment by a non-Canadian could be "injurious to national security." The federal government has broad discretion to determine whether an investor is a non-Canadian and therefore subject to national security review. Review on national security grounds is at the discretion of the Canadian government, and may occur on a pre- or post-closing basis.

        Certain transactions relating to our common shares will generally be exempt from the Investment Canada Act, subject to the federal government's prerogative to conduct a national security review, including:

    (1)
    the acquisition of our common shares by a person in the ordinary course of that person's business as a trader or dealer in securities;

    (2)
    the acquisition of control of us in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Canada Act; and

    (3)
    the acquisition of control of us by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of us, through ownership of our common shares, remains unchanged.

        Other.    There is no law, governmental decree or regulation in Alberta that restricts the export or import of capital, or that would affect the remittance of dividends (if any) or other payments by us to non-resident holders of our common shares, other than withholding tax requirements.

Proposed Certificate of Incorporation and Bylaws of Epsilon Energy, Inc.

        We have included provisions in the proposed certificate of incorporation and bylaws of Epsilon Energy, Inc. that do not simply reflect the default provisions of Delaware law. They are as follows:

        "Blank-Check" Preferred Stock Issuance Authority for Board of Directors.    Under Delaware law, the powers, preferences and rights, and the qualifications, limitations or restrictions in respect of any series of preferred stock must be set forth in the certificate of incorporation, or, if authority is vested in the Board of Directors by the certificate of incorporation, in the resolutions providing for the issuance of such series of preferred stock. The proposed certificate of incorporation of Epsilon Energy, Inc. contains a provision granting its Board of Directors the authority to fix by resolution the rights, preferences, limitations and other characteristics in respect of any series of preferred stock.

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        Increase or Decrease in Amount of Authorized Stock.    Under Delaware law, the holders of outstanding shares of a class of stock are entitled to vote as a class on a proposed amendment to increase or decrease the number of authorized shares of such class unless the certificate of incorporation provides that such number of shares may be increased or decreased by the affirmative vote of holders of a majority of the voting power of the outstanding stock entitled to vote.

        The proposed certificate of incorporation of Epsilon Energy, Inc. contains a provision that requires the vote of the holders of a majority of the voting power of all of its common stock entitled to vote to increase or decrease the aggregate number of authorized shares of preferred stock.

        Bylaws.    Under Delaware law, unless otherwise provided in the certificate of incorporation or bylaws, the holders of a majority in voting power of the shares present at a meeting of stockholders have the power to adopt, amend or repeal the bylaws of the corporation. In addition, if the certificate of incorporation so provides, the Board of Directors also has the power to adopt, amend or repeal the bylaws. The proposed certificate of incorporation of Epsilon Energy, Inc. provides that the Board of Directors has the power to make, alter or repeal the bylaws. Additionally, the proposed bylaws of Epsilon Energy, Inc. provide that a majority in outstanding voting power of the shares entitled to vote shall have the power to adopt, amend or repeal the bylaws.

        Stockholder Action by Written Consent.    Under Delaware law, unless otherwise provided in a corporation's certificate of incorporation, stockholders representing a majority of the outstanding voting power of a corporation entitled to vote on a matter may act by written consent. The proposed certificate of incorporation of Epsilon Energy, Inc. will allow action by written consent of the stockholders.

        Presentation of Nominations and Proposals at Meetings of Stockholders.    The DGCL does not specify whether or how stockholders can nominate directors or submit other proposals for consideration at meetings of stockholders. The proposed bylaws of Epsilon Energy, Inc. contain procedures governing stockholder nominations To nominate an individual to the Board of Directors of Epsilon Energy, Inc. at an annual or special stockholders meeting, or to present other proposals at an annual meeting, a stockholder must provide advance notice to Epsilon Energy, Inc., in the case of an annual meeting, not fewer than 90 days nor more than 120 days prior to the first anniversary of the date of Epsilon Energy, Inc.'s annual meeting for the preceding year and, in the case of a special meeting, not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.

        Number of Directors.    Under Delaware law, the number of directors is fixed by, or in the manner provided in, the bylaws of a corporation, unless the certificate of incorporation fixes the number of directors. The proposed bylaws of Epsilon Energy, Inc. provides that the number of directors must be set by a resolution adopted by a majority of the authorized number of directors. The proposed bylaws of Epsilon Energy, Inc. provide that the number of directors on the Board of Directors may not be less than five nor more than seven.

        Vacancies and Newly Created Directorships.    Under Delaware law, vacancies and newly created directorships may be filled by a majority of directors then in office unless the certificate of incorporation or the bylaws otherwise provide. The proposed bylaws of Epsilon Energy, Inc. provide that any vacancies and newly created directorships on the Board of Directors may be filled by a majority of the directors then in office.

Dissenting Rights of Shareholders

        A registered Shareholder has the right to dissent (a "Dissenting Shareholder") to the domestication pursuant to Section 191 of the ABCA. The following description of the right to dissent

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and appraisal to which Dissenting Shareholders are entitled is not a comprehensive statement of the procedures to be followed by a Dissenting Shareholder who seeks payment of the fair value of such Dissenting Shareholder's common shares, and is qualified in its entirety by the reference to the full text of Section 191 of the ABCA, the text of which is attached at Exhibit E. A Dissenting Shareholder who intends to exercise the right to dissent and appraisal should carefully consider and comply with the provisions of Section 191 of the ABCA. Failure to strictly comply with the provisions of Section 191 of the ABCA and to adhere to the procedures established therein may result in the loss of all rights thereunder.

        Under the ABCA, a registered holder of common shares is entitled, in addition to any other right such holder may have, to dissent and to be paid by the Corporation the fair value of the common shares held by such Dissenting Shareholder in respect of which such Dissenting Shareholder dissents, determined as of the close of business on the last business day before the day on which the special resolution approving the domestication was adopted. A registered Shareholder may dissent only with respect to all of the common shares held by such registered holder or on behalf of any one beneficial owner and registered in the Dissenting Shareholder's name. Only registered Shareholders may dissent. Persons who are beneficial owners of common shares registered in the name of a broker, custodian, nominee or other intermediary who wish to dissent should be aware that they may only do so through the registered owner of such securities. A registered holder, such as a broker, who holds common shares as nominee for beneficial holders, some of whom wish to dissent, must exercise dissent rights on behalf of such beneficial owners with respect to the common shares held for such beneficial owners. In such case, the demand for dissent should set forth the number of common shares covered by it.

        A Dissenting Shareholder must send to the Corporation a written objection to the special resolution to approve the domestication at or prior to the Meeting.

        A registered Shareholder wishing to exercise the right to dissent with respect to such holder's common shares must not vote such common shares at the Meeting, either by the submission of a proxy or by personally voting, in favour of the special resolution approving the domestication.

        An application may be made to the Alberta Court of Queen's Bench (the "Court") by the Corporation or by a Dissenting Shareholder after the adoption of the special resolution approving the domestication to fix the fair value of the Dissenting Shareholder's common shares. If such an application to the Court is made by the Corporation or a Dissenting Shareholder, the Corporation must, unless the Court otherwise orders, send to each Dissenting Shareholder a written offer to pay the Dissenting Shareholder an amount considered by the Corporation's Board of Directors to be the fair value of the common shares. The offer, unless the Court otherwise orders, will be sent to each Dissenting Shareholder at least 10 days before the date on which the application is returnable, if the Corporation is the applicant, or within 10 days after the Corporation is served with notice of the application, if a Dissenting Shareholder is the applicant. The offer will be made on the same terms to each Dissenting Shareholder and will be accompanied by a statement showing how the fair value was determined.

        A Dissenting Shareholder may make an agreement with the Corporation for the purchase of such holder's common shares in the amount of the offer made by the Corporation (or otherwise) at any time before the Court pronounces an order fixing the fair value of the common shares.

        A Dissenting Shareholder is not required to give security for costs in respect of an application and, except in special circumstances, will not be required to pay the costs of the application or appraisal. On the application, the Court will make an order fixing the fair value of the common shares of all Dissenting Shareholders who are parties to the application, giving judgment in that amount against the Corporation and in favour of each of those Dissenting Shareholders, and fixing the time within which the Corporation must pay that amount payable to the Dissenting Shareholders. The Court may, in its discretion, allow a reasonable rate of interest on the amount payable to each Dissenting Shareholder calculated from the date on which the Dissenting Shareholder ceases to have any rights as a Shareholder of the Corporation, until the date of payment.

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        On the domestication becoming effective, or upon the making of an agreement between the Corporation and the Dissenting Shareholder as to the payment to be made by the Corporation to the Dissenting Shareholder, or upon the pronouncement of a Court order, whichever first occurs, the Dissenting Shareholder will cease to have any rights as a Shareholder of the Corporation other than the right to be paid the fair value of such holder's common shares, in the amount agreed to between the Corporation and the Dissenting Shareholder or in the amount of the judgment, as the case may be. Until one of these events occurs, the Dissenting Shareholder may withdraw the Dissenting Shareholder's dissent, and the dissent and appraisal proceedings in respect of that Dissenting Shareholder will be discontinued.

        All common shares held by Dissenting Shareholders who exercise their right to dissent will, if the holders are ultimately paid the fair value thereof, be deemed to be transferred to the Corporation in exchange for such fair value.

        THIS IS ONLY A SUMMARY OF THE DISSENTING SHAREHOLDER PROVISIONS OF THE ABCA. THEY ARE TECHNICAL AND COMPLEX. IT IS SUGGESTED THAT IF YOU WANT TO AVAIL YOURSELF OF YOUR RIGHTS THAT YOU SEEK YOUR OWN LEGAL ADVICE. FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF THE ABCA MAY PREJUDICE YOUR RIGHT OF DISSENT. SECTION 191 OF THE ABCA IS ATTACHED HEREIN AS EXHIBIT E AND IS INCORPORATED HEREIN BY REFERENCE.

Accounting Treatment of the Domestication

        Our domestication as a Delaware corporation represents a transaction between entities under common control. Assets and liabilities transferred between entities under common control are accounted for at carrying value. Accordingly, the assets and liabilities of Epsilon Energy, Inc. will be reflected at their carrying value to us.

United States and Canadian Income Tax Considerations

        The domestication may have income tax consequences in both the United States and Canada. The material tax consequences of the domestication to us and our current shareholders are summarized below.

United States Federal Income Tax Consequences.

        The following discussion sets forth certain material U.S. federal income tax consequences of the domestication to Epsilon Energy Ltd., the Alberta corporation (hereinafter referred to as the "Corporation"), and the U.S. Holders (as defined below) and Non-U.S. Holders (as defined below) of its common shares, as well as certain of the expected material U.S. federal income and estate tax consequences of the ownership and disposition of the shares of common stock of Epsilon Energy, Inc., the Delaware corporation. Legal conclusions contained in this section, unless otherwise noted, are the opinion of DLA Piper LLP (US), U.S. tax counsel to the Corporation.

        This discussion does not address all aspects of taxation that may be relevant to particular holders in light of their personal investment or tax circumstances or to persons that are subject to special tax rules. In particular, this description of U.S. federal tax consequences does not address the tax treatment of special classes of holders, such as banks, insurance companies, tax-exempt entities, financial institutions, broker-dealers, regulated investment companies, controlled foreign corporations, passive foreign investment companies, investors in pass-through entities and the applicable pass-through entity, including partnerships and Subchapter S corporations holding shares of our common stock, persons holding shares of our common stock as part of a hedging or conversion transaction or as part of a "straddle," United States expatriates, holders who acquired their common shares in the Corporation pursuant to the exercise of employee stock options or otherwise as compensation or through a

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tax-qualified retirement plan and holders who exercise dissent rights. We assume in this discussion that you hold our common stock as a capital asset within the meaning of the Code. This discussion is based on current provisions of the Code, United States Treasury Regulations, judicial opinions, published positions of the United States Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect on the date of this Circular and all of which are subject to differing interpretations or change, possibly with retroactive effect. This discussion does not give a detailed discussion of any state, local or foreign tax considerations. We urge you to consult your tax advisor about the U.S. federal tax consequences of acquiring, holding, and disposing of the common stock of the Corporation and Epsilon Energy, Inc., the Delaware corporation, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction or under any applicable tax treaty.

        As used in this summary, the term "U.S. Holder" means a beneficial owner of our common stock that is for U.S. federal income tax purposes:

    a citizen or resident of the United States;

    a corporation (including any entity treated as a corporation for United States federal income tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia;

    an estate the income of which is taxable in the United States regardless of its source; or

    a trust, the administration of which is subject to the primary supervision of a United States Court and one or more United States persons have the authority to control all substantial decisions of the trust, or that has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

        A beneficial owner of our common stock who is not a U.S. Holder is referred to below as a "Non-U.S. Holder."

        If a partnership (including for this purpose any other entity, either organized within or without the United States, that is treated as a partnership for U.S. federal income tax purposes) holds the shares, the tax treatment of a partner as a beneficial owner of the shares, generally will depend upon the status of the partner and the activities of the partnership. Foreign partnerships also generally are subject to special U.S. federal income tax documentation requirements.

        Code Section 368 Reorganization Provisions.    The change in our place of incorporation will constitute a reorganization within the meaning of Code Section 368(a)(1)(F), which we refer to as an F Reorganization, and generally will not represent a taxable transaction to the Corporation for U.S. federal income tax purposes, provided that holders of not more than 1% of the Corporation's common shares entitled to vote on the transaction elect to exercise their dissenters' rights ("Dissenting Shareholders"). Under IRS guidance, if holders of less than 1% of the Corporation's common shares entitled to vote on the domestication exercise their dissenters rights, the domestication would qualify as an F Reorganization.

        If the domestication does not qualify as an F Reorganization for the reason stated above, it will qualify as a tax-free transaction to the Corporation under Code Section 368(a)(1)(D) of the Code, which we refer to as a D Reorganization, unless the Corporation is required to use an amount of its assets to satisfy claims of Dissenting Shareholders which would prevent the Corporation from transferring substantially all of its assets to Epsilon Energy, Inc., the Delaware corporation. Historically, for advance ruling purposes, the IRS defines "substantially all" to mean 70% of the fair market value of gross assets, and at least 90% of the fair market value of net assets of such entity. In determining if Epsilon Energy, Inc. acquires "substantially all" of the assets of the Corporation, payments of cash by the Corporation to Dissenting Shareholders will not be considered assets acquired by Epsilon Energy, Inc. The Corporation will satisfy the "substantially all" test unless it is required to pay to

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Dissenting Shareholders more than 30% of the fair market value of its gross assets and more than 10% of the fair market value of its net assets. The Corporation believes that the amount it may be required to pay to Dissenting Shareholders