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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2020

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36057

RING ENERGY, INC.

(Exact Name of registrant as specified  in its charter)

Nevada

90-0406406

(State or other jurisdiction of incorporation or
organization)

(IRS Employer Identification No.)

901 West Wall St. 3rd Floor
Midland, TX

79701

(Address of principal executive offices)

(Zip Code)

(432) 682-7464

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act

Title of each Class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value

REI

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act).

 Yes  No

The registrant has one class of common stock of which 81,668,600 shares were outstanding at November 9, 2020.

Table of Contents

INDEX

Ring Energy, Inc.

For the Quarter Ended September 30, 2020

PART I – FINANCIAL INFORMATION

5

Item 1.  Financial Statements.

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

32

Item 4. Controls and Procedures

34

PART II – OTHER INFORMATION

35

Item 1. Legal Proceedings

35

Item 1A. Risk Factors

35

Item 6. Exhibits

36

SIGNATURES

37

2

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements contained in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, need for financing, competitive position and potential growth opportunities. Our forward-looking statements do not consider the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,” “expects,” “could,” “plans,” “estimates,” “projects,” “targets” or comparable terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.

Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this report and in our annual report on Form 10-K for the year ended December 31, 2019. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to:

declines or volatility in the prices we receive for our oil and natural gas;

our ability to raise additional capital to fund future capital expenditures;

our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fully develop and produce our oil and natural gas properties;

general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business;

risks associated with drilling, including completion risks, cost overruns and the drilling of non-economic wells or dry holes;

uncertainties associated with estimates of proved oil and natural gas reserves;

the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;

risks and liabilities associated with acquired companies and properties;

risks related to integration of acquired companies and properties;

potential defects in title to our properties;

cost and availability of drilling rigs, equipment, supplies, personnel and oilfield services;

geological concentration of our reserves;

environmental or other governmental regulations, including legislation of hydraulic fracture stimulation;

our ability to secure firm transportation for oil and natural gas we produce and to sell the oil and natural gas at market prices;

exploration and development risks;

management’s ability to execute our plans to meet our goals;

our ability to retain key members of our management team on commercially reasonable terms;

3

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the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems or on systems and infrastructure used by the oil and gas industry;

weather conditions;

actions or inactions of third-party operators of our properties;

costs and liabilities associated with environmental, health and safety laws;

our ability to find and retain highly skilled personnel;

operating hazards attendant to the oil and natural gas business;

competition in the oil and natural gas industry;

evolving geopolitical and military hostilities in the Middle East;

the ongoing COVID-19 pandemic, including any reactive or proactive measures taken by businesses, governments and by other organizations related thereto, and the direct and indirect effects of COVID-19 on the market for and price of oil; and

the other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Should our underlying assumptions prove incorrect or the consequences of the aforementioned risks worsen, actual results could differ materially from those expected.

Forward-looking statements speak only as to the date hereof. All such forward-looking statements and any subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the statements contained herein or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.

There may also be other risks and uncertainties that we are unable to predict at this time or that we do not now expect to have a material adverse impact on our business.

Explanatory Note

As previously disclosed in the Notes to Financial Statements of the 2019 Form 10-K, we restated our unaudited financial statements for the quarter and year to date periods ended March 31, 2019, June 30, 2019 and September 30, 2019.

4

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

The unaudited condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited interim financial statements should be read in conjunction with the Company’s audited financial statements and related footnotes included in its most recent Annual Report on Form 10-K.

5

Table of Contents

RING ENERGY, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)

    

September 30, 

    

December 31, 

2020

2019

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash

$

17,920,817

$

10,004,622

Accounts receivable

 

12,489,321

22,909,195

Joint interest billing receivable

 

653,607

1,812,469

Derivative receivable

1,711,710

Derivative asset

9,518,564

Prepaid expenses and retainers

 

498,610

3,982,255

Total Current Assets

 

42,792,629

38,708,541

Properties and Equipment

 

 

  

Oil and natural gas properties subject to amortization

 

953,696,964

1,083,966,135

Financing lease asset subject to depreciation

858,513

858,513

Fixed assets subject to depreciation

 

1,465,551

1,465,551

Total Properties and Equipment

 

956,021,028

1,086,290,199

Accumulated depreciation, depletion and amortization

 

(188,922,137)

(157,074,044)

Net Properties and Equipment

 

767,098,891

929,216,155

Operating lease asset

990,155

1,867,044

Derivative asset

 

1,568,057

 

Deferred Income Taxes

21,152,105

Deferred Financing Costs

 

2,647,160

 

3,214,408

Total Assets

$

836,248,997

$

973,006,148

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

Current Liabilities

 

 

  

Accounts payable

$

24,839,820

$

54,635,602

Financing lease liability

 

292,227

280,970

Operating lease liability

 

814,400

1,175,904

Derivative liabilities

 

3,000,078

Total Current Liabilities

 

25,946,447

59,092,554

Deferred income taxes

6,001,176

Revolving line of credit

 

360,000,000

366,500,000

Financing lease liability, less current portion

 

201,528

424,126

Operating lease liability, less current portion

175,755

691,140

Asset retirement obligations

 

17,119,114

16,787,219

Total Liabilities

 

403,442,844

449,496,215

Stockholders’ Equity

 

 

  

Preferred stock - $0.001 par value; 50,000,000 shares authorized; no shares issued or outstanding

 

 

Common stock - $0.001 par value; 150,000,000 shares authorized; 67,983,075 shares and 67,993,797 shares issued and outstanding, respectively

 

67,983

67,994

Additional paid-in capital

 

528,755,063

526,301,281

Accumulated deficit

 

(96,016,893)

(2,859,342)

Total Stockholders' Equity

 

432,806,153

523,509,933

Total Liabilities and Stockholders' Equity

$

836,248,997

$

973,006,148

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

6

Table of Contents

RING ENERGY, INC.

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

For The Three Months

For The Nine Months

Ended September 30, 

Ended September 30, 

    

2020

    

2019 (restated)

    

2020

    

2019 (restated)

Oil and Gas Revenues

$

31,466,544

$

50,339,105

$

81,673,465

$

143,471,645

Costs and Operating Expenses

 

 

 

Oil and gas production costs

 

9,678,011

15,478,052

 

27,128,768

 

36,455,925

Oil and gas production taxes

 

1,427,041

2,307,226

 

3,731,046

 

6,802,996

Depreciation, depletion and amortization

 

10,826,989

14,115,170

 

31,848,093

 

41,659,494

Ceiling test impairment

147,937,943

Asset retirement obligation accretion

 

230,784

236,207

 

694,113

 

681,386

Operating lease expense

 

295,631

114,112

 

876,889

 

370,462

General and administrative expense

 

2,496,927

3,745,928

 

9,709,431

 

15,287,072

Total Costs and Operating Expenses

 

24,955,383

35,996,695

 

221,926,283

 

101,257,335

Income (Loss) from Operations

 

6,511,161

14,342,410

 

(140,252,818)

 

42,214,310

Other Income (Expense)

 

 

 

Interest income

 

1

9

 

7

 

13,505

Interest expense

 

(4,457,250)

(4,556,509)

 

(12,958,788)

 

(9,589,434)

Realized gain on derivatives

 

1,726,373

 

18,814,068

 

Unrealized gain (loss) on change in fair value of derivatives

 

(6,228,453)

1,877,368

 

14,086,699

 

3,066,913

Net Other Income (Expense)

 

(8,959,329)

(2,679,132)

 

19,941,986

 

(6,509,016)

Income (Loss) before Tax Provision

 

(2,448,168)

11,663,278

 

(120,310,832)

 

35,705,294

(Provision for) Benefit from Income Taxes

 

486,565

(2,805,278)

 

27,153,281

 

(11,235,437)

Net Income (Loss)

$

(1,961,603)

$

8,858,000

$

(93,157,551)

$

24,469,857

Basic Earnings (Loss) per Share

$

(0.03)

$

0.13

$

(1.37)

$

0.37

Diluted Earnings (Loss) per Share

$

(0.03)

$

0.13

$

(1.37)

$

0.37

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

7

Table of Contents

RING ENERGY, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

    

    

    

Additional

    

    

Total

Common Stock

Paid-in

Accumulated

Stockholders’

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity

For the Nine Months Ended September 30, 2020

Balance, December 31, 2019

 

67,993,797

$

67,994

$

526,301,281

$

(2,859,342)

$

523,509,933

Share-based compensation

673,795

673,795

Net income

43,804,118

43,804,118

Balance, March 31, 2020

67,993,797

$

67,994

$

526,975,076

$

40,944,776

$

567,987,846

Return of common stock issued as consideration in asset acquisition

(16,702)

(17)

(103,368)

(103,385)

Restricted stock vested

3,480

4

(4)

Share-based compensation

 

 

 

1,317,542

 

 

1,317,542

Net loss

(135,000,066)

(135,000,066)

Balance, June 30, 2020

67,980,575

$

67,981

$

528,189,246

$

(94,055,290)

$

434,201,937

Restricted stock vested

2,500

2

(2)

Share-based compensation

565,819

565,819

Net loss

 

 

 

 

(1,961,603)

 

(1,961,603)

Balance, September 30, 2020

 

67,983,075

$

67,983

$

528,755,063

$

(96,016,893)

$

432,806,153

For the Nine Months Ended September 30, 2019 (restated)

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2018

 

63,229,710

$

63,230

$

494,892,093

$

(32,355,893)

$

462,599,430

Share-based compensation

 

 

 

834,465

 

 

834,465

Net income

 

 

 

 

4,269,260

 

4,269,260

Balance, March 31, 2019

63,229,710

$

63,230

$

495,726,558

$

(28,086,633)

$

467,703,155

Common stock issued as consideration in asset acquisition

4,581,001

4,581

28,351,815

28,356,396

Restricted stock vested

400

Share-based compensation

808,734

808,734

Net income

11,342,597

11,342,597

Balance, June 30, 2019

 

67,811,111

$

67,811

$

524,887,107

$

(16,744,036)

$

508,210,882

Share-based compensation

792,836

792,836

Restricted stock vested

500

1

(1)

Net income

8,858,000

8,858,000

Balance, September 30, 2019

 

67,811,611

$

67,812

$

525,679,942

$

(7,886,036)

$

517,861,718

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

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RING ENERGY, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

2019

For the Nine Months Ended September 30, 

    

2020

    

(restated)

Cash Flows From Operating Activities

Net income (loss)

$

(93,157,551)

$

24,469,857

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

Depreciation, depletion and amortization

 

31,848,093

41,659,494

Ceiling test impairment

147,937,943

Accretion expense

 

694,113

681,386

Amortization of deferred financing costs

567,248

Share-based compensation

 

2,557,156

2,436,035

Deferred income tax provision

 

(25,573,920)

7,498,112

Excess tax deficiency related to share-based compensation

 

(1,579,361)

3,737,325

Change in fair value of derivative instruments

 

(14,086,699)

(3,066,913)

Changes in assets and liabilities:

 

Accounts receivable

 

9,867,026

(7,095,256)

Prepaid expenses and retainers

 

3,483,645

(6,060,699)

Accounts payable

 

(17,225,782)

(1,055,397)

Settlement of asset retirement obligation

 

(428,605)

(615,732)

Net Cash Provided by Operating Activities

 

44,903,306

62,588,212

Cash Flows From Investing Activities

 

 

Payments to purchase oil and natural gas properties

 

(1,189,433)

(263,262,046)

Proceeds from oil and gas property divestiture

4,500,000

Payments to develop oil and natural gas properties

 

(33,586,337)

(122,004,117)

Net Cash Used in Investing Activities

 

(30,275,770)

 

(385,266,163)

Cash Flows From Financing Activities

 

  

 

  

Proceeds from revolving line of credit

 

21,500,000

 

327,000,000

Payments on revolving line of credit

(28,000,000)

Reduction of financing lease liability

(211,341)

(86,686)

Net Cash (Used in) Provided by Financing Activities

 

(6,711,341)

 

326,913,314

Net Change in Cash

 

7,916,195

4,235,363

Cash at Beginning of Period

 

10,004,622

3,363,726

Cash at End of Period

$

17,920,817

$

7,599,089

Supplemental Cash Flow Information

 

Cash paid for interest

$

12,387,670

$

5,821,545

Noncash Investing and Financing Activities

 

 

Asset retirement obligation incurred during development

$

66,387

$

602,090

Operating lease assets obtained in exchange for new operating lease liability

539,577

Financing lease assets obtained in exchange for new financing lease liability

947,435

Capitalized expenditures attributable to drilling projects financed through current liabilities

2,600,000

26,958,655

Acquisition of oil and gas properties

 

Assumption of joint interest billing receivable

 

1,464,394

Assumption of prepaid assets

 

2,864,554

Assumption of accounts and revenue payables

 

(1,234,862)

Asset retirement obligation incurred through acquisition

 

(2,979,645)

Common stock issued as partial consideration in asset acquisition

(28,356,396)

Oil and gas properties subject to amortization

 

296,910,774

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

9

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RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Condensed Financial Statements – The accompanying condensed financial statements prepared by Ring Energy, Inc. (the “Company” or “Ring”) have not been audited by an independent registered public accounting firm.  In the opinion of the Company’s management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the full year ending December 31, 2020, for various reasons, including as a result of the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results, fluctuations in the fair value of derivative instruments, the impacts of COVID-19 and other factors.

These unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements.  Therefore, these financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2019.

Organization and Nature of Operations – The Company is a Nevada corporation that owns interests in oil and natural gas properties located in Texas and New Mexico. The Company’s oil and natural gas sales, profitability and future growth are dependent upon prevailing and future prices for oil and natural gas and the successful acquisition, exploration and development of oil and natural gas properties. Oil and natural gas prices have historically been volatile and may be subject to wide fluctuations in the future. A substantial decline in oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil and natural gas reserves that may be economically produced.

COVID - 19 – In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic. The nature of COVID-19 led to worldwide shutdowns, reductions in commercial and interpersonal activity and changes in consumer behavior. In attempting to control the spread of COVID-19, governments around the world imposed laws and regulations such as shelter-in-place orders, quarantines, executive orders and similar restrictions. As a result, the global economy has been marked by significant slowdown and uncertainty, which in turn has led to a precipitous decline in oil prices in response to decreased demand, further exacerbated by global energy storage shortages and by the price war among members of the Organization of Petroleum Exporting Countries (“OPEC”) and other non-OPEC producer nations (collectively with OPEC members, “OPEC+”) during the first quarter 2020. The decline in oil prices has resulted in a significantly weaker outlook for oil and gas producers, who have been compelled to cut their capital and operating budgets and have implemented a diverse range of operational adjustments. The Company's financial statements for the three-month and nine-month periods ended September 30, 2020, reflect the impact of these events and current market conditions. The continued spread of COVID-19 or further deterioration in oil and natural gas prices could result in additional adverse impacts on the Company's results of operations, cash flows and financial position, including further asset impairments.

Liquidity and Capital Considerations –  The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the issuance date of these condensed financial statements.

The price of both oil and gas has decreased primarily as a result of oil demand concerns due to the economic impacts of COVID-19 and uncertainty surrounding the OPEC+ voluntary production adjustments. While declines in oil and natural gas prices affect the Company's liquidity, the Company's hedges protect, to some extent, its cash flows from such price declines; however, if oil or natural gas prices remain depressed or continue to decline, the Company may be required to record oil and gas property write-downs.

In early March 2020, global oil and natural gas prices declined sharply, have since been volatile, and may decline again. The Company expects ongoing oil price volatility over the short term. Continued depressed oil prices have had and will continue to have a material adverse impact on the Company's oil revenue, which is mitigated to some extent by the Company's hedge contracts.

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RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

As mentioned, consumer demand has decreased since the global COVID-19 outbreak, which decrease is largely attributable to travel restrictions enacted by governments in an effort to curtail the spread of the coronavirus. The effects of the COVID-19 pandemic and of the decrease in oil and natural gas prices continue to evolve and to be realized as of the date of this report. As such, it is uncertain as to the full magnitude of the foregoing events on the Company’s business. Management is actively monitoring the global situation and the impact or adverse effects of the recent events on the Company’s results of future operations, financial position and liquidity in fiscal year 2020.

Due to the recent oil price volatility, the Company has suspended its 2020 capital spending program. The Company has also reduced staff, reduced overtime and made other staffing changes.  Furthermore, the Company began shutting in and curtailing production in April 2020. The curtailments continued until early June 2020 when, with commodity prices improving and price differential decreasing, the Company  began bringing wells back online. The Company has returned to full production for the third quarter.

The Company believes that it has the ability to continue to fund its operations and service its debt by using cash on hand, cash flows from operations and cash flows from its hedges.

Subsequent to September 30, 2020, the Company completed a public offering and concurrently completed a registered direct offering of common shares, pre-funded warrants and common warrants.  In total, the company issued 13,075,800 shares, 16,728,500 pre-funded warrants and 29,804,300 common warrants.  Gross proceeds received at closing were approximately $20.8 million and net proceeds are anticipated to be approximately $19.1MM.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period.  The Company’s unaudited condensed financial statements are based on a number of significant estimates, including estimates of oil and natural gas reserve quantities, which are the basis for the calculation of depletion and impairment of oil and gas properties.  Reserve estimates, by their nature, are inherently imprecise.  Actual results could differ from those estimates. Changes in the future estimated oil and natural gas reserves or the estimated future cash flows attributable to the reserves that are utilized for impairment analysis could have a significant impact on the Company’s future results of operations.

Fair Value Measurements – Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Financial Accounting Standards Board (“FASB”) has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability.

Fair Values of Financial Instruments – The carrying amounts reported for the revolving line of credit approximate their fair value because the underlying instruments are at interest rates which approximate current market rates. The carrying amounts of accounts receivables and accounts payable and other current assets and liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities.

Derivative Instruments and Hedging Activities – The Company may periodically enter into derivative contracts to manage its exposure to commodity risk. These derivative contracts, which are generally placed with major financial institutions, may take the form of forward contracts, futures contracts, swaps or options. The oil and gas reference prices upon which the commodity derivative contracts are based reflect various market indices that have a high degree of historical correlation with actual prices received by the Company for its oil and gas production.

When applicable, the Company records all derivative instruments, other than those that meet the normal purchases and sales exception, on the balance sheet as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met.  The change in fair value resulted in the recognition of an unrealized loss of $6,228,453 for the three months ended September 30, 2020 and an unrealized gain of $14,086,699 for the nine months ended September 30, 2020.  During the three and nine months ended September 30, 2019, the change in fair value resulted in the recognition of unrealized gains of

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RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

$1,877,368 and $3,066,913, respectively, on derivative contracts.  During the three and nine months ended September 30, 2020, the Company had realized gains of $1,726,373 and $18,814,068, respectively, on derivatives.  During the three and nine months ended September 30, 2019, the Company had no realized gain or loss on derivatives.

Concentration of Credit Risk and Major Customer – The Company had cash in excess of federally insured limits at September 30, 2020.  During the nine months ended September 30, 2020, sales to two customers represented 64% and 14%, respectively, of the Company’s oil and gas revenues.  At September 30, 2020, these two customers made up 85% and 0%, respectively, of the Company’s accounts receivable.

Approximately 95% of the Company’s accounts and joint interest billing receivables are from purchasers of oil and gas.  Oil and gas sales are generally unsecured.  The Company has not had any significant credit losses in the past and believes its accounts and joint interest billing receivables are fully collectable.  Accordingly, no allowance for doubtful accounts has been provided at September 30, 2020.  The Company also has joint interest billing receivable.  Joint interest billing receivables are collateralized by the pro rata revenue attributable to the joint interest holders and further by the interest itself.

Oil and Gas Properties – The Company uses the full cost method of accounting for oil and gas properties.  Under this method, all costs associated with the acquisition, leasing, exploration and development of oil and gas reserves are capitalized. Costs capitalized include acquisition costs, estimated future costs of abandonment and site restoration, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs.  Capitalized costs are generally categorized either as being subject to amortization or not subject to amortization. All of our costs are subject to amortization.

All capitalized costs of oil and gas properties, plus estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves as determined by independent petroleum engineers. The Company evaluates oil and gas properties for impairment quarterly. For the nine months ended September 30, 2020, the Company incurred write downs on oil and natural gas properties as a result of the ceiling test in the amount of $147,937,943. No impairment was recorded for the three months ended September 31, 2020. No impairment was recorded for the three or nine months ended September 30, 2019.

Depreciation, depletion and amortization expense for the three and nine months ended September 30, 2020 was $10,826,989 and $31,848,093, respectively, based on depletion at the rate of $12.22 and $13.37, respectively, per barrel of oil equivalent compared to $14,115,170 and $41,659,494, respectively, based on depletion at the rate of $13.42 and $14.18 per barrel of oil equivalent for the three and nine months ended September 30, 2019. These amounts include $88,928 and $289,106, respectively, of depreciation for the three and nine months ended September 30, 2020, compared to $110,120 and $217,551, respectively, of depreciation for the three and nine months ended September 30, 2019.

Equipment, vehicles and leasehold improvements – Office equipment is valued at historical cost adjusted for impairment loss less accumulated depreciation. Historical costs include all direct costs associated with the acquisition of office equipment and placing such equipment in service. Depreciation is calculated using the straight-line method based upon an estimated useful life of 5 to 7 years.

Asset Retirement Obligation – The Company records a liability in the period in which an asset retirement obligation (“ARO”) is incurred, in an amount equal to the discounted estimated fair value of the obligation that is capitalized. Thereafter, this liability is accreted up to the final estimated retirement cost. An ARO is a future expenditure related to the disposal or other retirement of certain assets. The Company’s ARO relates to future plugging and abandonment expenses of its oil and natural gas properties and related facilities disposal.

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RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

Share-Based Employee Compensation – The Company has outstanding stock option grants to directors, officers and employees, which are described more fully in Note 11. The Company recognizes the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the related compensation expense over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.

Share-Based Compensation to Non-Employees – The Company accounts for share-based compensation issued to non-employees as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for these issuances is the earlier of (i) the date at which a commitment for performance by the recipient to earn the equity instruments is reached or (ii) the date at which the recipient’s performance is complete.

Income Taxes – Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are based on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The CARES ACT was enacted March 27, 2020 and includes income tax provisions that, among other things, allow net operating losses (“NOLs”) to be carried back, permits interest expense to be deducted up to a higher percentage of adjusted taxable income and modifies tax depreciation of qualified improvement property. These provisions have no material impact on the Company.

Recently Adopted Accounting Pronouncements – In August 2018, the FASB issued Accounting Standards Updated (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurement. ASU 2018-13 is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted for either the entire standard or only the provisions that eliminate or modify requirements. ASU 2018-13 requires that the additional disclosure requirements be adopted using a retrospective approach.  The adoption of this guidance did not have a material impact on the Company’s financial statements.

Basic and Diluted Earnings per Share – Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution that could occur if all contracts to issue common stock were converted into common stock, except for those that are anti-dilutive.  The dilutive effect of stock options and other share-based compensation is calculated using the treasury method.

NOTE 2 – REVENUE RECOGNITION

The Company predominantly derives its revenue from the sale of produced crude oil and natural gas. The contractual performance obligation is satisfied when the product is delivered to the customer.  Revenue is recorded in the month the product is delivered to the purchaser and the Company receives payment from one to three months after delivery.  The transaction price includes variable consideration as product pricing is based on published market prices and reduced for contract specified differentials.  The guidance does not require that the transaction price be fixed or stated in the contract.  Estimating the variable consideration does not require significant judgment and Ring engages third party sources to validate the estimates.  Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration the Company expects to receive in exchange for those products.

Oil sales

Under the Company’s oil sales contracts, the Company sells oil production at the point of delivery and collects an agreed upon index price, net of pricing differentials. The Company recognizes revenue when control transfers to the purchaser at the point of delivery at the net price received.

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RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

Natural gas sales

Under the Company’s natural gas sales processing contracts for our Central Basin Platform properties, Delaware Basin properties and part of our Northwest Shelf assets, the Company delivers unprocessed natural gas to a midstream processing entity at the wellhead. The midstream processing entity obtains control of the natural gas at the wellhead. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sale of natural gas. Under these processing agreements, the Company recognizes revenue when control transfers to the purchaser at the point of delivery. As such, the Company accounts for any fees and deductions as a reduction of the transaction price.

Under the Company natural gas sales processing contracts for the bulk of our Northwest Shelf assets, the Company delivers unprocessed natural gas to a midstream processing entity at the well head. However, the Company maintains ownership of the gas through processing and receives proceeds from the marketing of the resulting products. Under this processing agreement, the Company recognizes the fees associated with the processing as an expense rather than netting these costs against revenue.

Disaggregation of Revenue. The following table presents revenues disaggregated by product for the three and nine months ended September 30, 2020 and 2019:

    

For The Three Months

    

For The Nine Months

Ended September 30, 

Ended September 30, 

2020

    

2019

2020

    

2019

Operating revenues

 

  

 

  

 

  

 

  

Oil

$

30,327,668

$

49,502,656

$

79,379,242

$

141,174,111

Natural gas

 

1,138,876

836,449

 

2,294,223

 

2,297,534

 

Total operating revenues

$

31,466,544

$

50,339,105

$

81,673,465

$

143,471,645

All revenues are from production from the Permian Basin in Texas and New Mexico.

NOTE 3 – LEASES

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The purpose of this guidance is to increase transparency and comparability among organizations by recognizing certain lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP methodology and the method proposed by this new guidance is the recognition on the balance sheet of certain lease assets and lease liabilities by lessees for those leases that were classified as operating leases under previous GAAP.

The Company made accounting policy elections to not capitalize leases with a lease term of twelve months or less and to not separate lease and non-lease components for all asset classes. The Company has also elected to adopt the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases and the practical expedient regarding land easements that exist prior to the adoption of ASU 2016-02. The Company did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date.

The Company has operating leases for our offices in Midland, Texas and Tulsa, Oklahoma that are month to month but which the Company intends to continue through at least December 31, 2020.  As such, these leases have been accounted for as operating leases with terms that end on December 31, 2020.  The office space being leased in Tulsa is owned by Arenaco, LLC, a company that is owned by Mr. Rochford, Chairman of the Board of the Company, and Mr. McCabe, a Director of the Company.

The Company also has month to month leases for office equipment and compressors used in our operations on which the Company has elected to apply ASU 2016-02.  While these leases are month to month, the Company intends to continue these leases for the useful life of the assets.  As such, these leases have been accounted for as if the lease term lasts through the estimated useful life of the assets.  

14

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

The Company also has month to month leases or other short-term leases for equipment used in its operations on which the Company has made accounting policy elections not to capitalize these leases.  These leases are for terms that are less than 12 months and the Company does not intend to continue to lease this equipment for more than 12 months.  The lease costs associated with these leases are reflected in the short-term lease costs below.

The Company also has financing leases for vehicles.  These leases have a term of 36 months at the end of which the Company owns the vehicles.  These vehicles are generally sold at the end of their term and the proceeds applied to a new vehicle.

Future lease payments associated with these operating and financing leases as of September 30, 2020 are as follows:

    

2020

    

2021

    

2022

Operating lease payments (1)

$

309,195

$

708,392

$

Financing lease payments (2)

77,802

311,206

132,499

(1)The weighted average discount rate as of September 30, 2020 for operating leases was 4.49%.  Based on this rate, the future lease payments above include imputed interest of $27,432.
(2)The weighted average discount rate as of September 30, 2020 for financing leases was 5.26%.  Based on this rate, the future lease payments above include imputed interest of $27,752.

The following table provides supplemental information regarding cash flows from operations:

    

2020

    

2019

Operating lease costs

$

876,889

$

384,525

Short term lease costs (1)

3,347,484

461,277

Financing lease costs:

Amortization of financing lease assets (2)

215,560

98,868

Interest on lease liabilities (3)

24,022

15,019

(1)Amount included in Oil and gas production costs
(2)Amount included in Depreciation, depletion and amortization
(3)Amount included in Interest expense

NOTE 4 – EARNINGS PER SHARE INFORMATION

For The Three Months

For The Nine Months

Ended September 30, 

Ended September 30, 

    

    

2019

    

    

2019

2020

(restated)

2020

(restated)

Net Income (Loss)

$

(1,961,603)

$

8,858,000

$

(93,157,551)

$

24,469,857

Basic Weighted-Average Shares Outstanding

 

67,980,961

67,811,127

 

67,985,168

 

66,149,469

Effect of dilutive securities:

 

 

 

Stock options

 

25,841

 

 

204,639

Restricted stock

 

 

 

47,314

Diluted Weighted-Average Shares Outstanding

 

67,980,961

67,836,968

 

67,985,168

 

66,401,422

Basic Earnings (Loss) per Share

$

(0.03)

$

0.13

$

(1.37)

$

0.37

Diluted Earnings (Loss) per Share

$

(0.03)

$

0.13

$

(1.37)

$

0.37

15

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

Stock options to purchase 483,500 shares of common stock and 1,326,709 shares of unvested restricted stock were excluded from the computation of diluted earnings per share during both the three and nine months ended September 30, 2020, as their effect would have been anti-dilutive. Stock options to purchase 2,353,500 shares of common stock and 3,250,420 shares of unvested restricted stock were excluded from the computation of diluted earnings per share during the three months ended September 30, 2019, as their effect would have been anti-dilutive. Stock options to purchase 2,353,500 shares of common stock and 2,639,540 shares of unvested restricted stock were excluded from the computation of diluted earnings per share during the nine months ended September 30, 2019, as their effect would have been anti-dilutive.

NOTE 5 – ACQUISITIONS

On April 9, 2019, the Company completed the acquisition of oil and gas properties from Wishbone Energy Partners, LLC, Wishbone Texas Operating Company LLC and WB WaterWorks LLC on the Northwest Shelf in Gaines, Yoakum, Runnels and Coke Counties, Texas and Lea County, New Mexico (the “Acquisition”). The acquired properties consist of 49,754 gross (38,230 net) acres and include a 77% average working interest and a 58% average net revenue interest. The Company incurred approximately $4.1 million in acquisition related costs, which were recognized in general and administrative expense during the nine months ended September 30, 2019.  Total consideration after purchase price adjustments included a cash payment of approximately $264.1 million and the issuance of 4,581,001 shares of common stock, of which 2,538,071 shares are being held in escrow to satisfy potential indemnification claims. As a part of the final settlement, Wishbone Partners, LLC returned 16,702 shares of stock.  These shares were subsequently cancelled by the Company.  The shares were valued at February 25, 2019, the date of the signing of the Purchase and Sale Agreement.  The price on February 25, 2019 was $6.19 per share.  The aggregate value of the shares returned, based on this price, was $103,385.  The full amount of the shares have been released from escrow as of September 30, 2020.

The Acquisition was recognized as a business combination whereby Ring recorded the assets acquired and the liabilities assumed at their fair values as of February 1, 2019, which is the date the Company obtained control of the properties and was the acquisition date for financial reporting purposes. Revenues and related expenses for the Acquisition are included in our condensed statement of operations beginning February 1, 2019. The estimated fair value of the acquired properties approximated the consideration paid, which the Company concluded approximated the fair value that would be paid by a typical market participant. The following table summarizes the fair values of the assets acquired and the liabilities assumed:

Assets acquired:

    

Proved oil and gas properties

$

296,910,774

Joint interest billing receivable

1,464,394

Prepaid assets

 

2,864,554

Liabilities assumed

 

Accounts and revenues payable

 

(1,234,862)

Asset retirement obligations

 

(2,979,645)

Total Identifiable Net Assets

$

297,025,215

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RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

The following unaudited pro forma information for the three and nine months ended September 30, 2019 is presented to reflect the operations of the Company as if the Acquisition had been completed on January 1, 2019:

For The Three Months

For The Nine Months

Ended September 30, 

Ended September 30, 

    

2019

    

2019

(restated)

(restated)

Oil and Gas Revenues

$

57,004,519

$

150,137,059

Net Income

$

8,918,442

$

24,530,299

Basic Earnings per Share

$

0.13

$

0.36

Diluted Earnings per Share

$

0.13

$

0.36

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to fluctuations in crude oil and natural gas prices on its production. It can utilize derivative strategies that consist of either a single derivative instrument or a combination of instruments to manage the variability in cash flows associated with the forecasted sale of its future domestic oil and natural gas production. While the use of derivative instruments may limit or partially reduce the downside risk of adverse commodity price movements, the use also may limit future income from favorable commodity price movements.

During April and November of 2019 and February and March of 2020, the Company entered into derivative contracts in the form of costless collars of WTI Crude Oil prices in order to protect the Company’s cash flow from price fluctuation and maintain its capital programs. “Costless collars” are the combination of two options, a put option (floor) and a call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. The trades were for a total of 5,500 barrels of oil per day for the period of January 2020 through December 2020 and 4,500 barrels of oil per day for the period of January 2021 through December 2021.

During May 2020, the Company unwound the costless collars for June 2020 and July 2020, resulting in the receipt of a cash payment of $5,435,136.  Concurrently, the Company entered into swap contracts at $33.24 for 5,500 barrels per day for June and July 2020, equal to the barrels for which the costless collars were unwound.  Similar to costless collars, there is no cost to enter into the swap contracts.  On swap contracts, there is no spread and payments will be made or received based on the difference between WTI and the swap contract price.  The following table reflects the  prices of those contracts:

Date entered into

    

Barrels per day

    

Put price

    

Call price

2020 costless collars, in place for August through December 2020

04/01/19

 

1,000

$

50.00

$

65.83

04/01/19

 

1,000

 

50.00

 

65.40

11/05/19

1,000

50.00

58.40

11/07/19

1,000

50.00

58.25

11/11/19

1,500

50.00

58.65

2021 costless collars, in place for January through December 2021

02/25/20

1,000

$

45.00

$

54.75

02/25/20

1,000

45.00

52.71

02/27/20

1,000

40.00

55.08

03/02/20

 

1,500

 

40.00

 

55.35

17

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RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

2020 Swap, in place for July 2020

Swap price

05/29/20

5,500

$

33.24

Derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying balance sheets. Any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included as a component of other income (expense) in the accompanying statements of operations.

The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. At September 30, 2020, 100% of our volumes subject to derivative instruments are with lenders under our Credit Facility (as defined in Note 8).

NOTE 7 – FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The authoritative guidance requires disclosure of the framework for measuring fair value and requires that fair value measurements be classified and disclosed in one of the following categories:

Level 1:        Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2:        Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3:        Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity).

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy. We continue to evaluate our inputs to ensure the fair value level classification is appropriate. When transfers between levels occur, it is our policy to assume that the transfer occurred at the date of the event or change in circumstances that caused the transfer.

The fair values of the Company’s derivatives are not actively quoted in the open market. The Company uses a market approach to estimate the fair values of its derivative instruments on a recurring basis, utilizing commodity futures pricing for the underlying commodities provided by a reputable third party, a Level 2 fair value measurement.

18

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes the valuation of our assets and liabilities that are measured at fair value on a recurring basis.

Fair Value Measurement Classification

Quoted prices in

    

Active Markets

for Identical Assets

Significant Other

Significant

or (Liabilities)

Observable Inputs

Unobservable

    

(Level 1)

    

(Level 2)

    

Inputs (Level 3)

    

Total

As of December 31, 2019

Oil and gas derivative liabilities

$

$

(3,000,078)

$

$

(3,000,078)

Total

$

$

(3,000,078)

$

$

(3,000,078)

    

Fair Value Measurement Classification

Quoted prices in

    

Active Markets

for Identical Assets

Significant Other

Significant

or (Liabilities)

Observable Inputs

Unobservable

(Level 1)

(Level 2)

Inputs (Level 3)

    

Total

As of September 30, 2020

  

  

  

  

Oil and gas derivative assets

$

$

11,086,621

$

$

11,086,621

Total

$

$

11,086,621

$

$

11,086,621

NOTE 8 – REVOLVING LINE OF CREDIT

In April 2019, the Company entered into an amended and restated Credit Agreement with SunTrust Bank, as lender, issuing bank and administrative agent for several banks and other financial institutions and lenders (the “Administrative Agent”). In June 2020, the Company amended and restated its Credit Agreement with the Administrative Agent (as amended and restated, the “Credit Facility”). The amendment and restatement of the Credit Facility, among other things, decreased the borrowing base (the “Borrowing Base”) to  $