0001384195--12-312021Q3falsefalsetrue0085568287993599380001384195us-gaap:EmployeeStockOptionMember2021-07-012021-09-300001384195rei:PreFundedWarrantsMember2021-01-012021-09-300001384195us-gaap:RetainedEarningsMember2021-09-300001384195us-gaap:AdditionalPaidInCapitalMember2021-09-300001384195us-gaap:RetainedEarningsMember2021-06-300001384195us-gaap:AdditionalPaidInCapitalMember2021-06-3000013841952021-06-300001384195us-gaap:RetainedEarningsMember2021-03-310001384195us-gaap:AdditionalPaidInCapitalMember2021-03-3100013841952021-03-310001384195us-gaap:RetainedEarningsMember2020-12-310001384195us-gaap:AdditionalPaidInCapitalMember2020-12-310001384195us-gaap:RetainedEarningsMember2020-09-300001384195us-gaap:AdditionalPaidInCapitalMember2020-09-300001384195us-gaap:RetainedEarningsMember2020-06-300001384195us-gaap:AdditionalPaidInCapitalMember2020-06-300001384195us-gaap:RetainedEarningsMember2020-03-310001384195us-gaap:AdditionalPaidInCapitalMember2020-03-3100013841952020-03-310001384195us-gaap:RetainedEarningsMember2019-12-310001384195us-gaap:AdditionalPaidInCapitalMember2019-12-310001384195us-gaap:CommonStockMember2021-09-300001384195us-gaap:CommonStockMember2021-06-300001384195us-gaap:CommonStockMember2021-03-310001384195us-gaap:CommonStockMember2020-12-310001384195us-gaap:CommonStockMember2020-09-300001384195us-gaap:CommonStockMember2020-06-300001384195us-gaap:CommonStockMember2020-03-310001384195us-gaap:CommonStockMember2019-12-310001384195us-gaap:EmployeeStockOptionMember2020-09-300001384195us-gaap:StockOptionMember2021-04-012021-06-300001384195us-gaap:StockOptionMember2020-12-310001384195us-gaap:StockOptionMember2020-03-310001384195us-gaap:StockOptionMember2019-12-310001384195us-gaap:StockOptionMember2021-06-300001384195us-gaap:StockOptionMember2021-03-310001384195us-gaap:StockOptionMember2020-06-300001384195us-gaap:StockOptionMember2021-01-012021-03-310001384195us-gaap:StockOptionMember2021-07-012021-09-300001384195us-gaap:StockOptionMember2020-07-012020-09-3000013841952020-06-300001384195us-gaap:StockOptionMember2021-09-300001384195us-gaap:StockOptionMember2020-09-3000013841952021-05-3100013841952011-12-3100013841952021-05-012021-05-3100013841952013-01-012013-12-310001384195us-gaap:RestrictedStockMember2021-06-300001384195us-gaap:RestrictedStockMember2021-03-310001384195us-gaap:RestrictedStockMember2020-12-310001384195us-gaap:RestrictedStockMember2020-09-300001384195us-gaap:RestrictedStockMember2020-06-300001384195us-gaap:RestrictedStockMember2020-03-310001384195us-gaap:RestrictedStockMember2019-12-310001384195us-gaap:RestrictedStockMember2021-04-012021-06-300001384195us-gaap:RestrictedStockMember2021-01-012021-03-310001384195us-gaap:RestrictedStockMember2020-04-012020-06-300001384195us-gaap:RestrictedStockMember2020-01-012020-03-3100013841952019-04-300001384195us-gaap:StandbyLettersOfCreditMember2016-06-2600013841952021-06-100001384195us-gaap:RestrictedStockMember2021-09-300001384195us-gaap:EmployeeStockOptionMember2021-09-300001384195us-gaap:EmployeeStockOptionMember2021-01-012021-09-3000013841952020-06-012020-06-300001384195srt:OilReservesMemberrei:CommodityContractAMemberus-gaap:PutOptionMember2021-09-300001384195srt:OilReservesMemberrei:CommodityContractCMember2021-09-300001384195srt:OilReservesMemberrei:CommodityContractBMember2021-09-300001384195srt:OilReservesMemberrei:CommodityContractAMember2021-09-300001384195us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2021-09-300001384195us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-09-300001384195us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-09-300001384195us-gaap:FairValueMeasurementsRecurringMember2021-09-300001384195us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310001384195us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310001384195us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310001384195us-gaap:FairValueMeasurementsRecurringMember2020-12-310001384195srt:MinimumMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-01-012021-09-300001384195srt:MaximumMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-01-012021-09-300001384195us-gaap:LondonInterbankOfferedRateLIBORMember2021-01-012021-09-300001384195us-gaap:FederalFundsPurchasedMember2021-01-012021-09-300001384195rei:CustomerTwoMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:CustomerConcentrationRiskMember2021-01-012021-09-300001384195rei:CustomerThreeMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:CustomerConcentrationRiskMember2021-01-012021-09-300001384195rei:CustomerOneMemberus-gaap:RevenueFromContractWithCustomerMemberus-gaap:CustomerConcentrationRiskMember2021-01-012021-09-300001384195rei:CommonWarrantsMember2021-09-3000013841952020-09-3000013841952019-12-310001384195us-gaap:RestrictedStockMember2021-07-012021-09-300001384195rei:CommonWarrantsMember2021-07-012021-09-300001384195us-gaap:RestrictedStockMember2021-01-012021-09-300001384195us-gaap:CommonStockMember2021-01-012021-09-300001384195rei:CommonWarrantsMember2021-01-012021-09-300001384195us-gaap:RestrictedStockMember2020-07-012020-09-300001384195us-gaap:RestrictedStockMember2020-01-012020-09-300001384195us-gaap:CommonStockMember2020-01-012020-09-300001384195us-gaap:StandbyLettersOfCreditMember2020-05-190001384195us-gaap:StandbyLettersOfCreditMember2019-04-090001384195us-gaap:SuretyBondMember2021-09-300001384195us-gaap:RetainedEarningsMember2021-07-012021-09-300001384195us-gaap:AdditionalPaidInCapitalMember2021-07-012021-09-300001384195us-gaap:RetainedEarningsMember2021-04-012021-06-300001384195us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-3000013841952021-04-012021-06-300001384195us-gaap:RetainedEarningsMember2021-01-012021-03-310001384195us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-3100013841952021-01-012021-03-310001384195us-gaap:RetainedEarningsMember2020-07-012020-09-300001384195us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001384195us-gaap:RetainedEarningsMember2020-01-012020-03-310001384195us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-3100013841952020-01-012020-03-310001384195us-gaap:CommonStockMember2021-07-012021-09-300001384195us-gaap:CommonStockMember2021-04-012021-06-300001384195us-gaap:CommonStockMember2021-01-012021-03-310001384195us-gaap:CommonStockMember2020-07-012020-09-300001384195us-gaap:CommonStockMember2020-01-012020-03-310001384195us-gaap:StockOptionMember2020-04-012020-06-300001384195us-gaap:StockOptionMember2020-01-012020-03-310001384195us-gaap:RetainedEarningsMember2020-04-012020-06-300001384195us-gaap:CommonStockMember2020-04-012020-06-300001384195us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-3000013841952020-04-012020-06-300001384195rei:CustomerTwoMemberus-gaap:AccountsReceivableMember2021-09-300001384195rei:CustomerThreeMemberus-gaap:AccountsReceivableMember2021-09-300001384195rei:CustomerOneMemberus-gaap:AccountsReceivableMember2021-09-300001384195srt:MinimumMemberrei:CalendarYear2022Member2021-06-100001384195srt:MaximumMemberrei:CalendarYear2022Member2021-06-100001384195rei:StateAndFederalAgenciesMemberus-gaap:StandbyLettersOfCreditMember2021-01-012021-09-300001384195us-gaap:SuretyBondMember2021-01-012021-09-3000013841952021-09-3000013841952020-12-310001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractGMember2021-09-300001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractFMember2021-09-300001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractEMember2021-09-300001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractDMember2021-09-300001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractCMember2021-09-300001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractBMember2021-09-300001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractAMember2021-09-300001384195srt:OilReservesMemberrei:January2021throughdecember2021Memberrei:CommodityContractFMember2021-09-300001384195srt:OilReservesMemberrei:January2021throughdecember2021Memberrei:CommodityContractEMember2021-09-300001384195srt:OilReservesMemberrei:January2021throughdecember2021Memberrei:CommodityContractDMember2021-09-300001384195srt:OilReservesMemberrei:January2021throughdecember2021Memberrei:CommodityContractCMember2021-09-300001384195srt:OilReservesMemberrei:January2021throughdecember2021Memberrei:CommodityContractBMember2021-09-300001384195srt:OilReservesMemberrei:January2021throughdecember2021Memberrei:CommodityContractAMember2021-09-300001384195srt:OilReservesMemberrei:CommodityContractCMemberus-gaap:CallOptionMember2021-09-300001384195srt:OilReservesMemberrei:CommodityContractBMemberus-gaap:CallOptionMember2021-09-300001384195srt:OilReservesMemberrei:CommodityContractAMemberus-gaap:CallOptionMember2021-09-300001384195srt:OilReservesMemberrei:January2022ThroughDecember2022Memberrei:CommodityContractGMember2021-05-210001384195srt:OilReservesMember2021-07-012021-09-300001384195srt:OilReservesMember2021-01-012021-09-300001384195srt:NaturalGasReservesMember2021-01-012021-09-300001384195srt:OilReservesMember2020-07-012020-09-300001384195srt:OilReservesMember2020-01-012020-09-300001384195srt:MinimumMember2021-01-012021-09-300001384195srt:MaximumMember2021-01-012021-09-300001384195rei:VinFisherOperatingIncMember2021-09-300001384195rei:VinFisherOperatingIncMember2021-01-012021-09-300001384195us-gaap:StandbyLettersOfCreditMember2021-01-012021-09-3000013841952021-07-012021-09-3000013841952020-07-012020-09-3000013841952020-01-012020-09-3000013841952021-11-0900013841952021-01-012021-09-30xbrli:sharesiso4217:USDxbrli:pureutr:bbliso4217:USDutr:bbliso4217:USDxbrli:shares

Table of Contents

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, 2021

 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.)

1725 Hughes Landing, Suite 900
The Woodlands, TX

77380

(Address of principal executive offices)

(Zip Code)

(281) 397-3699

(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, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

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

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 99,640,162 shares were outstanding at November 9, 2021.

Table of Contents

INDEX

Ring Energy, Inc.

For the Quarter Ended September 30, 2021

PART I – FINANCIAL INFORMATION

5

Item 1.  Financial Statements.

5

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

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. Controls and Procedures

36

PART II – OTHER INFORMATION

38

Item 1. Legal Proceedings

38

Item 1A. Risk Factors

38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3. Defaults Upon Senior Securities

38

Item 4. Mine Safety Disclosure

38

Item 5. Other Information

38

Item 6. Exhibits

39

SIGNATURES

40

2

Table of Contents

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 “Exchange Act”). 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, 2020. 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

Table of Contents

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;

effectiveness of our internal control over financial reporting;

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 and other areas of the world;

economic and competitive conditions;

lack of available insurance;

cash flow and anticipated liquidity;

continuing compliance with the financial covenant contained in our amended and restated credit agreement;

the ongoing COVID-19 pandemic and its mutations and variants, including 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, 2020.

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

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.

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”). Accordingly, certain disclosures required by accounting principles generally accepted in the United States and normally included in Annual Reports on Form 10-K have been omitted. Although management believes that our 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, 

    

2021

2020

ASSETS

 

Current Assets

  

 

  

Cash and cash equivalents

$

2,046,946

$

3,578,634

Accounts receivable

 

20,306,264

 

14,997,979

Joint interest billing receivable

 

1,672,334

 

1,327,262

Derivative receivable

499,906

Prepaid expenses and retainers

 

1,298,801

 

396,109

Total Current Assets

 

25,324,345

 

20,799,890

Properties and Equipment

 

 

  

Oil and natural gas properties, full cost method

 

872,258,987

 

836,514,815

Financing lease asset subject to depreciation

1,422,487

858,513

Fixed assets subject to depreciation

 

2,130,523

 

1,520,890

Total Properties and Equipment

875,811,997

838,894,218

Accumulated depreciation, depletion and amortization

 

(225,744,692)

 

(200,111,658)

Net Properties and Equipment

 

650,067,305

 

638,782,560

Operating lease asset

1,344,378

1,494,399

Deferred financing costs

 

1,882,815

 

2,379,348

Total Assets

$

678,618,843

$

663,456,197

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current Liabilities

 

  

 

  

Accounts payable

$

45,259,500

$

32,500,081

Financing lease liability

385,866

295,311

Operating lease liability

268,512

859,017

Derivative liabilities

 

38,402,944

 

3,287,328

Notes Payable

857,151

Total Current Liabilities

 

85,173,973

 

36,941,737

Noncurrent Liabilities

Deferred income taxes

141,943

Revolving line of credit

 

295,000,000

 

313,000,000

Financing lease liability, less current portion

393,340

126,857

Operating lease liability, less current portion

1,212,239

635,382

Derivative liabilities

6,061,724

869,273

Asset retirement obligations

 

14,998,130

 

17,117,135

Total Liabilities

 

402,981,349

 

368,690,384

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; 99,359,938 shares and 85,568,287 shares issued and outstanding, respectively

 

99,360

 

85,568

Additional paid-in capital

 

552,598,622

 

550,951,415

Accumulated deficit

 

(277,060,488)

 

(256,271,170)

Total Stockholders’ Equity

 

275,637,494

 

294,765,813

Total Liabilities and Stockholders' Equity

$

678,618,843

$

663,456,197

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 Ended

    

For the Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020

Oil and Natural Gas Revenues

$

49,376,176

$

31,466,544

$

136,638,810

$

81,673,465

Costs and Operating Expenses

    

 

    

 

    

 

  

    

 

  

Lease operating expenses

 

6,983,196

 

7,819,639

 

22,634,259

 

21,887,356

Gathering, transportation and processing costs

1,051,163

1,058,372

2,883,348

2,833,957

Ad valorem taxes

 

703,774

 

800,000

 

2,144,800

 

2,407,455

Oil and natural gas production taxes

 

2,240,759

 

1,427,041

 

6,291,860

 

3,731,046

Depreciation, depletion and amortization

 

9,310,524

 

10,826,989

 

26,693,808

 

31,848,093

Ceiling test impairment

147,937,943

Asset retirement obligation accretion

 

182,905

 

230,784

 

560,662

 

694,113

Operating lease expense

83,589

295,631

439,896

876,889

General and administrative expense

 

4,433,251

 

2,496,927

 

11,103,394

 

9,709,431

Total Costs and Operating Expenses

 

24,989,161

 

24,955,383

 

72,752,027

 

221,926,283

Income (Loss) from Operations

 

24,387,015

 

6,511,161

 

63,886,783

 

(140,252,818)

Other Income (Expense)

 

 

  

 

 

Interest income

 

0

 

1

 

1

 

7

Interest (expense)

 

(3,551,462)

 

(4,457,250)

 

(10,947,960)

 

(12,958,788)

Gain (loss) on derivative contracts

 

(6,720,320)

 

(4,502,080)

 

(73,586,199)

 

32,900,767

Net Other Income (Expense)

 

(10,271,782)

 

(8,959,329)

 

(84,534,158)

 

19,941,986

Income (Loss) Before Provision for Income Taxes

14,115,233

 

(2,448,168)

 

(20,647,375)

 

(120,310,832)

Benefit from (Provision for) Income Taxes

 

48,701

 

486,565

 

(141,943)

 

27,153,281

Net Income (Loss)

$

14,163,934

$

(1,961,603)

$

(20,789,318)

$

(93,157,551)

Basic Earnings (Loss) per share

$

0.14

$

(0.03)

$

(0.21)

$

(1.37)

Diluted Earnings (Loss) per share

$

0.12

$

(0.03)

$

(0.21)

$

(1.37)

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

    

Retained Earnings

    

Total

Common Stock

Paid-in

(Accumulated

Stockholders’

For the Nine Months Ended September 30, 2021

 

Shares

 

Amount

 

Capital

 

Deficit)

 

Equity

Balance, December 31, 2020

 

85,568,287

$

85,568

$

550,951,415

$

(256,271,170)

$

294,765,813

Common stock and warrants issued for cash, net

(65,000)

(65,000)

Exercise of pre-funded warrants issued in offering

13,428,500

13,429

13,429

Exercise of common warrants issued in offering

184,800

185

147,655

147,840

Restricted stock vested

94,350

94

(94)

Share-based compensation

355,494

355,494

Net income (loss)

(19,066,093)

(19,066,093)

Balance, March 31, 2021

99,275,937

$

99,276

$

551,389,470

$

(275,337,263)

$

276,151,483

Common stock and warrants issued for cash, net

Exercise of pre-funded warrants issued in offering

Exercise of common warrants issued in offering

100,000

100

79,900

80,000

Restricted stock vested

3,480

3

(3)

Shares to cover tax withholdings

(28,272)

(28)

28

Share-based compensation

 

 

 

351,775

 

 

351,775

Net income (loss)

(15,887,159)

(15,887,159)

Balance, June 30, 2021

99,351,145

$

99,351

$

551,821,170

$

(291,224,422)

$

260,696,099

Common stock and warrants issued for cash, net

Exercise of pre-funded warrants issued in offering

Exercise of common warrants issued in offering

Restricted stock vested

12,500

13

(13)

Shares to cover tax withholdings

(3,707)

(4)

4

Share-based compensation

777,461

777,461

Net income (loss)

 

 

 

 

14,163,934

 

14,163,934

Balance, September 30, 2021

 

99,359,938

$

99,360

$

552,598,622

$

(277,060,488)

$

275,637,494

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

Common stock and warrants issued for cash, net

Exercise of pre-funded warrants issued in offering

Exercise of common warrants issued in offering

Restricted stock vested

 

 

 

 

 

Share-based compensation

 

 

 

673,795

 

 

673,795

Net income (loss)

 

 

 

 

43,804,118

 

43,804,118

Balance, March 31, 2020

67,993,797

$

67,994

$

526,975,076

$

40,944,776

$

567,987,846

Common stock and warrants issued for cash, net

Exercise of pre-funded warrants issued in offering

Exercise of common warrants issued in offering

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 income (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

Common stock and warrants issued for cash, net

Exercise of pre-funded warrants issued in offering

Exercise of common warrants issued in offering

Restricted stock vested

2,500

2

(2)

Shares to cover tax withholdings

Share-based compensation

565,819

565,819

Net income (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

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

8

Table of Contents

RING ENERGY, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

For the Nine Months Ended September 30,

    

2021

    

2020

Cash Flows From Operating Activities

  

 

  

Net income (loss)

$

(20,789,318)

$

(93,157,551)

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

 

Depreciation, depletion and amortization

26,693,808

 

31,848,093

Ceiling test impairment

 

147,937,943

Accretion expense

560,662

 

694,113

Amortization of deferred financing costs

496,533

567,248

Share-based compensation

1,484,730

 

2,557,156

Deferred income tax expense (benefit)

141,943

 

(25,573,920)

Excess tax expense (benefit) related to share-based compensation

(1,579,361)

(Gain) loss on derivative contracts

73,586,199

 

(32,900,767)

Cash received (paid) for derivative settlements, net

(33,278,132)

18,814,068

Changes in assets and liabilities:

 

Accounts receivable

(5,017,078)

 

9,867,026

Prepaid expenses and retainers

(902,692)

 

3,483,645

Accounts payable

8,329,563

 

(17,225,782)

Settlement of asset retirement obligation

(1,782,779)

 

(428,605)

Net Cash Provided by (Used In) Operating Activities

49,523,439

 

44,903,306

Cash Flows From Investing Activities

 

  

Payments to purchase oil and natural gas properties

(579,156)

 

(1,189,433)

Payments to develop oil and natural gas properties

(34,680,935)

(33,586,337)

Payments to acquire or improve fixed assets

(609,633)

 

Proceeds from divestiture of oil and natural gas properties

2,000,000

 

4,500,000

Net Cash Provided by (Used in) Investing Activities

(33,869,724)

 

(30,275,770)

Cash Flows From Financing Activities

 

  

Proceeds from revolving line of credit

34,400,000

 

21,500,000

Payments on revolving line of credit

(52,400,000)

(28,000,000)

Proceeds from issuance of common stock and warrants

241,269

 

Proceeds from notes payable

1,233,138

Payments on notes payable

(375,987)

 

Payment of deferred financing costs

(76,887)

Reduction of financing lease liabilities

(206,936)

 

(211,341)

Net Cash Provided by (Used in) Financing Activities

(17,185,403)

 

(6,711,341)

Net Change in Cash

(1,531,688)

 

7,916,195

Cash at Beginning of Period

3,578,634

 

10,004,622

Cash at End of Period

$

2,046,946

$

17,920,817

Supplemental Cash Flow Information

 

Cash paid for interest

$

10,622,077

$

12,387,670

Noncash Investing and Financing Activities

 

Asset retirement obligation incurred during development

$

160,285

$

66,387

Asset retirement obligation acquired

$

662,704

$

Asset retirement obligation revisions

$

153,475

$

Asset retirement obligation sold

$

(2,934,126)

$

Capitalized expenditures attributable to drilling projects financed through current liabilities

$

5,921,816

$

2,600,000

Operating lease assets obtained in exchange for new operating lease liability

$

839,536

$

Operating lease asset revision

$

(621,636)

$

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

9

Table of Contents

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 nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the full year ending December 31, 2021, for various reasons, including 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, 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”) applicable to 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 financial statement and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2020.

Reclassifications – Certain prior period amounts relating to components of operating expense have been reclassified to conform to current year presentation within “Costs and Operating Expenses” in the Statements of Operations. Additionally, certain prior amounts associated with realized and unrealized gains (losses) have been reclassified within the Statements of Operations and Statements of Cash Flows to conform with current year presentation.

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.  Prices recovered to pre-pandemic levels earlier this year and have recently increased to levels not seen since 2014, due in part to the accessibility of vaccines, reopening of states and other regions around the world after lockdowns, and optimism about the economic recovery.  The continued spread of COVID-19, including-vaccine resistant strains such as the Delta variant, or repeated 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 asset impairments.

Liquidity and Capital Considerations – The Company strives to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include the Company’s cash flow from operations, cash on hand, available borrowing capacity under its revolving credit facility, proceeds from sales of non-strategic assets.

While changes in oil and natural gas prices affect the Company's liquidity, the Company has put in place hedges to protect, to some extent, its cash flows from such price declines; however, if oil or natural gas prices rapidly deteriorate due to a resurgence of COVID-19 or other reasons, this could have a material adverse effect on the Company's cash flows.

The Company expects ongoing oil price volatility over the short term. Extended depressed oil prices have historically had and could have a material adverse impact on the Company’s oil revenue, which is mitigated to some extent by the Company’s hedge contracts. The Company is always mindful of oil price volatility and its impact on our liquidity.

10

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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 derivative contracts.

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 Commodity Risk 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.

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 Statements of Operations.

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 gain of $8,200,688 for the three months ended September 30, 2021 and an unrealized loss of $40,308,067 for the nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, the change in fair value resulted in the recognition of unrealized loss of $6,228,453 and unrealized gain of $14,086,699, respectively, on derivative contracts. During the three and nine months ended September 30,2021, the Company had realized losses of $14,921,008 and $33,278,132, respectively, on derivatives including $581,424 from unwinding the Company’s remaining gas swaps for 2021 and 2022. 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.

Concentration of Credit Risk and Major Customers – The Company had $1,546,946 of cash on deposit in excess of federally insured limits at September 30, 2021 and $3,328,634 of cash in excess of federally insured limits at December 31, 2020. During the nine months ended September 30, 2021, sales to three customers represented 78%, 6% and 6%, respectively, of the Company’s oil and gas revenues. At September 30, 2021, these three customers made up 79%, 5% and 3%, respectively, of the Company’s accounts receivable.

11

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

Approximately 92% of the Company’s accounts receivables and joint interest billing receivables are from purchasers of oil and gas. Oil and gas sales are generally unsecured. The Company also has joint interest billing receivables which are collateralized by the pro rata revenue attributable to the joint interest holders and further by the interest itself. The Company has not had any significant credit losses in the past and believes its accounts and joint interest billing receivables are collectable. Accordingly, no material allowance for credit losses has been provided at September 30, 2021.

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 drilling 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 the Company’s capitalized 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.  The Company did not incur a write down of oil and natural gas properties as a result of the ceiling test for the three and nine months ended September 30, 2021. During the three months ended June 30, 2020, the Company incurred write downs of oil and natural gas properties as a result of ceiling test impairments in the amount of $147,937,943. Depreciation, depletion and amortization expense for the three and nine months ended September 30, 2021 was $9,310,524 and $26,693,808, respectively, based on depletion at the rate of $12.12 and $11.64, respectively, per barrel of oil equivalent compared to $10,826,989 and $31,848,093, respectively, based on depletion at the rate of $12.22 and $13.37 for the three and nine months ended September 30, 2020. These amounts include $120,817 and $276,677, respectively, of depreciation for the three and nine months ended September 30, 2021, compared to $88,928 and $289,106, respectively, of depreciation for the three and nine months ended September 30, 2020.

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 3 to 10 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.

Share-Based Employee Compensation – The Company has outstanding stock option grants and restricted stock awards 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.

12

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

The CARES Act was enacted on March 27, 2020, and includes income tax provisions that, among other things, allow net operating losses 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. Due to the Company having taxable losses in all years eligible for the NOL carryback, no benefit was recorded, and these provisions have no material impact on the Company.

For the period ended September 30, 2021, the Company recorded no federal income tax expense or benefit due to the Company having a full valuation allowance against its net federal deferred tax assets. Since December 31, 2020, the Company has determined that a full valuation allowance is necessary due to the Company assessment that it is more likely than not that it will be unable to obtain the benefits of its deferred tax assets due to the Company’s history of taxable losses. The Company reviews its Deferred Tax Assets (“DTAs”) and valuation allowance on a quarterly basis. The Company anticipates that it will continue to record a valuation allowance against its federal DTAs until such time it is able to determine it is more likely than not that its DTAs will be realized. During the year 2021, the Company expects to be in a net deferred tax liability position for Texas and recorded state deferred income tax expense of $141,943 for the period ending September 30, 2021. The Company has immaterial operations in certain other states which are in a net deferred tax asset position for which a full valuation allowance is still recorded.

New and 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.

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. See Note 3 for a discussion of the impact on the Company’s financial statements.

In December 2019, the FASB released ASU No. 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The amended standard is effective for fiscal years beginning after December 15, 2020.The adoption of ASU 2019-12 did not have a material impact to the Company’s financial statements or disclosures.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which clarifies or improves disclosure requirements for various topics to align with SEC regulations. This update is effective for the Company beginning in the first quarter of 2021 and will be applied retrospectively. The adoption and implementation of this ASU did not have a material impact on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. ASU 2020-04 will be in effect through December 31, 2022.  In January 2021, issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), to provide clarifying guidance regarding the scope of Topic 848. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.  The Company is currently assessing the impact of adopting this new guidance.

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.

13

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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 Company has utilized the practical expedient in ASC (Accounting Standards Codification) 606-10-50-14, which states an entity is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under the Company’s sales contracts, each unit of production delivered to a customer represents a separate performance obligation, therefore, future volumes to be delivered are wholly unsatisfied and disclosure of transaction price allocated to remaining performance obligation is not required. The transaction price includes variable consideration as product pricing is based on published market prices and reduced for contract specified differentials such as quality, energy content and transportation. 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 the Company 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 at the net price received when control transfers to the purchaser at the point of delivery and it is probable the Company will collect the consideration it is entitled to receive.

Natural gas sales

Under the Company’s natural gas sales processing contracts for its Central Basin Platform properties, Delaware Basin properties and part of its 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 and it is probable the Company will collect the consideration it is entitled to receive. As such, the Company accounts for any fees and deductions as a reduction of the transaction price.

Under the Company’s natural gas sales processing contracts for the bulk of its 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 Oil and Natural Gas Revenues in the Statements of Operations.

Disaggregation of Revenue. The following table presents revenues disaggregated by product for the three and nine months ended September 30, 2021 and 2020:

For The Three Months

    

For The Nine Months

Ended September 30,

Ended September 30,

    

2021

    

2020

2021

    

2020

Operating Revenues

 

  

 

  

 

  

 

  

Oil

$

45,889,548

$

30,327,668

$

126,927,318

$

79,379,242

Natural gas

 

3,486,628

1,138,876

 

9,711,492

 

2,294,223

Total operating revenues

$

49,376,176

$

31,466,544

$

136,638,810

$

81,673,465

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

14

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

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 under 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 its offices in The Woodlands, Texas and Midland, Texas. The month-to-month Tulsa, Oklahoma lease was terminated as of March 31, 2021. The office space that was previously leased in Tulsa is owned by Arenaco, LLC, a company that is owned by Mr. Rochford, former Chairman of the Board of the Company, and Mr. McCabe, a former Director of the Company.

The Company also has month to month leases for office equipment and compressors used in its operations on which the Company had previously elected to apply ASU 2016-02. The office equipment and compressors are not subject to ASU 2016-02 based on the agreement and nature of use. The costs are recorded as short-term lease costs and amounts included in Oil and gas production costs.

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 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 new vehicles.

Future lease payments associated with these operating and financing leases as of September 30, 2021 are as follows:

    

2021

    

2022

    

2023

    

2024

    

2025

Operating lease payments (1)

$

68,132

$

349,127

$

356,991

$

376,855

$

384,719

Financing lease payments (2)

126,889

336,206

215,530

142,354

(1)The weighted average discount rate as of September 30, 2021 for operating leases was 4.5%. Based on this rate, the future lease payments above include imputed interest of $165,167.
(2)The weighted average discount rate as of September 30, 2021 for financing leases was 4.3%. Based on this rate, the future lease payments above include imputed interest of $39,771.

15

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

The following table provides supplemental information regarding cash flows from operations for the nine months ended:

Three months ended

Nine months ended

September 30,

September 30,

2021

    

2020

2021

    

2020

Operating lease costs

$

83,589

$

295,631

$

439,896

$

876,889

Short term lease costs (1)

964,873

1,205,407

2,903,387

3,347,484

Financing lease costs:

Amortization of financing lease assets (2)

85,367

71,854

189,831

215,560

Interest on lease liabilities (3)

5,160

7,172

14,166

24,022

(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 (LOSS) PER SHARE INFORMATION

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

    

2021

    

2020

    

2021

    

2020

Net Income (Loss)

$

14,163,934

$

(1,961,603)

$

(20,789,318)

$

(93,157,551)

Basic Weighted-Average Shares Outstanding

 

99,358,504

67,980,961

 

99,251,532

 

67,985,168

Effect of dilutive securities:

 

 

 

Stock options

 

135,536

 

 

Restricted stock

 

1,463,690

 

 

Common warrants

20,263,018

Diluted Weighted-Average Shares Outstanding

 

121,220,748

67,980,961

 

99,251,532

 

67,985,168

Basic Earnings (Loss) per Share

$

0.14

$

(0.03)

$

(0.21)

$

(1.37)

Diluted Earnings (Loss) per Share

$

0.12

$

(0.03)

$

(0.21)

$

(1.37)

Stock options to purchase 70,500 share of common stock and 14,709 share of unvested restricted stock were excluded from the computation of diluted earnings per share during the three months ended September 30, 2021. Stock options to purchase 465,500 shares of common stock, 3,247,623 shares of unvested restricted stock and unexercised common warrants of 29,519,500 were excluded from the computation of diluted earnings per share during the nine months ended September 30, 2021, as their effect would have been anti-dilutive. 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.

NOTE 5 – ACQUISITIONS & DIVESTITURES

The Company entered into a Purchase, Sale and Exchange Agreement dated February 1, 2021, effective January 1, 2021, with an unrelated party, covering the sale and exchange of certain oil and gas interests in Andrews County, Texas. Upon the sale and transfer of wells and leases between the two parties, the Company received a net value consideration in cash of $2,000,000 and reduced the Company’s asset retirement obligations by $2,934,126 for the properties sold and added $662,705 of asset retirement obligations for the wells acquired.

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to fluctuations in crude oil and natural gas prices on its production. It utilizes 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

16

Table of Contents

RING ENERGY, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

the downside risk of adverse commodity price movements, the use also may limit future income from favorable commodity price movements.

The Company’s derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying balance sheets. The Company has not designated its derivative financial instruments as hedges for accounting purposes, and, as a result, 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)” under the heading “Gain (loss) on derivative contracts” 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, 2021, 100% of the Company’s volumes subject to derivative instruments are with lenders under its Credit Facility (as defined in Note 8). The Company is not subject to master netting agreements and classifies the fair value of its derivative positions on a gross basis in its corresponding balance sheets. The following presents the impact of the Company’s contracts on its balance sheets for the periods indicated.