RING ENERGY, INC. 10-Q

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. ​ 8 Table of Contents 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 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 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. 10 Table of Contents 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 $ 19.1 MM. 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 11 Table of Contents 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. 12 Table of Contents 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. 13 Table of Contents 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 ​ 16 Table of Contents 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 Table of Contents 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 $ 375 million, subject to periodic redeterminations, adjusted the interest rates and provided some relief on the total Leverage Ratio (as defined in the Credit Facility). The Credit Facility is secured by a first lien security interest on substantially all of the Company’s assets. The Borrowing Base is subject to periodic redeterminations, mandatory reductions and further adjustments from time to time. The Borrowing Base is redetermined semi-annually on each May 1 and November 1. Subsequent to September 30, 2020, the bank group agreed to an extension of the scheduled borrowing base redetermination from November 2020 to December 2020. The Borrowing Base will be reduced in certain circumstances such as the sale or disposition of certain oil and gas properties of the Company and the cancellation of certain hedging positions. The Credit Facility allows for Eurodollar Loans and Base Rate Loans (as respectively defined in the Credit Facility). The interest rate on each Eurodollar Loan will be the adjusted LIBOR for the applicable interest period plus a margin between 2.5 % and 3.5 % (depending on the then-current level of Borrowing Base usage). The annual interest rate on each Base Rate Loan is (a) the greatest of (i) the Administrative Agent’s prime lending rate, (ii) the Federal Funds Rate (as defined in the Credit Facility) plus 0.5 % per annum, (iii) the adjusted LIBOR determined on a daily basis for an interest period of one-month, plus 1.00 % per annum and (iv) 0.00 % per annum, plus (b) a margin between 1.5 % and 2.5 % (depending on the then-current level of Borrowing Base usage). 19 Table of Contents RING ENERGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) ​ The Credit Facility contains certain covenants, which, among other things, require the maintenance of (i) a total Leverage Ratio (outstanding debt to adjusted earnings before interest, taxes, depreciation and amortization) of not more than 4.0 to 1.0 and (ii) a minimum ratio of Current Assets to Current Liabilities (as such terms are defined in the Credit Facility) of 1.0 to 1.0 . As referenced, as a part of the redetermination completed in June 2020, the amendment included an adjustment to the total Leverage Ratio to be not more than 4.75 to 1.0 beginning for the fiscal quarter ending September 30, 2020. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of September 30, 2020, $ 360,000,000 was outstanding on the Credit Facility. The Company was in compliance with all covenants contained in the Credit Facility as of September 30, 2020. ​ NOTE 9 – ASSET RETIREMENT OBLIGATION The Company provides for the obligation to plug and abandon oil and gas wells at the dates properties are either acquired or the wells are drilled. The asset retirement obligation is adjusted each quarter for any liabilities incurred or settled during the period, accretion expense and any revisions made to the estimated cash flows. The asset retirement obligation incurred at the time of drilling was computed using the annual credit-adjusted risk-free discount rate at the applicable dates. Changes in the asset retirement obligation were as follows: ​ ​ ​ ​ ​ Balance, December 31, 2019 $ 16,787,219 Liabilities incurred ​ 66,387 Liabilities settled ​ ( 428,605 ) Accretion expense ​ 694,113 Balance, September 30, 2020 ​ $ 17,119,114 ​ ​ NOTE 10 – STOCKHOLDERS’ EQUITY Cancellation of shares issued as consideration in property acquisition – In April 2019, the Company completed the acquisition of assets from Wishbone Partners, LLC as disclosed in Note 5. As a part of the consideration for the Acquisition, the Company issued 4,581,001 shares of common stock. 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 . ​ ​ NOTE 11 – EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK AWARD PLAN In June 2020, officers and directors of the Company voluntarily returned stock options that had previously been granted to them. In total, 2,265,000 options with an average exercise price of $ 6.87 per share were returned to and cancelled by the Company. No grants, cash payments or other consideration has been or will be made to replace the options or otherwise in connection with the return. As a result of the return and cancellation of the options, the Company incurred additional compensation expense of $ 768,379 . Compensation expense charged against income for share-based awards during the three and nine months ended September 30, 2020, was $ 565,819 and $ 2,557,156 , respectively, as compared to $ 792,836 and $ 2,436,035 , respectively, for the three and nine months ended September 30, 2019. These amounts are included in general and administrative expense in the accompanying financial statements. In 2011, the board of directors and stockholders approved and adopted a long-term incentive plan which allowed for the issuance of up to 2,500,000 shares of common stock through the grant of qualified stock options, non-qualified stock options and restricted stock. In 2013, the Company’s board of directors and stockholders approved an amendment to the long-term incentive plan, increasing the number of shares eligible under the plan to 5,000,000 shares. As of September 30, 2020, there were 2,303,155 shares remaining eligible for issuance under the plan. 20 Table of Contents RING ENERGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) ​ Stock Options A summary of the stock option activity as of September 30, 2019 and 2020, respectively, and changes during the nine months then ended is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ Weighted- ​ Average ​ ​ ​ ​ ​ ​ ​ Average ​ Remaining ​ Aggregate ​ ​ ​ ​ Exercise ​ Contractual ​ Intrinsic ​ ​ Shares ​ Price ​ Term ​ Value Outstanding, December 31, 2018 2,751,000 ​ $ 6.28 ​ Granted — ​ $ — ​ Forfeited or rescinded ( 2,500 ) ​ $ 11.70 ​ Vested — ​ $ — ​ Outstanding, September 30, 2019 2,748,500 ​ $ 6.28 4.2 Years ​ $ — Exercisable, September 30, 2019 2,329,400 ​ $ 5.43 3.7 Years ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding, December 31, 2019 2,748,500 ​ $ 6.28 ​ Granted — ​ $ — ​ Forfeited or rescinded ( 2,265,000 ) ​ $ 6.87 ​ Vested — ​ $ — ​ Outstanding, September 30, 2020 483,500 ​ $ 3.52 1.9 Years ​ $ — Exercisable, September 30, 2020 460,700 ​ $ 3.15 1.7 Years ​ ​ The intrinsic values were calculated using the closing price on September 30, 2019 of $ 1.64 and the closing price on September 30, 2020 of $ 0.68 . As of September 30, 2020, there was $ 42,106 of unrecognized compensation cost related to stock options that is expected be recognized over a weighted-average period of 0.7 years. Restricted Stock A summary of the restricted stock activity as of September 30, 2019 and 2020, and changes during the nine months then ended is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Average Grant ​ ​ Restricted stock ​ Date Fair Value Outstanding, December 31, 2018 878,360 ​ $ 7.36 Granted 20,400 ​ 4.59 Forfeited or rescinded ( 5,940 ) ​ 6.88 Vested ( 900 ) ​ 11.40 Outstanding, September 30, 2019 891,920 ​ $ 7.30 ​ ​ ​ ​ ​ ​ Outstanding, December 31, 2019 1,341,889 ​ $ 4.94 Granted — ​ — Forfeited or rescinded ( 9,200 ) ​ 3.97 Vested ( 5,980 ) ​ 5.96 Outstanding, September 30, 2020 1,326,709 ​ $ 4.99 ​ As of September 30, 2020, there was $ 2,799,763 of unrecognized compensation cost related to restricted stock grants that will be recognized over a weighted average period of 1.6 years. 21 Table of Contents RING ENERGY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) ​ ​ NOTE 12 – CONTINGENCIES AND COMMITMENTS Standby Letters of Credit – A commercial bank issued standby letters of credit on behalf of the Company totaling $ 260,000 to state and federal agencies and $ 500,438 to an insurance company. The standby letters of credit are valid until cancelled or matured and are collateralized by the Credit Facility. The terms of the letters of credit to the state and federal agencies are extended for a term of one year at a time. The Company intends to renew the standby letters of credit to the state and federal agencies for as long as the Company does business in the States of Texas and New Mexico. The letter of credit to the insurance company relates to the surety bonds noted below. No amounts have been drawn under the standby letters of credit. Surety Bonds - An insurance company issued surety bonds on behalf of the Company totaling $ 500,438 to various State of New Mexico agencies in order for the Company to do business in the State of New Mexico. The surety bonds are valid until canceled or matured. The terms of the surety bonds are extended for a term of one year at a time. The Company intends to renew the surety bonds on $ 400,000 as long as the Company does business in the State of New Mexico. The remaining $ 100,438 is related to inactive wells and will remain in place until we return those wells to activity or plug them. ​ NOTE 13 – SUBSEQUENT EVENTS 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 $ 19.1 MM. Also subsequent to September 30, 2020, the bank group agreed to an extension of the scheduled borrowing base redetermination from November 2020 to December 2020. This was to allow the Company to properly reflect recent cost reductions and operational efficiencies in the reserve information provided to the bank group. Also subsequent to September 30, 2020, changes occurred to executive management and to the Board of Directors. Mr. Lloyd T. Rochford resigned from his employment position and from the Board of Directors. Mr. Kelly Hoffman resigned as Chief Executive Officer and from the Board of Directors. Mr. Stanley McCabe resigned from the Board of Directors. Mr. David Fowler resigned from the Board of Directors but remains as President of the Company. Mr. Paul D. McKinney was appointed as Chairman of the Board and as Chief Executive Officer. Additionally, Mr. Thomas L. Mitchell, John A. Crum and Richard E. Harris were appointed to the Board of Directors. Also subsequent to September 30, 2020, the Company paid an aggregate of $ 128,333 gross wages and accelerated the vesting of a total 574,725 shares of previously granted restricted stock to Mr. Lloyd T. Rochford, Mr. Kelly Hoffman and Mr. Stanley McCabe as a result of their departures. Also subsequent to September 30, 2020, the previously announced plan to divest of Delaware Basin assets failed to close. We continue to attempt to work with the buyer but the termination process has been initiated and unless an agreement can be reached, the contract will terminate on November 12, 2020. Also subsequent to September 30, 2020, the Company entered into swap derivative contracts for 6,000 MMBTU/day for calendar year 2021 at a price of $ 2.991 per MMBTU and 5,000 MMBTU/day for calendar year 2022 at a price of $ 2.7255 per MMBTU. ​ ​ ​ ​ 22 Table of Contents