Item 9A. Controls and Procedures
Item 9A:
Controls and Procedures
Evaluation of disclosure controls and procedures.
Under the direction of our Chief Executive Officer and Chief Financial Officer, we have established disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
As of December 31, 2021, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2021, our disclosure controls and procedures are effective.
Changes in internal control over financial reporting.
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. During the first quarter of 2021, the Company transitioned its accounting and reporting functions from Tulsa in conjunction with its corporate headquarters relocation. On March 24, 2021, Travis Thomas was named Chief Financial Officer, replacing William Broaddrick.
Except as described above, there were no changes in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Management’s Annual Report on Internal Control Over Financial Reporting and Report of Independent Accounting Firm
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Furthermore, the effectiveness of a system of internal control over financial reporting in future periods can change as conditions change.
In making our assessment of internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013) . Based on our assessment, we believe that, as of December 31, 2021, our internal control over financial reporting is effective based on those criteria.
The independent registered public accounting firm, Grant Thornton LLP, has audited the financial statements included in this Annual Report on Form 10-K, and has issued their report on the effectiveness of the Company’s internal control over financial reporting at December 31, 2021. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting at December 31, 2021, is set forth below.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Ring Energy, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Ring Energy, Inc. (a Nevada corporation) (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the financial statements of the Company as of and for the year ended December 31, 2021, and our report dated March 16, 2022 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Houston, Texas
March 16, 2022
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Item 9B:
Other Information
None.
Item 9C:
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10:
Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference herein from the 2022 Proxy Statement to be filed with the SEC no later than 120 days after December 31, 2021. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 11:
Executive Compensation
The information required by this item is incorporated by reference herein from the 2022 Proxy Statement to be filed with the SEC no later than 120 days after December 31, 2021. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference herein from the 2022 Proxy Statement to be filed with the SEC no later than 120 days after December 31, 2021. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 13:
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference herein from the 2022 Proxy Statement to be filed with the SEC no later than 120 days after December 31, 2021. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
Item 14:
Principal Accounting Fees and Services
The information required by this item is incorporated by reference herein from the 2022 Proxy Statement to be filed with the SEC no later than 120 days after December 31, 2021. If the Proxy Statement is not filed with the SEC by such time, such information will be included in an amendment to this Annual Report by such time.
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PART IV
Item 15:
Exhibits, Financial Statement Schedules
(a) Financial Statements
The following financial statements are filed with this Annual Report:
Page
Report of Grant Thornton, LLP, Independent Registered Public Accounting Firm (PCAOB ID Number 248)
F-5
Report of Eide Bailly LLP, Independent Registered Public Accounting Firm (PCAOB ID Number 286)
F-8
Balance Sheets as of December 31, 2021 and 2020
F-9
Statements of Operations for the years ended December 31, 2021, 2020, and 2019
F-10
Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020, and 2019
F-11
Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019
F-12
Notes to Financial Statements
F-14
Supplemental Information on Oil and Gas Producing Activities
F-33
56
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Incorporated by Reference
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Here-with
2.1
Purchase and Sale Agreement, dated February 25, 2019 by and among Ring Energy, Inc. and Wishbone Energy Partners, LLC, Wishbone Texas operating Company LLC and WB WaterWorks, LLC
8-K
001-36057
2.1
2/28/19
3.1
Articles of Incorporation (as amended)
10-K
000-53920
3.1
4/1/13
3.1(a)
Certificate of Amendment to the Articles of Incorporation, as amended, of Ring Energy, Inc.
8-K
001-36057
3.1
12/17/21
3.2
Bylaws of Ring Energy, Inc. as amended April 13, 2021
8-K
001-36057
3.1
4/15/21
4.1
Registration Rights Agreement, dated April 9, 2019 by and between Ring Energy, Inc. and Wishbone Energy Partners, LLC
10-Q
001-36057
4.1
4/12/19
4.2
Description of Ring Energy, Inc. equity securities registered under Section 12(b) of the Securities Exchange Act of 1934, as amended
10-K
X
4.3
Securities Purchase Agreement, dated October 27, 2020
8-K
001-36057
4.1
10/29/20
10.1
Executive Employment and Severance Agreement, dated as of September 30, 2020, by and between the Company and Stephen D. Brooks
8-K
001-36957
10.1
12/4/20
10.2
Executive Employment and Severance Agreement, dated as of September 30, 2020, by and between the Company and Paul D. McKinney
8-K
001-36957
10.1
10/6/20
10.3
Employment and Severance Agreement, dated as of September 30, 2020, by and between the Company and Alexander Dyes
8-K
001-36057
10.1
12/22/20
10.4
Employment and Severance Agreement, dated as of September 30, 2020, by and between the Company and Marinos C. Baghdati
8-K
001-36057
10.2
12/22/20
10.5*
Ring Energy Inc. Long Term Incentive Plan, as Amended
8-K
000-53920
99.3
1/24/13
10.6 *
Form of Option Grant for Long-Term Incentive Plan
10-Q
000-53920
10.2
8/14/12
10.7
Credit Agreement dated July 1, 2014 with SunTrust Bank
8-K
001-36057
10.1
7/3/14
10.8
First Amendment to Credit Agreement with SunTrust Bank
8-K
001-36057
10.1
6/29/15
10.9
Second Amendment to Credit Agreement with SunTrust Bank
8-K
001-36057
10.1
7/29/15
10.10
Third Amendment to Credit Agreement with SunTrust Bank
8-K
001-36057
10.1
5/20/16
10.11
Fourth Amendment to Credit Agreement with SunTrust Bank
10-K
001-36057
10.16
3/16/21
10.12
Fifth Amendment to Credit Agreement with SunTrust
8-K
001-36057
10.1
6/19/18
10.13
Amended and Restated Credit Agreement with SunTrust Bank
10-Q
001-36057
10.2
5/8/19
10.14
First Amendment to Amended and Restated Credit Agreement with SunTrust Bank
8-K
001-36057
10.1
12/9/19
10.15
Second Amendment to Amended and Restated Credit Agreement, dated June 17, 2020, by and among Ring Energy, Inc., the lenders party thereto, and Truist Bank, as administrative agent for the lenders and as issuing bank
8-K
001-36057
10.1
6/19/20
10.16
Third Amendment to Amended and Restated Credit Agreement with Truist Bank
8-K
001-36057
10.1
12/29/20
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10.17
Fourth Amendment to Amended and Restated Credit Agreement with Truist Bank dated June 10, 2021
8-K
001-36057
10.1
6/16/21
10.18
Fifth Amendment to Amended and Restated Credit Agreement with Truist Bank dated June 25, 2021
8-K
001-36057
10.1
6/25/21
10.19
Executive Employment and Severance Agreement, dated as of October 26, 2020, by and between the Company and Travis T. Thomas
8-K
001-36057
10.1
3/26/21
10.20
Commitment Letter dated February 24, 2019, between Ring Energy, Inc., SunTrust Bank and SunTrust Robinson Humphrey, Inc.
8-K
001-36057
2.1
2/28/19
14.1
Code of Ethics
8-K
000-53920
14.1
1/24/13
23.1
Consent of Cawley, Gillespie & Associates, Inc.
X
23.2
Consent of Grant Thornton LLP
X
23.3
Consent of Eide Bailly LLP
X
31.1
Rule 13a-14(a) Certification by Chief Executive Officer
X
31.2
Rule 13a-14(a) Certification by Chief Financial Officer
X
32.1
Section 1350 Certification of Chief Executive Officer
X
32.2
Section 1350 Certification Chief Financial Officer
X
99.1
Reserve Report of Cawley, Gillespie & Associates, Inc.
X
101.INS
Inline XBRL Instance Document
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document
X
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
X
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Management contract
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on behalf by the undersigned, thereunto duly authorized.
Ring Energy, Inc.
By:
/s/ Paul D. McKinney
Mr. Paul D. McKinney
Chief Executive Officer
Date: March 16, 2022
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Paul D. McKinney, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the annual report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming his signature as he may be signed by his or her said attorney to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.
/s/ Paul D. McKinney
/s/ Thomas L. Mitchell
Mr. Paul D. McKinney
Mr. Thomas L. Mitchell
Chief Executive Officer and Director
Director
(Principal Executive Officer)
Date: March 16, 2022
Date: March 16, 2022
/s/ Travis T. Thomas
/s/ Anthony B. Petrelli
Mr. Travis T. Thomas
Mr. Anthony B. Petrelli
Chief Financial Officer
Director
(Principal Financial Officer)
Date: March 16, 2022
Date: March 16, 2022
/s/ Regina Roesener
/s/ Clayton E. Woodrum
Mrs. Regina Roesener
Mr. Clayton E. Woodrum
Director
Director
Date: March 16, 2022
Date: March 16, 2022
/s/ Richard Harris
/s/ John Crum
Mr. Richard Harris
Mr. John Crum
Director
Director
Date: March 16, 2022
Date: March 16, 2022
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RING ENERGY, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Grant Thornton, LLP, Independent Registered Public Accounting Firm (PCAOB ID Number 248)
F-5
Report of Eide Bailly LLP, Independent Registered Public Accounting Firm (PCAOB ID Number 286)
F-8
Balance Sheets as of December 31, 2021 and 2020
F-9
Statements of Operations for the years ended December 31, 2021, 2020, and 2019
F-10
Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020, and 2019
F-11
Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019
F-12
Notes to Financial Statements
F-14
Supplemental Information on Oil and Natural Gas Producing Activities
F-33
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Ring Energy, Inc.
Opinion on the financial statements
We have audited the accompanying balance sheet of Ring Energy, Inc. (a Nevada corporation) (the “Company”) as of December 31, 2021, the related statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16, 2022 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
The development of estimated proved reserves used in the calculation of depletion, depreciation and amortization expense and evaluation of full cost ceiling impairment under the full cost method of accounting
As described further in Note 1 to the financial statements, the Company accounts for its oil and gas properties using the full cost method of accounting which requires management to make estimates of proved reserve volumes and future net revenues to record depletion, depreciation and amortization expense and assess its oil and gas properties for potential full cost ceiling impairment. To estimate the volume of proved reserves and future net revenue, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with proved reserves to determine if wells are expected with reasonable certainty to be economical under the appropriate pricing assumptions required in the estimation of depletion,
F-2
Table of Contents
depreciation and amortization expense and potential full cost ceiling impairment assessment. We identified the estimation of proved reserves of oil and gas properties as a critical audit matter.
The principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that changes in certain inputs and assumptions, which require a high degree of subjectivity, necessary to estimate the volume and future net revenues of the Company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense and potential full cost ceiling impairment. In turn, auditing those inputs and assumptions required subjective and complex auditor judgment.
Our audit procedures related to the estimation of proved reserves included the following, among others.
● We tested the design and operating effectiveness of controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense and assessing the Company’s oil and gas properties for potential full cost ceiling impairment.
● We evaluated the independence, objectivity, and professional qualifications of the Company’s reserve engineers, made inquiries of those specialists regarding the process followed and judgments made to estimate the Company’s proved reserve volumes, and read the reserve report prepared by the Company’s specialists.
F-3
Table of Contents
● To the extent key inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions are derived from the Company’s accounting records, including, but not limited to: historical pricing differentials, operating costs, estimated capital costs, and ownership interests, we tested management’s process for determining the assumptions, including examining the underlying support on a sample basis. Specifically, our audit procedures involved testing management’s assumptions by performing the following:
o We compared the estimated pricing differentials used in the reserve report to prices realized by the Company related to revenue transactions recorded in the current year and examined contractual support for the pricing differentials
o We tested models used to estimate the future operating costs in the reserve report and compared amounts to historical operating costs
o We evaluated the method used to determine the estimated future development costs used in the reserve report and compared management’s estimates to amounts expended for recently drilled and completed wells
o We tested the working and net revenue interests used in the reserve report by inspecting land and division order records;
o We evaluated evidence supporting the amount of proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties; and
o We applied analytical procedures to production forecasts in the reserve report by comparing to historical actual results.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Houston, Texas
March 16, 2022
F-4
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Ring Energy, Inc.
The Woodlands, Texas
Opinions on the Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying balance sheet of Ring Energy, Inc. (Ring Energy) as of December 31, 2020, and the related statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2020 and 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Ring Energy as of December 31, 2020, and the results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited Ring Energy’s internal control over financial reporting as of December 31, 2020, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, Ring Energy maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in 2013 Internal Control—Integrated Framework issued by COSO.
Basis for Opinion
Ring Energy’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the entity’s financial statements and an opinion on the entity’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Ring Energy in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-5
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Definition and Limitations of Internal Control Over Financial Reporting
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee that (1) relate to accounts or disclosures that are material to the financial statements and (2) involve our especially challenging, subjective, or complex judgement. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Depletion expense and ceiling test calculation of oil and natural gas properties impacted by the estimation of proved oil and natural gas reserves
As described further in Note 1 to the financial statements, the Company uses the full cost method of accounting for oil and natural gas properties. This accounting method requires management to make estimates of proved oil and natural gas reserves and related future cash flows to compute and record depreciation, depletion and amortization expense, as well as to assess potential impairment of oil and natural gas properties (the full cost ceiling test). To estimate the volume of proved oil and natural gas reserves quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved undeveloped properties. In addition, the estimation of proved oil and natural gas reserves is also impacted by management’s judgements and estimates regarding the financial performance of wells associated with those proved oil and natural gas reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depreciation, depletion and amortization expense and potential ceiling test impairment assessments. We identified the estimation of proved oil and natural gas reserves as it relates to the recognition of depreciation, depletion and amortization expense and the assessment of potential impairment as a critical audit matter.
The principal consideration for our determination that the estimation of proved oil and natural gas reserves is a critical audit matter is that there is significant judgement by management and use of specialist in developing the estimates of proved oil and natural gas reserves and a relatively minor change in certain inputs and assumptions that are necessary to estimate the volume and future cash flows of the Company’s proved oil and natural gas reserves could have a significant impact on the measurement of depreciation, depletion and amortization expense and/or impairment expense. In turn, auditing those inputs and assumptions required subjective and complex auditor judgement.
Our audit procedures related to the estimation of proved oil and natural gas reserves included the following, among others.
● We tested the design and operating effectiveness of internal controls relating to management’s estimation of proved oil and natural gas reserves for the purpose of estimating depreciation, depletion and amortization expense and assessing for ceiling test impairment.
● We evaluated the independence, objectivity, and professional qualifications of the Company’s independent petroleum engineer specialist and read the report prepared by the Company’s independent petroleum engineer specialist.
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Table of Contents
● We evaluated the sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the Company’s accounting records, such as historical pricing differentials, operating costs, estimated capital costs, and ownership interests. We tested management’s process for determining the assumptions, including the underlying support, on a sample basis where applicable. Specifically, our audit procedures involved testing management’s assumptions as follows:
o Tested the working and net revenue interest used in the reserve report
o Tested the model used to determine the future capital expenditures by comparing estimated future capital expenditures used in the reserve report to amounts expended for recently drilled and completed wells, where applicable;
o Compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year;
o Tested the model used to estimate the operating costs at year end and compared to historical operating costs;
o Evaluated the Company’s evidence supporting the proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the Company’s ability to fund and intent to develop the proved undeveloped properties.
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Valuation Allowance of Deferred Tax Assets
As described in Note 1 to the financial statements, the Company records a valuation allowance to reduce total net deferred tax assets when a judgement is made that is considered more likely than not that a tax benefit will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences will become deductible. We identified the realizability of deferred tax assets as a critical audit matter.
The principal considerations for our determination that the realizability of deferred tax assets is a critical audit matter are that (a) the forecast of future taxable income is subject to a high level of estimation and (b) the determination of any limitations on the utilization of net operating loss carryforwards involve complex calculations and judgement. There is inherent uncertainty and subjectivity related to management’s judgements and assumptions regarding the Company’s future taxable income, which are complex in nature and require significant auditor judgment.
Our audit procedures related to the valuation of deferred tax assets included the following, among others.
● We tested the effectiveness of controls over management’s estimate of the realization of the deferred tax assets and management’s tax planning strategies and the determination of whether it is more likely than not that the deferred tax assets will be realized prior to expiration.
● We tested the reasonableness of management’s corporate model used to estimate future taxable income by comparing the estimates to the following:
o Historical taxable income.
o Evidence obtained in other areas of the audit.
o Management’s history of carrying out its stated plans and its ability to carry out its plans.
We have served as Ring Energy’s auditor since 2013.
Denver, Colorado
March 16, 2021
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Table of Contents
RING ENERGY, INC.
BALANCE SHEETS
As of December 31,
2021
2020
ASSETS
Current Assets
Cash and cash equivalents
$
2,408,316
$
3,578,634
Accounts receivable
24,026,807
14,997,979
Joint interest billing receivable
2,433,811
1,327,262
Derivative receivable
—
499,906
Prepaid expenses and retainers
938,029
396,109
Total Current Assets
29,806,963
20,799,890
Properties and Equipment
Oil and natural gas properties, full cost method
883,844,745
836,514,815
Financing lease asset subject to depreciation
1,422,487
858,513
Fixed assets subject to depreciation
2,089,722
1,520,890
Total Properties and Equipment
887,356,954
838,894,218
Accumulated depreciation, depletion and amortization
( 235,997,307 )
( 200,111,658 )
Net Properties and Equipment
651,359,647
638,782,560
Operating lease asset
1,277,253
1,494,399
Deferred financing costs
1,713,466
2,379,348
Total Assets
$
684,157,329
$
663,456,197
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable
$
46,233,452
$
32,500,081
Financing lease liability
316,514
295,311
Operating lease liability
290,766
859,017
Derivative liabilities
29,241,588
3,287,328
Notes Payable
586,410
—
Total Current Liabilities
76,668,730
36,941,737
Noncurrent Liabilities
Deferred income taxes
90,292
—
Revolving line of credit
290,000,000
313,000,000
Financing lease liability, less current portion
343,727
126,857
Operating lease liability, less current portion
1,138,319
635,382
Derivative liabilities
—
869,273
Asset retirement obligations
15,292,054
17,117,135
Total Liabilities
383,533,122
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; 225,000,000 shares authorized; 100,192,562 shares and 85,868,287 shares issued and outstanding , respectively
100,193
85,568
Additional paid-in capital
553,472,292
550,951,415
Accumulated deficit
( 252,948,278 )
( 256,271,170 )
Total Stockholders’ Equity
300,624,207
294,765,813
Total Liabilities and Stockholders' Equity
$
684,157,329
$
663,456,197
The accompanying notes are an integral part of these financial statements.
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Table of Contents
RING ENERGY, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31,
2021
2020
2019
Oil and Natural Gas Revenues
$
196,305,966
$
113,025,138
$
195,702,831
Costs and Operating Expenses
Lease operating expenses
30,312,399
29,753,413
42,213,006
Gathering, transportation and processing costs
4,333,232
4,090,238
2,874,155
Ad valorem taxes
2,276,463
3,125,222
3,409,064
Oil and natural gas production taxes
9,123,420
5,228,090
9,130,379
Depreciation, depletion and amortization
37,167,967
43,010,660
56,204,269
Ceiling test impairment
—
277,501,943
—
Asset retirement obligation accretion
744,045
906,616
943,707
Operating lease expense
523,487
1,196,372
925,217
General and administrative expense
16,068,105
16,874,050
19,866,706
Total Costs and Operating Expenses
100,549,118
381,686,604
135,566,503
Income (Loss) from Operations
95,756,848
( 268,661,466 )
60,136,328
Other Income (Expense)
Interest income
1
8
13,511
Interest (expense)
( 14,490,474 )
( 17,617,614 )
( 13,865,556 )
Gain (loss) on derivative contracts
( 77,853,141 )
21,366,068
( 3,000,078 )
Deposit forfeiture income
—
5,500,000
—
Net Other Income (Expense)
( 92,343,614 )
9,248,462
( 16,852,123 )
Income (Loss) Before Provision for Income Taxes
3,413,234
( 259,413,004 )
43,284,205
Benefit from (Provision for) Income Taxes
( 90,342 )
6,001,176
( 13,787,654 )
Net Income (Loss)
$
3,322,892
$
( 253,411,828 )
$
29,496,551
Basic Earnings (Loss) per share
$
0.03
$
( 3.48 )
$
0.44
Diluted Earnings (Loss) per share
$
0.03
$
( 3.48 )
$
0.44
The accompanying notes are an integral part of these financial statements.
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RING ENERGY, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional
Retained Earnings
Total
Common Stock
Paid-in
(Accumulated
Stockholders'
Shares
Amount
Capital
Deficit)
Equity
Balance, December 31, 2018
63,229,710
$
63,230
$
494,892,093
$
( 32,355,893 )
$
462,599,430
Common stock issued as partial consideration in acquisition
4,576,951
4,577
28,326,750
—
28,331,327
Restricted stock vested
187,136
187
( 187 )
—
—
Share-based compensation
—
—
3,082,625
—
3,082,625
Net income
—
—
—
29,496,551
29,496,551
Balance, December 31, 2019
67,993,797
$
67,994
$
526,301,281
$
( 2,859,342 )
$
523,509,933
Return of common stock issued as
consideration in asset acquisition
( 16,702 )
( 17 )
( 103,368 )
—
( 103,385 )
Common stock and warrants issued for cash, net
13,075,800
13,076
19,366,756
—
19,379,832
Exercise of pre-funded warrants issued in offering
3,300,000
3,300
—
—
3,300
Common stock issued for services
35,000
35
23,765
—
23,800
Restricted stock vested
1,180,392
1,180
( 1,180 )
—
—
Share-based compensation
—
—
5,364,162
—
5,364,162
Net (loss)
—
—
—
( 253,411,828 )
( 253,411,828 )
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
442,600
443
353,637
—
354,080
Options exercised
100,000
100
199,900
—
200,000
Restricted stock vested
785,357
785
( 785 )
—
—
Shares to cover tax withholdings
( 132,182 )
( 132 )
132
—
—
Payments to cover tax withholdings
—
—
( 385,330 )
—
( 385,330 )
Share-based compensation
—
—
2,418,323
—
2,418,323
Net income (loss)
—
—
—
3,322,892
3,322,892
Balance, December 31, 2021
100,192,562
$
100,193
$
553,472,292
$
( 252,948,278 )
$
300,624,207
The accompanying notes are an integral part of these financial statements.
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Table of Contents
RING ENERGY, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2021
2020
2019
Cash Flows From Operating Activities
Net income (loss)
$
3,322,892
$
( 253,411,828 )
$
29,496,551
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization
37,167,967
43,010,660
56,204,269
Ceiling test impairment
—
277,501,943
—
Asset retirement obligation accretion
744,045
906,616
943,707
Amortization of deferred financing costs
665,882
1,190,109
991,310
Share-based compensation
2,418,323
5,364,162
3,082,625
Shares issued for services
—
23,800
—
Deferred income tax expense (benefit)
265,479
( 3,975,170 )
9,500,517
Excess tax expense (benefit) related to share-based compensation
( 175,187 )
( 2,026,006 )
3,855,389
Adjustment to deferred tax asset for change in effective tax rate
—
—
431,748
(Gain) loss on derivative contracts
77,853,141
( 21,366,068 )
2,937,024
Cash received (paid) for derivative settlements, net
( 52,768,154 )
22,522,591
63,054
Changes in assets and liabilities:
Accounts receivable
( 9,483,639 )
7,896,517
( 10,035,648 )
Prepaid expenses and retainers
( 541,920 )
3,586,146
( 1,878,667 )
Accounts payable
15,449,215
( 8,380,594 )
12,320,308
Settlement of asset retirement obligation
( 2,186,832 )
( 683,623 )
( 1,295,966 )
Net Cash Provided by Operating Activities
72,731,212
72,159,255
106,616,221
Cash Flows From Investing Activities
Payments for the Wishbone Acquisition
—
—
( 276,061,594 )
Payments to purchase oil and natural gas properties
( 1,368,437 )
( 1,317,313 )
( 3,400,411 )
Proceeds from divestiture of oil and natural gas properties
2,000,000
—
8,547,074
Payments to develop oil and natural gas properties
( 51,302,131 )
( 42,457,745 )
( 152,125,320 )
Payments to acquire or improve fixed assets subject to depreciation
( 568,832 )
( 55,339 )
—
Net Cash (Used in) Investing Activities
( 51,239,400 )
( 43,830,397 )
( 423,040,251 )
Cash Flows From Financing Activities
Proceeds from revolving line of credit
60,150,000
26,500,000
327,000,000
Payments on revolving line of credit
( 83,150,000 )
( 80,000,000 )
—
Proceeds from issuance of common stock and warrants
367,509
19,383,131
—
Proceeds from option exercise
200,000
—
—
Payments for taxes withheld on vested restricted shares
( 385,330 )
—
—
Proceeds from notes payable
1,297,718
—
—
Payments on notes payable
( 711,308 )
—
—
Payment of deferred financing costs
( 104,818 )
( 355,049 )
( 3,781,657 )
Reduction of financing lease liabilities
( 325,901 )
( 282,928 )
( 153,417 )
Net Cash (Used in) Financing Activities
( 22,662,130 )
( 34,754,846 )
323,064,926
Net Increase (Decrease) in Cash
( 1,170,318 )
( 6,425,988 )
6,640,896
Cash at Beginning of Period
3,578,634
10,004,622
3,363,726
Cash at End of Period
$
2,408,316
$
3,578,634
$
10,004,622
Supplemental Cash Flow Information
Cash paid for interest
$
14,110,421
$
16,911,344
$
10,364,313
The accompanying notes are an integral part of these financial statements.
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RING ENERGY, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31,
2021
2020
2019
Noncash Investing and Financing Activities
Asset retirement obligation incurred during development
$
171,390
$
99,436
$
631,727
Asset retirement obligation acquired
662,705
—
39,701
Asset retirement obligation revision of estimate
435,419
34,441
—
Asset retirement obligation sold
( 2,934,126 )
—
—
Operating lease assets obtained in exchange for new operating lease liability
839,536
823,727
2,319,185
Operating lease asset revision
( 621,636 )
—
—
Financing lease assets obtained in exchange for new financing lease liability
—
—
858,513
Prepaid asset settled in divestiture of oil and natural gas properties
—
—
1,019,876
Oil and gas assets and properties acquired through stock issuance
—
—
—
Stock issued in property acquisition returned in final settlement
—
103,385
—
Capitalized expenditures attributable to drilling projects financed through current liabilities
309,365
1,415,073
15,170,000
Supplemental Schedule of Investing Activities Wishbone Acquisition
Assumption of joint interest billing receivable
—
—
1,464,394
Assumption of prepaid assets
—
—
2,864,554
Assumption of accounts and revenue payables
—
—
( 1,234,861 )
Asset retirement obligation incurred through acquisition
—
—
( 3,705,941 )
Common stock issued as partial consideration in acquisition
—
—
( 28,331,327 )
Oil and gas properties subject to amortization
—
—
305,004,775
Cash paid
—
—
276,061,594
The accompanying notes are an integral part of these financial statements.
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Table of Contents
RING ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations – Ring Energy, Inc., a Nevada corporation (“Ring,” “Ring Energy,” the “Company,” “we,” “us,” “our,” or similar terms), is a growth oriented independent exploration and production company based in The Woodlands, Texas and is engaged in oil and natural gas development, production, acquisition, and exploration activities currently focused in Texas and New Mexico. Our primary drilling operations target the oil and liquids rich producing formations in the Northwest Shelf, the Central Basin Platform, and the Delaware Basin all of which are part of the Permian Basin in Texas and New Mexico.
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.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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. 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 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 approximates fair value because the underlying instruments are at interest rates which approximate current market rates. The carrying amounts of 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.
Fair Value of Non-financial Assets and Liabilities – The Company also applies fair value accounting guidance to initially, or as events dictate, measure non-financial assets and liabilities such as those obtained through business acquisitions, property and equipment and asset retirement obligations. These assets and liabilities are subject to fair value adjustments only in certain circumstances and are not subject to recurring revaluations. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two as considered appropriate based on the circumstances. Under the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and natural gas production or other applicable sales estimates, operational costs and a risk-adjusted discount rate. The Company may use the present value of estimated future cash inflows and/or outflows or third-party offers or prices of comparable assets with consideration of current market conditions to value its non-financial assets and liabilities when circumstances dictate determining fair value is necessary. Given the significance of the unobservable nature of a number of the inputs, these are considered Level 3 on the fair value hierarchy.
Concentration of Credit Risk and Accounts Receivable – Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and accounts receivable. The Company has cash in excess of federally insured limits of $ 1,936,805 and $ 3,328,634 as of December 31, 2021 and 2020, respectively. The Company places its cash with a high credit quality financial institution. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.
Substantially all of the Company’s accounts receivable is from purchasers of oil and natural gas. Oil and natural gas sales are generally unsecured. The Company has not had any significant credit losses in the past and believes its accounts receivable are fully collectable. The Company also has a joint interest billing receivable. Joint interest billing receivables are collateralized by the pro
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rata revenue attributable to the joint interest holders and further by the interest itself. Accordingly, no material credit losses have been provided as of December 31, 2021 and 2020.
Cash and Cash Equivalents – The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Oil and Natural Gas Properties – The Company uses the full cost method of accounting for oil and natural gas properties. Under this method, all costs (direct and indirect) associated with acquisition, exploration, and development of oil and natural gas properties are capitalized. Costs capitalized include acquisition costs, 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 categorized either as being subject to amortization or not subject to amortization.
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 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.
All capitalized costs of oil and natural gas properties, including the estimated future costs to develop proved reserves and estimated future costs to plug and abandon wells and costs of site restoration, less the estimated salvage value of equipment associated with the oil and natural gas properties, are amortized on the unit-of-production method using estimates of proved reserves as determined by independent petroleum engineers. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is offset to the capitalized costs to be amortized. The following table shows total depletion and the depletion per barrel-of-oil-equivalent rate, for the years ended December 31, 2021, 2020, and 2019.
For the Years Ended December 31,
2021
2020
2019
Depletion
$
36,735,070
$
42,634,294
$
55,870,246
Depletion rate, per barrel-of-oil-equivalent (BOE)
$
11.82
$
13.25
$
14.15
In addition, capitalized costs less accumulated depreciation, depletion and amortization and related deferred income taxes shall not exceed an amount (the full cost ceiling) equal to the sum of:
1) the present value of estimated future net revenues discounted ten percent computed in compliance with SEC guidelines;
2) plus the cost of properties not being amortized;
3) plus the lower of cost or estimated fair value of unproven properties included in the costs being amortized;
4) less income tax effects related to differences between the book and tax basis of the properties.
For the year ended December 31, 2020, the Company recognized an impairment on oil and natural gas properties as a result of the ceiling test in the amount of $ 277,501,943 . No impairment was recorded for the years ended December 31, 2021 or 2019.
Land, Buildings, Equipment and Leasehold Improvements – Land, buildings, equipment and leasehold improvements are carried at historical cost, adjusted for impairment loss and accumulated depreciation. Historical costs include all direct costs associated with the acquisition of land, buildings, equipment and leasehold improvements and placing them in service.
Depreciation of buildings, equipment , software and leasehold improvements is calculated using the straight-line method based upon the following estimated useful lives:
Leasehold improvements
3 ‑ 10 years
Office equipment and software
3 ‑ 7 years
Equipment
5 ‑ 10 years
Depreciation expense was $ 432,897 , $ 376,366 , and 334,023 for the years ended December 31, 2021, 2020, and 2019, respectively.
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Notes Payable – During 2021, the Company obtained external insurance for directors and officers, control of well, and cybersecurity through signing three promissory notes. As of December 31, 2021, our notes payable balance included within current liabilities on our balance sheet is $ 586,410 .
Revenue Recognition – In January 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenues from Contracts with Customers (Topic 606) (“ASU 2014-09”). The timing of recognizing revenue from the sale of produced crude oil and natural gas was not changed as a result of adopting ASU 2014-09. 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. 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 new guidance regarding ASU 2014-09 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. See Note 2 for additional information.
Income Taxes – Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, and tax carryforwards. 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.
In January 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718.) The Company used the modified retrospective method to account for unrecognized excess tax benefits from prior periods and uses the prospective method to account for current period and future excess tax benefit.
Accounting for Uncertainty in Income Taxes – In accordance with generally accepted accounting principles, the Company has analyzed its filing positions in all jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions. The Company has identified its federal income tax return and its franchise tax return in Texas in which it operates as “major” tax jurisdictions. The Company’s federal income tax returns for the years ended December 31, 2017 through 2021 remain subject to examination. The Company’s federal income tax returns for the years ended December 31, 2007 through 2021 remain subject to examination to the extent of the net operating loss (NOL) carryforwards. The Company’s franchise tax returns in Texas remain subject to examination for 2016 through 2021. The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit. Therefore, the Company has no significant reserves for uncertain tax positions and no adjustments to such reserves were required by generally accepted accounting principles. No interest or penalties have been levied against the Company and none are anticipated; therefore, no interest or penalty has been included in our provision for income taxes in the statements of operations.
Earnings (Loss) Per Share – Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per share are calculated to give effect to potentially issuable dilutive common shares.
Major Customers – During the year ended December 31, 2021, sales to three customers represented 76 %, 7 % and 6 %, respectively, of total oil and natural gas sales. As of December 31, 2021, sales outstanding from these three customers represented 75 %, 8 % and 4 %, respectively, of accounts receivable. During the year ended December 31, 2020, sales to three customers represented 68 %, 10 % and 8 %, respectively, of total oil and natural gas sales. As of December 31, 2020, sales outstanding from these three customers represented 80 %, 0 % and 5 %, respectively, of accounts receivable. During the year ended December 31, 2019, sales to three customers represented 42 %, 36 % and 7 %, respectively, of total oil and natural gas sales. As of December 31, 2019, sales outstanding from these three customers represented 47 %, 31 % and 9 %, respectively, of accounts receivable.
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 13. 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
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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.
Share-based compensation incurred for the years ended December 31, 2021, 2020, and 2019 was $ 2,418,323 , $ 5,364,162 , and $ 3,082,625 , respectively.
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 natural 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. Refer to Note 8 for further details.
Recently Adopted Accounting Pronouncements – In August 2018, the FASB issued 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 June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, followed by other related ASUs that provided targeted improvements (collectively “ASU 2016-13”). ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The guidance is to be applied using a modified retrospective method and is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2016-13 on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact to the Company’s consolidated financial statements or disclosures.
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 was effective for the Company beginning in the first quarter of 2021 and is being applied retrospectively. The adoption and implementation of this ASU did not have a material impact on the Company’s financial statements.
Recent Accounting Pronouncements – 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.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. The
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guidance is to be applied using either a modified retrospective or a fully retrospective method. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company will adopt ASU 2020-06 effective January 1, 2022. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This update requires the acquirer in a business combination to record contract asset and liabilities following Topic 606 – “Revenue from Contracts with Customers” at acquisition as if it had originated the contract, rather than at fair value. This update is effective for public business entities beginning after December 15, 2022, with early adoption permitted. The Company continues to evaluate the provisions of this update, but it does not believe the adoption will have a material impact on its financial position, results of operations or liquidity .
NOTE 2 – REVENUE RECOGNITION
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.
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 wellhead. 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 years ended December 31,
2021
2020
2019
Operating revenues
Oil
$
181,533,093
$
109,113,557
$
191,891,314
Natural gas
14,772,873
3,911,581
3,811,517
Total operating revenues
$
196,305,966
$
113,025,138
$
195,702,831
NOTE 3 – LEASES
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). This guidance attempts 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 in 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.
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The Company has operating leases for our offices in Midland, Texas and The Woodlands, Texas. The Midland office is under a five-year lease which began January 1, 2021. Also beginning January 15, 2021, the Company entered into a five-and-a-half-year sub-lease for office space in The Woodlands, Texas. The future payments associated with these operating leases are reflected below. During the years ended December 31, 2019 and 2020 the Company had an operating lease with Arenaco, LLC for its Tulsa, Oklahoma office. The Tulsa lease was terminated as of March 31, 2021, with payments made until the end of February 2021. Refer to Note 14 for further details.
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 (i.e not capitalize). The office equipment and compressors are not subject to ASU 2016-02 based on the agreement and nature of use.
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 is reflected in the short-term lease costs within Lease operating expenses, shown 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 December 31, 2021 are as follows:
2022
2023
2024
2025
2026
Operating lease payments (1)
$
349,127
$
356,991
$
376,855
$
384,719
$
110,096
Financing lease payments (2)
336,206
213,530
142,354
—
—
(1)
The weighted average discount rate as of December 31, 2021 for operating leases was 4.50 % . Based on this rate, the future lease payments above include imputed interest of $ 148,701 . The weighted average remaining term of operating leases was 4.3 years.
(2)
The weighted average discount rate as of December 31, 2021 for financing leases was 4.22 % . Based on this rate, the future lease payments above include imputed interest of $ 31,850 . The weighted average remaining term of financing leases was 2.23 years.
The following table provides supplemental information regarding cash flows from operations:
2021
Operating lease costs
$
523,487
Short term lease costs (1)
$
4,161,540
Financing lease costs:
Amortization of financing lease assets (2)
$
307,936
Interest on lease liabilities (3)
$
22,088
(1)
Amount included in Lease operating expenses
(2)
Amount included in Depreciation, depletion and amortization
(3)
Amount included in Interest expense
NOTE 4 – EARNINGS (LOSS) PER SHARE INFORMATION
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For the years ended December 31,
2021
2020
2019
Net Income (Loss)
$
3,322,892
$
( 253,411,828 )
$
29,496,551
Basic Weighted-Average Shares Outstanding
99,387,028
72,891,310
66,571,738
Effect of dilutive securities:
Stock options
75,897
—
174,944
Restricted stock
1,613,810
—
10,346
Common warrants
20,116,440
—
—
Diluted Weighted-Average Shares Outstanding
121,193,175
72,891,310
66,757,028
Basic Earnings (Loss) per Share
$
0.03
$
( 3.48 )
$
0.44
Diluted Earnings (Loss) per Share
$
0.03
$
( 3.48 )
$
0.44
Stock options to purchase 113,659 , 465,500 , and 2,353,500 shares of common stock were excluded from the computation of diluted earnings per share during the years ended December 31, 2021, 2020 and 2019, respectively, as their effect would have been anti-dilutive. Also excluded from the computation of diluted earnings per share were 114,880 (including 94,270 shares related to the performance stock units further described in Note 13), 2,144,617 , and 704,684 shares of unvested restricted stock during the year ended December 31, 2021, 2020 and 2019, respectively, as their effect would have been anti-dilutive. Common warrants to purchase 29,804,300 shares of common stock were excluded from the computation of diluted earnings per share during the year ended December 31, 2020, as their effect would have been anti-dilutive.
Pre-funded warrants to purchase 13,428,500 shares of common stock were included in the calculation of the Basic Weighted-Average Shares Outstanding for the year ended December 31, 2020 as they were exercisable for a nominal amount and so were treated as if they were exercised at issuance. These shares were exercised in January 2021 and have also been included in the beginning shares outstanding for the calculation of Basic Weighted-Average Shares Outstanding for the year ended December 31, 2021 .
NOTE 5 – ACQUISITIONS & DIVESTITURES
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 (collectively, “Wishbone”) on the Northwest Shelf in Gaines, Yoakum, Runnels and Coke Counties, Texas and Lea County, New Mexico (the “Acquisition”) pursuant to a purchase and sale agreement dated as of February 25, 2019 by and among the Company and Wishbone (the “Purchase and Sale Agreement”). 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. Ring executed the Acquisition for the existing production and future development potential. The Company incurred approximately $ 4.1 million in acquisition related costs, which were recognized in general and administrative expense. Total consideration after purchase price adjustments included cash payments totaling approximately $ 276.1 million and the issuance of 4,576,951 shares of common stock, of which 2,538,071 shares were placed in escrow to satisfy potential indemnification claims. The shares held in escrow were released in April of 2020. The shares were valued at the price on the date of the signing of the Purchase and Sale Agreement, February 25, 2019, of $ 6.19 per share.
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. The Company determined that it had effective control of the properties effective February 1, 2019 based on Ring having primary decision making ability regarding the properties beginning at that time. Revenues and related expenses for the Acquisition are included in our statements 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:
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Assets acquired:
Proved oil and natural gas properties
$
305,004,775
Joint interest billing receivable
1,464,394
Prepaid assets
2,864,554
Liabilities assumed
Accounts and revenues payable
( 1,234,861 )
Asset retirement obligations
( 3,705,941 )
Total Identifiable Net Assets
$
304,392,921
The revenues and direct operating costs associated with the acquired properties included in our financial statements for the year ended December 31, 2019 are as follows:
Revenue
$
105,102,038
Oil and natural gas production costs
17,037,228
Oil and natural gas production taxes
4,646,660
Total direct costs (1)
21,683,888
Earnings from the Acquired properties
$
83,418,150
(1) This includes only oil and natural gas production costs and oil and natural gas production taxes and does not give account to depreciation, depletion and amortization, accretion of asset retirement obligation, general and administrative expense, interest expense or any other cost that cannot be directly correlated to the Acquisition.
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 cash consideration 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 – DEPOSIT FORFEITURE INCOME
In the second quarter of 2020, the Company entered into an agreement with an intended buyer to sell the Company’s Delaware Basin assets. The agreement was amended on six different occasions throughout 2020 releasing the initial deposits to the Company and requiring additional non-refundable deposits. In total, $ 5,500,000 in non-refundable deposits were made to the Company. In October 2020, the agreement was terminated as the buyer was not able to consummate the transaction. As such, the Company recognized the $ 5,500,000 as income in our Statements of Operations as no divestiture of assets had occurred. Refer to Note 17 for further details.
NOTE 7 – OIL AND NATURAL GAS PRODUCING ACTIVITIES
Set forth below is certain information regarding the aggregate capitalized costs of oil and natural gas properties and costs incurred by the Company for its oil and natural gas property acquisitions, development and exploration activities:
Net Capitalized Costs
As of December 31,
2021
2020
Oil and natural gas properties, full cost method
$
883,844,745
$
836,514,815
Financing lease asset subject to depreciation
1,422,487
858,513
Fixed assets subject to depreciation
2,089,722
1,520,890
Total Properties and Equipment
887,356,954
838,894,218
Accumulated depletion, depreciation and amortization
( 235,997,307 )
( 200,111,658 )
Net Properties and Equipment
$
651,359,647
$
638,782,560
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Net Costs Incurred in Oil and Gas Producing Activities
For the years Ended December 31,
2021
2020
Payments to purchase oil and natural gas properties
$
1,368,437
$
1,317,313
Proceeds from divestiture of oil and natural gas properties
( 2,000,000 )
—
Payments to develop oil and natural gas properties
51,302,131
42,457,745
Payments to acquire or improve fixed assets subject to depreciation
568,832
55,339
Total Net Costs Incurred
$
51,239,400
$
43,830,397
NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to fluctuations in crude oil and natural gas prices on its production. We 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 our 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, their use also may limit future income from favorable commodity price movements.
From time to time the Company enters into derivative contracts to protect the Company’s cash flow from price fluctuation and maintain its capital programs. The Company has historically used either costless collars or swaps for this purpose. Oil derivative contracts are based on WTI Crude Oil prices and natural gas contacts are based on Henry Hub. A “costless collar” is the combination of two options, a put option (floor) and 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. 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.
Throughout 2020 and 2021, the Company entered into additional derivative contracts in the form of oil swaps for 2022. The following tables reflect the details of those contracts:
Oil derivative contracts
Barrels
Date entered into
Period covered
per day
Swap price
2022 swaps
12/4/2020
Calendar year 2022
500
$
44.22
12/7/2020
Calendar year 2022
500
44.75
12/10/2020
Calendar year 2022
500
44.97
12/17/2020
Calendar year 2022
250
45.98
1/4/2021
Calendar year 2022
250
47.00
2/4/2021
Calendar year 2022
250
50.05
5/11/2021
Calendar year 2022
879 (1)
49.03
(1) The notional quantity per the swap contract entered into on May 11, 2021 is for 26,750 barrels of oil per month. The 879 represents the daily amount on an annual basis.
We did not designate our derivative instruments as hedges for accounting purposes. 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 in the accompanying statements of operations.
The following presents the impact of the Company’s contracts on its balance sheets for the periods indicated.
As of December 31,
2021
2020
Liabilities
Commodity derivative instruments
$
29,241,588
$
3,287,328
Derivative liabilities, current
$
29,241,588
$
3,287,328
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Commodity derivative instruments
$
—
$
869,273
Derivative liabilities, non-current
$
—
$
869,273
The components of “Gain (loss) on derivative contracts” are as follows for the respective periods:
For the years ended December 31,
2021
2020
2019
Gain (loss) on oil derivative
$
( 77,654,452 )
$
20,357,812
$
( 3,000,078 )
Gain (loss) on natural gas derivatives
( 198,689 )
1,008,256
—
Gain (loss) on derivative contracts
$
( 77,853,141 )
$
21,366,068
$
( 3,000,078 )
The components of “Cash (paid) received for derivative settlements, net” are as follows for the respective periods:
For the years ended December 31,
2021
2020
2019
Cash flows from operating activities
Cash (paid) received on oil derivatives
$
( 53,511,332 )
$
22,522,591
$
63,054
Cash (paid) received on natural gas derivatives
743,178
—
—
Cash (paid) received from derivative settlements
$
( 52,768,154 )
$
22,522,591
$
63,054
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. All derivative contracts have been with lenders under our credit facility.
NOTE 9 – 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.
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As a result of the Acquisition, the Company evaluated the fair value of the assets acquired and the liabilities assumed. The Company recorded the oil and gas assets acquired in the Acquisition at the price paid. Prior to doing so, the Company determined that the price paid approximated the fair value of the net assets acquired. In doing so, the Company compared the price paid per BOE of existing production to comparable companies’ enterprise value per BOE of existing production. Additionally, the Company did an evaluation of the reserves acquired, based on varying percentages of the present value discounted at 10 percent (“PV-10”) of the different categories (PDP, PDNP and PUD) of the reserves. Based on these evaluations, we determined that the price paid was a reasonable approximation of the fair value of the oil and gas assets acquired. Given the significance of the unobservable nature of a number of the inputs, these are considered Level 3 on the fair value hierarchy.
The Company recorded the prepaid expenses, joint interest billing receivables and revenues payable at the carrying value assumed from Wishbone. The carrying amounts of 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.
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.
The following table summarizes the valuation of our assets and liabilities that are measured at fair value on a recurring basis (further detail in Note 8).
Fair Value Measurement Classification
Quoted prices in
Active Markets
Significant
for Identical Assets
Significant Other
Unobservable
or (Liabilities)
Observable Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
As of December 31, 2020
Commodity Derivatives - Liabilities
$
—
$
( 4,156,601 )
$
—
$
( 4,156,601 )
Total
$
—
$
( 4,156,601 )
$
—
$
( 4,156,601 )
As of December 31, 2021
Commodity Derivatives - Liabilities
$
—
$
( 29,241,588 )
$
—
$
( 29,241,588 )
Total
$
—
$
( 29,241,588 )
$
—
$
( 29,241,588 )
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The carrying amounts reported for the revolving line of credit approximates fair value because the underlying instruments are at interest rates which approximate current market rates. The carrying amounts of 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.
NOTE 10 – REVOLVING LINE OF CREDIT
On July 1, 2014, the Company entered into a Credit Agreement with SunTrust Bank, as lender, issuing bank and administrative agent for several banks and other financial institutions and lenders (the “Administrative Agent”), which was amended on June 14, 2018, May 18, 2016, July 24, 2015, and June 26, 2015. In April 2019, 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, increased the maximum borrowing amount to $ 1 billion, extended the maturity date through April 2024 and made other modifications to the terms of the Credit Facility. This Credit Facility was amended on December 23, 2020 and June 17, 2020. The latest amendment adjusted the borrowing base to $ 350 million and made other modifications to the terms of the Credit Facility. The Credit Facility is secured by a first lien 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. The Borrowing Base is subject to reduction in certain circumstances such as the sale or disposition of certain oil and gas properties of the Company or its subsidiaries and 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).
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. The amendment to the credit facility in June 2020 allowed for a Leverage Ratio of not greater than 4.75 to 1 as of the last day of the fiscal quarter ending September 30, 2020. The December 2020 amendment permitted a total Leverage Ratio not greater than 4.25 for the period ending March 31, 2021. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of December 31, 2021, $ 290,000,000 was outstanding on the Credit Facility. We are in compliance with all covenants contained in the Credit Facility.
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NOTE 11 – ASSET RETIREMENT OBLIGATION
A reconciliation of the asset retirement obligation for the years ended December 31, 2019, 2020 and 2021 is as follows:
Balance, December 31, 2018
$
13,055,797
Liabilities acquired
3,745,642
Liabilities incurred
631,727
Liabilities settled
( 1,589,654 )
Accretion expense
943,707
Balance, December 31, 2019
$
16,787,219
Liabilities incurred
99,436
Liabilities settled
( 710,577 )
Revision of estimate (1)
34,441
Accretion expense
906,616
Balance, December 31, 2020
$
17,117,135
Liabilities acquired
$
662,705
Liabilities incurred
171,390
Liabilities sold
( 2,934,126 )
Liabilities settled
( 904,514 )
Revision of estimate (1)
435,419
Accretion expense
744,045
Balance, December 31, 2021
$
15,292,054
(1) Several factors are considered in the annual review process, including current estimates for removal cost and estimated remaining useful life of the assets. The 2020 revision of estimates reflect an adjustment to the estimates for plugging costs. The 2021 revision of estimates primarily reflect updated interests for our working interest partners.
NOTE 12 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue 225,000,000 shares of common stock, with a par value of $ 0.001 per share, and 50,000,000 shares of preferred stock with a par value per share of $ 0.001 per share.
Issuance of equity instruments in public and private offerings – In October 2020, the Company closed on an underwritten public offering of (i) 9,575,800 shares of common stock, (ii) 13,428,500 Pre-Funded Warrants and (iii) 23,004,300 warrants to purchase common stock (the “Common Warrants”) at a combined purchase price of $ 0.70 . This includes a partial exercise of the over-allotment. The Common Warrants have a term of five years and an exercise price of $ 0.80 per share. Gross proceeds totaled $ 16,089,582 .
Concurrently with the underwritten public offering, the Company closed on a registered direct offering of (i) 3,500,000 shares of common stock, (ii) 3,300,000 Pre-Funded Warrants and (iii) 6,800,000 Common Warrants at a combined purchase price of $ 0.70 per share of common stock and Pre-Funded Warrants. The Common Warrants have a term of five years and an exercise price of $ 0.80 per share. Gross proceeds totaled $ 4,756,700 .
Total gross proceeds from the 2020 underwritten public offering and the registered direct offering aggregated $ 20,846,282 . Total net proceeds aggregated $ 19,379,832 .
Common stock issued pursuant to warrant exercise - In December 2020, the Company issued 3,300,000 shares of common stock pursuant to the exercise of Pre-Funded Warrants issued in the October 2020 registered direct offering. Gross and net proceeds were $ 3,300 . In January 2021, the remaining 13,428,500 Pre-Funded Warrants were exercised. During the year ended December 31, 2021, 442,600 of the Common Warrants were exercised. Accordingly, the number of Common Warrants outstanding as of December 31, 2021 was 29,361,700 .
Common stock issued in property acquisition – As discussed in Note 5, in April 2019, the Company completed the acquisition of assets from Wishbone. As a part of the consideration for the acquisition, the Company issued 4,576,951 shares of common stock.
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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 issued, based on this price, was $ 28,331,327 .
In April 2020, 16,702 shares of common stock were returned and cancelled as settlement of post-closing adjustments. 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 .
Common Stock Issued for option exercises – During the year ended December 31, 2021, the Company issued 100,000 shares of common stock as a result of stock option exercises. No stock options were exercised in 2019 or 2020. The following tables present the details of the 2021 exercises:
Stock price on
Aggregate value
Options
Exercise
Shares
Shares
Cash paid at
date of exercise
of shares retained
exercised
price ($)
issued
retained
exercise ($)
($)
($)
2021
100,000
$
2.00
100,000
—
$
200,000
$
3.14
$
—
2021 Totals
100,000
100,000
—
$
200,000
—
2021 Weighted Averages
$
2.00
$
3.14
NOTE 13 – EMPLOYEE STOCK OPTIONS, RESTRICTED STOCK AWARD PLAN AND 401(k)
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 a weighted 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 .
During October and December 2020, as a result of changes to the executive team and the Board of Directors (the “Board”) of the Company, the Company accelerated the vesting of 1,131,955 shares of restricted stock and as a result of such acceleration, the Company incurred additional compensation expense of $ 2,361,362 .
Compensation expense charged against income for share-based awards during the years ended December 31, 2021, 2020, and 2019 was $ 2,418,323 , $ 5,364,162 ,and $ 3,082,625 , respectively. These amounts are included in general and administrative expense in the Statements of Operations.
In 2011, the Board approved and adopted a long-term incentive plan (the “2011 Plan”), which was subsequently approved and amended by the shareholders. There were 341,155 shares eligible for grant, either as stock options or as restricted stock, as of December 31, 2021.
In 2021, the Board approved and adopted The Omnibus Incentive Plan (the “2021 Plan”), which was subsequently approved and amended by the shareholders at the 2021 Annual Meeting. There were 7,814,128 shares eligible for grant, either as stock options or as restricted stock, as of December 31, 2021.
Employee Stock Options – No stock options have been granted in the years ended December 31, 2021, 2020, or 2019. All outstanding stock option awards vest at the rate of 20 % each year over five years beginning one year from the date granted and expire ten years
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from the grant date. A summary of the status of the stock options as of December 31, 2021, 2020, and 2019 and changes during the years ended December 31, 2021, 2020, and 2019 is as follows:
2021
2020
2019
Weighted-
Weighted-
Weighted-
Average
Average
Average
Options
Exercise Price
Options
Exercise Price
Options
Exercise Price
Outstanding at beginning of the year
465,500
$
3.26
2,748,500
$
6.28
2,751,000
$
6.28
Issued
—
—
—
—
—
—
Forfeited or rescinded
—
—
( 2,283,000 )
6.89
( 2,500 )
11.70
Exercised
( 100,000 )
2.00
—
—
—
—
Outstanding at end of year
365,500
$
3.61
465,500
$
3.26
2,748,500
$
6.28
Exercisable at end of year
365,500
$
3.61
455,300
$
3.11
2,506,700
$
5.78
For the years ended December 31, 2021, 2020, and 2019 the Company incurred share-based compensation expense related to stock options of $ 20,934 , $ 927,559 , and $ 625,855 , respectively. As of December 31, 2021, the Company had $ 0 of unrecognized compensation cost related to stock options. The aggregate intrinsic value of options vested and expected to vest as of December 31, 2021 was $ 82,600 . The aggregate intrinsic value of options exercisable at December 31, 2021 was $ 82,600 . The year-end intrinsic values are based on a December 31, 2021 closing stock price of $ 2.28 .
Stock options exercised of 100,000 in 2021 had an aggregate intrinsic value on the date of exercise of $ 114,000 . No stock options were exercised in 2020 or 2019.
The following table summarizes information related to the Company’s stock options outstanding as of December 31, 2021:
Options Outstanding
Weighted-
Average
Remaining
Number
Contractual Life
Number
Exercise price
Outstanding
(in years)
Exercisable
$
2.00
295,000
2.00
295,000
5.50
5,000
2.21
5,000
14.54
10,000
3.74
10,000
8.00
4,500
3.92
4,500
6.42
15,000
4.34
15,000
11.75
36,000
4.95
36,000
365,500
2.46
365,500
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Restricted stock grants – Following is a table reflecting the restricted stock grants during 2019, 2020 and 2021:
# of shares of
Grant date
restricted stock
April 9,2019
10,400
May 30, 2019
5,000
July 9,2019
5,000
September 13, 2019
10,000
December 21, 2019
627,205
October 1, 2020
900,000
October 26,2020
150,000
December 15,2020
930,000
April 30, 2021
33,950
June 17, 2021
1,162,152
July 6, 2021
11,824
July 12, 2021
4,007
September 1, 2021
10,417
September 8, 2021
3,306
Restricted stock grants prior to 2020 vest at the rate of 20 % each year over five years beginning one year from the date granted. Restricted stock grants in 2020 and 2021 vest at a rate of 33 % each year over three years beginning one year from the date granted for all employees; for members of the Company’s Board of Directors, the restricted stock grants vest on the earliest of (i) the day before the next shareholder meeting or (ii) the first anniversary of the date of the award. A summary of the status of restricted stock grants as of December 31, 2021 and 2020 and changes during the years ended December 31, 2021, 2020 and 2019 is as follows:
2021
2020
2019
Weighted-
Average
Grant
Weighted-
Weighted-
Date Fair
Average Grant
Average Grant
Restricted stock
Value
Restricted stock
Date Fair Value
Restricted stock
Date Fair Value
Outstanding at beginning of year
2,132,297
$
2.94
1,341,889
$
4.99
878,360
$
7.33
Granted
1,225,656
2.77
1,980,000
0.71
657,605
2.63
Forfeited or rescinded
—
—
( 9,200 )
3.97
( 6,940 )
4.23
Vested
( 785,357 )
1.37
( 1,180,392 )
4.97
( 187,136 )
7.79
Outstanding at end of year
2,572,596
$
1.75
2,132,297
$
2.94
1,341,889
$
4.99
For the years ended December 31, 2021, 2020 and 2019, the Company incurred share-based compensation expense related to restricted stock grants of $ 2,225,895 , $ 4,436,603 , and $ 2,456,770 , respectively. As of December 31, 2021, the Company had $ 2,721,852 of unrecognized compensation cost related to restricted stock grants that will be recognized over a weighted average period of 2.02 years.
During 2021, 2020, and 2019, 785,357 , 1,180,392 , and 187,136 shares of restricted stock vested, respectively. At the dates of vesting those shares had an aggregate intrinsic value of $ 2,049,603 , $ 801,133 , and $ 494,605 , respectively.
Performance Stock Units - In accordance with the 2021 Plan, as of November 22, 2021, the Company entered into performance stock unit (“PSU”) agreements (the “PSU Agreement”) with certain employees. Upon approval the Board, a total of 860,216 PSU were granted to the Company’s five executive officers (the “2021 PSU Awards”). The performance period for the 2021 PSU Awards began on January 1, 2021, and will end December 31, 2023, with such awards vesting on the last day of the performance period (the vesting date). The PSUs are performance-based restricted stock units subject to the terms of the 2021 Plan and the PSU Agreement. A summary of the status of the performance stock grants as of December 31, 2021 and changes during the year ended December 31, 2021 is as follows:
2021
Weighted-
Average
Performance
Grant Date
Stock Units
Fair Value
Outstanding at beginning of year
—
$
—
Granted
860,216
3.87
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Forfeited or rescinded
—
—
Vested
—
—
Outstanding at end of year
860,216
$
3.87
For the year ended December 31, 2021, the Company incurred share-based compensation expense related to the 2021 PSU Awards of $ 171,494 . As of December 31, 2021, the Company had $ 3,348,851 of unrecognized compensation cost related to the 2021 PSU Awards that will be recognized over a weighted average period of 2 years .
401(k) Plan - In 2019, the Company initiated a sponsored 401(k) plan that is a defined contribution plan for the benefit of all eligible employees. The plan allows eligible employees, after a three-month waiting period, to make pre-tax or after-tax contributions, not to exceed annual limits established by the federal government. The Company makes matching contributions of up to 6 % of any employee’s compensation. Employees are 100 % vested in the employer contribution upon receipt.
The following table presents the matching contributions expense recognized for the Company’s 401(k) plan for the years ended December 31, 2021, 2020, and 2019.
2021
2020
2019
Employer safe harbor match
228,273
138,977
59,716
NOTE 14 – RELATED PARTY TRANSACTIONS
The Company leased office space in Tulsa, Oklahoma, from Arenaco, LLC (“Arenaco”), a company that is owned by two stockholders of the Company, Mr. Rochford, former Chairman of the Board, and Mr. McCabe, a former Director of the Company. During the years ended December 31, 2021, 2020, and 2019, the Company paid $ 10,000 , $ 60,000 , and $ 60,000 , respectively, to Arenaco. The month-to-month Arenaco lease was terminated as of March 31, 2021.
During June 2021, the Company began using Pro-Ject Chemicals, LLC (“PJ Chemicals”) to perform various chemical services on its wells. As publicly disclosed on the Company’s website, Paul D. McKinney, Chief Executive Officer and Chairman of the Board, is a member of the board of directors of Pro-Ject Holdings, LLC, a privately owned oil field chemical services company and parent of PJ Chemicals. Mr. McKinney owns . 34 % of the shares of Pro-Ject Holdings, LLC. During the year ended December 31, 2021, the Company paid $ 117,830 to PJ Chemicals. As of December 31, 2021 the Company had accounts payable of $ 37,641 due to PJ Chemicals.
NOTE 15 – COMMITMENTS AND CONTINGENT LIABILITIES
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 to secure the surety bonds described below. The standby letters of credit are valid until cancelled or matured and are collateralized by the revolving credit facility with the bank. 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 letters of credit to the insurance company will be renewed if the insurance requires them to retain the surety bonds. 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 will require renewal until the two subject wells are plugged.
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NOTE 16 – INCOME TAXES
For the years ended December 31, 2021, 2020, and 2019, components of our provision for income taxes are as follows:
Provision for Income Taxes
2021
2020
2019
Federal Deferred Tax
$
—
$
( 6,001,176 )
$
13,787,654
State Deferred Tax
90,342
—
—
Provision for Income Taxes
$
90,342
$
( 6,001,176 )
$
13,787,654
The following is a reconciliation of income taxes computed using the U.S. federal statutory rate to the provision for income taxes:
Rate Reconciliation
2021
2020
2019
Pre-tax book income
$
3,413,234
$
( 259,413,004 )
$
43,284,205
Tax at federal statutory rate
$
716,779
$
( 54,476,731 )
$
9,089,683
Excess tax benefit from stock option exercises and restricted stock vesting
( 175,187 )
( 1,109,379 )
4,055,418
Adjust prior estimates to tax return
2,938,948
( 1,930,994 )
19
States taxes, net of federal benefit
430,654
( 964,393 )
160,913
Adjustment for change in future effective tax rate (1)
—
—
479,222
Valuation allowance
( 3,827,194 )
52,161,412
—
Non-deductible expenses and other
6,342
318,909
2,399
Provision for Income Taxes
$
90,342
$
( 6,001,176 )
$
13,787,654
(1) The acquisition of the Northwest Shelf assets from Wishbone included properties in the State of New Mexico. The tax rates associated with the State of New Mexico adjusted our overall tax rate from 21 % to 21.29 % . This resulted in an additional tax expense during the year ended December 31, 2019 of $ 479,222 .
The net deferred taxes consisted of the following as of December 31, 2021 and 2020:
12/31/2021
12/31/2020
Total
Total
Deferred Tax Assets
Net operating loss (NOL) carryforward
60,155,112
54,185,183
Equity compensation
691,076
3,350,361
Asset retirement obligation
3,348,875
4,604,906
Fair market value of derivatives
6,403,745
888,266
Accrued expense
5,049
—
Others
56,028
55,746
Gross Deferred Tax Assets
70,659,885
63,084,462
Less: valuation allowance
( 48,334,217 )
( 52,161,412 )
Net Deferred Tax Assets
22,325,668
10,923,050
Deferred Tax Liabilities
Propety and equipment
( 22,415,959 )
( 10,923,050 )
Net Deferred Liabilties
( 22,415,959 )
( 10,923,050 )
Net Deferred Tax Asset/(Liabilities)
( 90,292 )
—
Note that the presentation of the December 31, 2020 income tax, rate reconciliation and deferred tax tables have been adjusted to conform to current year presentation. The total income tax expense, net deferred tax asset and deferred tax liability balances remain the same as prior year.
As of December 31, 2021, the Company had net operating loss carryforwards for federal income tax reporting purposes of approximately $ 108.9 million which, if unused, will begin to expire in 2027 and fully expire in 2037 and an additional $ 176.7 million that can be carried forward indefinitely. Because of the change in ownership provisions of the Code, use of a portion of our federal NOLs may be limited in future periods. As of December 31, 2021, we carried a valuation allowance against our federal and state deferred tax assets of $ 48,334,217 . We have considered both the positive and negative evidence in determining whether it was more likely than not that some portion or all of our deferred tax assets will be realized. The amount of deferred tax assets considered
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realizable could, however, be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence is no longer present and additional weight is given to subjective positive evidence, including projections for growth. The valuation allowance along with $ 22,415,959 of deferred tax liabilities bring our net deferred position to a deferred tax liability of $90,292. The net deferred tax liability recognized on our balance sheet as of December 31, 2021 is attributable to certain state deferred tax liabilities associated with property and equipment.
NOTE 17 – LEGAL MATTERS
The Company is a defendant in a lawsuit in Harris County District Court, Houston, Texas, styled EPUS Permian Assets, LLC, v. Ring Energy, Inc. , that was filed in July 2021. The plaintiff, EPUS Permian Assets, LLC, claims breach of contract, money had and received by fraudulent inducement, unjust enrichment and constructive trust. The plaintiff is requesting its forfeited deposit of $ 5,500,000 in connection with a proposed property sale by the Company plus related damages, and attorneys’ fees and costs. The action relates to a proposed property sale by the Company to the plaintiff, which was extended by the Company on several occasions with the plaintiff ultimately failing to perform on the agreement and the Company keeping the deposit. The Company believes that the claims by the plaintiff are entirely without merit and is conducting a vigorous defense and counterclaim. The Company has filed an answer and a counterclaim denying the allegations and asserting affirmative defenses that would bar or substantially limit the plaintiff’s claims, asserting breach of contract and requesting a declaratory judgment and attorneys’ fees and costs. The parties are conducting discovery.
NOTE 18 – SUBSEQUENT EVENTS
Effective February 1, 2022, the Company entered into a derivative contract with its lender for 1,000 barrels of oil per day for the remainder of 2022 (total notional quantity of 334,000 barrels). Fixed swap prices range vary by month, ranging from $ 90.78 per barrel in February to $ 80.01 per barrel by the end of the year, with a weighted average swap price of $ 84.61 per barrel.
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RING ENERGY, INC.
SUPPLEMENTAL INFORMATION ON OIL AND NATURAL GAS PRODUCING ACTIVITIES
(Unaudited)
Results of Operations from Oil and Natural Gas Producing Activities – The Company’s results of operations from oil and natural gas producing activities exclude interest expense, gain from change in fair value of derivatives, and other financing expense.
For the years ended December 31,
2021
2020
2019
Oil and natural gas sales
$
196,305,966
$
113,025,138
$
195,702,831
Lease operating expenses
(30,312,399)
(29,753,413)
(42,213,006)
Gathering, transportation and processing costs
(4,333,232)
(4,090,238)
(2,874,155)
Ad valorem taxes
(2,276,463)
(3,125,222)
(3,409,064)
Production taxes
(9,123,420)
(5,228,090)
(9,130,379)
Depreciation, depletion, amortization and accretion
(37,167,967)
(43,010,660)
(56,204,269)
Ceiling test impairment
—
(277,501,943)
—
General and administrative (exclusive of corporate overhead)
(2,003,876)
(1,454,041)
(5,696,189)
Results of Oil and Natural Gas Producing Operations
$
111,088,609
$
(251,138,469)
$
76,175,769
Net Costs Incurred in Oil and Gas Producing Activities
For the years Ended December 31,
2021
2020
Payments to purchase oil and natural gas properties
$
1,368,437
$
1,317,313
Proceeds from divestiture of oil and natural gas properties
(2,000,000)
—
Payments to develop oil and natural gas properties
51,302,131
42,457,745
Payments to acquire or improve fixed assets subject to depreciation
568,832
55,339
Total Net Costs Incurred
$
51,239,400
$
43,830,397
Net Capitalized Costs
As of December 31,
2021
2020
Oil and natural gas properties, full cost method
$
883,844,745
$
836,514,815
Financing lease asset subject to depreciation
1,422,487
858,513
Fixed assets subject to depreciation
2,089,722
1,520,890
Total Properties and Equipment
887,356,954
838,894,218
Accumulated depletion, depreciation and amortization
(235,997,307)
(200,111,658)
Net Properties and Equipment
$
651,359,647
$
638,782,560
Reserve Quantities Information – The following estimates of proved and proved developed reserve quantities and related standardized measure of discounted future net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company’s reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and natural gas properties. Accordingly, these estimates are expected to change as future information becomes available. All of the Company’s reserves are located in the United States of America.
The proved reserves estimates shown herein for the years ended December 31, 2021, 2020 and 2019 have been prepared by Cawley, Gillespie & Associates, Inc., independent petroleum engineers. Proved reserves were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing economic and operating conditions based upon the 12-month unweighted average of the first-day-of-the-month prices.
The reserve information in these Consolidated Financial Statements represents only estimates. There are a number of uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the Company’s control, such as commodity pricing. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. As a result, estimates by different engineers may vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may lead to revising the original estimate. Accordingly, initial reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. The meaningfulness of such
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estimates depends primarily on the accuracy of the assumptions upon which they were based. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities or both, the Company’s proved reserves will decline as reserves are produced.
The oil prices as of December 31, 2021, 2020 and 2019 are based on the respective 12-month unweighted average of the first of the month prices of the West Texas Intermediate (“WTI”) spot prices which equates to $63.04 per barrel, $36.04 per barrel and $52.19 per barrel, respectively. The natural gas prices as of December 31, 2021, 2020 and 2019 are based on the respective 12-month unweighted average of the first of month prices of the Henry Hub spot price which equates to $3.598 per MMBtu, $1.99 per MMBtu and $2.58 per MMBtu, respectively. Prices are adjusted by local field and lease level differentials and are held constant for life of reserves in accordance with SEC guidelines.
Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and methods.
For the Year Ended December 31,
2021
2020
Oil (1)
Natural Gas (1)
Oil (1)
Natural Gas (1)
Proved Developed and Undeveloped Reserves
Beginning of year
66,264,286
61,305,027
71,359,014
58,271,882
Purchases of minerals in place
2,180,497
824,512
—
—
Extensions, discoveries and improved recovery
3,975,675
5,172,392
3,495,210
1,824,310
Sale of minerals in place
(462,970)
(555,879)
—
—
Production
(2,686,940)
(2,535,188)
(2,801,528)
(2,494,501)
Revisions of previous quantity estimates
(3,431,939)
7,562,925
(5,788,410)
3,703,336
End of year
65,838,609
71,773,789
66,264,286
61,305,027
Proved Developed at beginning of year
38,260,639
34,335,520
41,242,050
33,467,870
Proved Undeveloped at beginning of year
28,003,648
26,969,507
30,116,964
23,804,012
Proved Developed at end of year
36,820,822
39,748,902
38,260,639
34,335,520
Proved Undeveloped at end of year
29,017,787
32,024,887
28,003,648
26,969,507
1 Oil reserves are stated in barrels; natural gas reserves are stated in thousand cubic feet.
Revisions represent changes in previous reserves estimates, either upward or downward, resulting from new information normally obtained from development drilling and production history or resulting from a change in economic factors, such as commodity prices, operating costs or development costs.
During the year ended December 31, 2021, the Company’s extensions and discoveries of 4,838 MBOE resulted primarily from new proved undeveloped locations resulting from the 2021 operated drilling program in the Northwest Shelf and Central Basin Platform as well as non-operated activity in the Northwest Shelf. Negative revisions of 2,172 MBOE were the result of Delaware PUD removal due to the 5 Year Rule, well performance, and increased cost from 2021 industry activity increase partially offset by commodity price increases.
The increase in proved undeveloped reserves was primarily attributable to extensions of 4,110 MBOE resulting primarily from the 2021 operated drilling program in the Northwest Shelf and Central Basin Platform as well as non-operated activity in the Northwest Shelf.
Standardized Measure of Discounted Future Net Cash Flows – The standardized measure of discounted future net cash flows is computed by applying the price according to the SEC guidelines for oil and natural gas to the estimated future production of proved oil and natural gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10 percent per year to reflect the estimated timing of the future cash flows.
Standardized Measure of Discounted Future Net Cash Flows
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December 31,
2021
2020
2019
Future cash inflows
$
4,853,709,000
$
2,682,488,655
$
3,825,773,515
Future production costs
(1,395,437,250)
(821,515,126)
(964,887,856)
Future development costs
(347,757,000)
(244,323,270)
(252,457,833)
Future income taxes
(501,586,949)
(208,645,934)
(424,715,966)
Future net cash flows
2,608,927,801
1,408,004,325
2,183,711,860
10% annual discount for estimated timing of cash flows
(1,471,562,953)
(852,133,072)
(1,260,536,809)
Standardized Measure of Discounted Future Net Cash Flows
$
1,137,364,848
$
555,871,253
$
923,175,051
The following is a summary of the changes in the Standardized Measure for the Company’s proved oil and natural gas reserves during each of the years in the three-year period ended December 31, 2021:
Changes in Standardized Measure of Discounted Future Net Cash Flows
2021
2020
2019
Beginning of the year
$
555,871,253
$
923,175,051
$
455,944,641
Purchase of minerals in place
33,688,718
—
598,489,190
Extensions, discoveries and improved recovery
79,003,885
61,303,074
334,641,933
Development costs incurred during the year
17,513,180
29,916,746
152,125,320
Sales of oil and gas produced, net of production costs
(154,615,685)
(70,634,853)
(137,663,314)
Sales of minerals in place
(2,523,746)
—
(30,174,528)
Accretion of discount
63,810,764
92,838,323
47,463,292
Net changes in price and production costs
636,884,944
(368,974,767)
(219,608,128)
Net change in estimated future development costs
(44,357,751)
(3,883,985)
47,617,158
Revisions of previous quantity estimates
(22,259,508)
(66,213,586)
(126,143,669)
Changes in estimated timing of cash flows
86,845,188
(139,039,115)
(107,443,484)
Net change in income taxes
(112,496,394)
97,384,365
(92,073,360)
End of the Year
$
1,137,364,848
$
555,871,253
$
923,175,051
F-35