United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2015

Or

 

¨

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ___________to ___________

 

Commission file number 001-36057

 

Ring Energy, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		90-0406406
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
901 West Wall St, 3rd Floor Midland, TX		79702
(Address of principal executive offices)		(Zip Code)

 

(432) 682-7464

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of Each Class		Name of Exchange
Common Stock, par value $0.001		NYSE MKT

 

Securities registered under Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x. No ¨

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

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

 

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

 

Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

 

As of June 30, 2015, the aggregate market value of the common voting stock held by non-affiliates of the issuer, based upon the closing stock price on the NYSE MKT of $11.19 per share, was approximately $285,408,458.

 

As of March 14, 2016, the issuer had outstanding 30,396,942 shares of common stock ($0.001 par value).

 

 

TABLE OF CONTENTS

 

PART I		3
Item 1:	Business	3
Item 1A:	Risk Factors	8
Item 1B:	Unresolved Staff Comments	13
Item 2:	Properties	14
Item 3:	Legal Proceedings	21
Item 4:	Mine Safety Disclosures	21
PART II		22
Item 5:	Market for Registrant's Common Equity, Related Stockholder Matters and Issued Purchases of Equity Securities	22
Item 6:	Selected Financial Data	25
Item 7:	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A:	Quantitative and Qualitative Disclosures About Market Risk	32
Item 8:	Financial Statements and Supplementary Data	32
Item 9:	Changes in and Disagreement's With Accountants on Accounting and Financial Disclosure	32
Item 9A:	Controls and Procedures	32
Item 9B:	Other Information	33
PART III		33
Item 10:	Directors, Executive Officers and Corporate Governance	33
Item 11:	Executive Compensation	37
Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
Item 13:	Certain Relationships and Related Transactions, and Director Independence	44
Item 14:	Principal Accounting Fees and Services	46
PART IV		46
Item 15:	Exhibits, Financial Statement Schedules	46

 

 

Forward Looking Statements

 

All statements, other than statements of historical fact included in this Annual Report on Form 10-K (herein, “Annual Report”) regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Annual Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Annual Report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Annual Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

Unless the context otherwise requires, references in this Annual Report to “Ring,” “the Company,” “we,” “us,” “our” or “ours” refer to Ring Energy, Inc.

 

PART I

 

Item 1:

Business

 

General

 

Ring was incorporated in the State of Nevada in 2004 as “Blanca Corp.” The name of the corporation was changed to “Transglobal Mining Corp.” in 2007 before being changed to “Ring Energy, Inc.” in 2008. We are a Midland-based exploration and production company that is engaged in oil and natural gas acquisition, exploration, development and production activities. Our exploration and production interests are currently focused in Texas and Kansas. The Company takes a conventional approach to its drilling program and seeks to develop its traditional core areas, as well as look for new growth opportunities.

  

The Company’s primary drilling operations target the Central Basin Platform in Andrews County and Gaines County, Texas and the Delaware Basin in Reeves County and Culberson County, Texas. As of December 31, 2015, Ring had 30,663 gross (18,130 net) acres in Andrews and Gaines counties and 19,983 gross (19,679 net) acres in Reeves and Culberson counties. The Company also has 17,631 gross (16,674 net) acres in Kansas.

 

As of December 31, 2015, Ring’s proved reserves were approximately 24.4 million BOE (barrel of oil equivalent). Effectively 100% of its reserves (based on the estimates above) relate to properties located in Texas. The Company’s proved reserves are oil-weighted with 91% of proved reserves consisting of oil and 9% consisting of natural gas. Of those reserves, 33% of the proved reserves are classified as proved developed producing, or “PDP,” 2% are classified as proved developed non-producing, or “PDNP,” and approximately 65% are classified as proved undeveloped, or “PUD.”

 

Production for the year ended December 31, 2015, was approximately 743,363 BOE, as compared to production of 463,495 BOE for the year ended December 31, 2014, a 60% increase in BOE. The stated production amount reflects only the oil and gas that was produced and shipped prior to the end of the fourth quarter. Any oil and gas produced in the fourth quarter but still held on site after December 31, 2015, will be credited in the first quarter of 2016.

 

Ring believes that there is significant value to be created by drilling the identified undeveloped opportunities on its Texas properties. As of December 31, 2015, Ring owned interests in a total of 5,875 gross (5,169 net) developed acres and 24,789 gross (12,961 net) undeveloped acres in Andrews and Gaines County, Texas. In these counties, the Company has 212 identified proven vertical drilling locations based on the reserve reports as of December 31, 2015, and an additional 2,478 identified potential vertical drilling locations based on 10-acre downspacing. Also as of December 31, 2015, Ring owned interests in a total of 10,190 gross (10,092 net) developed acres and 9,793 (9,587 net) undeveloped acres in Culberson and Reeves County, Texas. In these counties, the Company has 43 identified proven vertical drilling locations based on the reserve reports as of December 31, 2015 and an additional 489 potential vertical drilling locations based on 20-acre downspacing. Ring intends to grow its reserves and production through development, drilling, exploitation and exploration activities on this multi-year project inventory of identified potential drilling locations and through acquisitions that meet the Company’s strategic and financial objectives, targeting oil-weighted reserves. Ring has identified 23 wells that are suitable candidates for re-stimulation, providing attractive returns with lower upfront costs.

 

Business Segments

 

Our operations are all oil and gas exploration and production related activities in the United States.

 

 

Principal Executive Office

 

Our principal executive offices are located at 901 West Wall St., 3^rd Floor, Midland, TX 79702, and our telephone number is (432) 682-7464. Our Internet website can be found at www.ringenergy.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 will be available through our Internet website as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC. The information on, or that can be accessed through, our website is not incorporated by reference into this Annual Report and should not be considered part of this Annual Report.

 

Ring Energy’s Business Strategy and Development

 

	·	Pursue strategic acquisitions with exceptional upside potential. Ring has a history of acquiring leasehold positions that it believes to have substantial resource potential and to meet its targeted returns on invested capital. Ring has historically pursued acquisitions of properties that it believes to have exploitation and development potential comparable to its existing inventory of drilling locations. The Company has developed and refined an acquisition program designed to increase reserves and complement existing core properties. Ring’s experienced team of management and engineering professionals identify and evaluate acquisition opportunities, negotiate and close purchases and manage acquired properties. Management intends to continue to pursue strategic acquisitions that meet the Company’s operational and financial targets. The executive team, with its extensive experience in the Permian Basin, has many relationships with operators and service providers in the region. Ring believes that leveraging its relationships will be a competitive advantage in identifying acquisition targets. Management’s proven ability to evaluate resource potential will allow Ring to successfully acquire acreage and bring out more value in the assets.
	·	Growing production and reserves by developing our oil-rich resource base. Over the long-term, Ring intends to drill and develop its acreage base in an effort to maximize its value and resource potential.  Ring’s portfolio of proved oil and natural gas reserves consists of 91% oil and 9% natural gas. Of those reserves, 33% of the proved reserves are classified as proved developed producing, or “PDP,” 2% are classified as proved developed non-producing, or “PDNP,” and approximately 65% are classified as proved undeveloped, or “PUD.” Through the conversion of undeveloped reserves to developed reserves, Ring will seek to increase production, reserves and cash flow while gaining favorable returns on invested capital.

 

Through December 31, 2015, we increased our proved reserves to approximately 24.4 million BOE (barrel of oil equivalent). As of December 31, 2015, our estimated proved reserves had a pre-tax “PV10” (present value of future net revenues before income taxes discounted at 10%) of approximately $240.2 million and a Standardized Measure of Discounted Future Net Cash Flows of approximately $172.7 million. The difference between these two amounts is the effect of income taxes. The Company presents the pre-tax PV10 value, which is a non-GAAP financial measure, because it is a widely used industry standard which we believe is useful to those who may review this Annual Report when comparing our asset base and performance to other comparable oil and gas exploration and production companies.   While Ring will continue to do some development near term, such development will be more limited while commodity prices remain low and unstable. The Company will manage any development activity around its operating cash flow.

 

·

Employ industry leading drilling and completion techniques. Ring’s executive team, which has over 100 years combined experience in the oil and gas industry, intends to utilize new and innovative technological advancements and careful geological evaluation in reservoir engineering to generate value for its stockholders and to build development opportunities for years to come. Improved efficiency through employing technological advancements can provide a significant benefit in a continuous drilling program such as the one Ring contemplates for its current inventory of drilling locations. Additionally, Ring believes that the experience of its executive team will help reduce the time and cost associated with drilling and completing both conventional and horizontal wells, while potentially increasing recovery.

 

Ring Energy’s Strengths

 

·

High quality asset base in one of North America’s leading resource plays. Ring’s acreage in the Permian Basin is located in Andrews and Gaines Counties, which is in the heart of the Central Basin Platform, and in Culberson and Reeves Counties, which is in the Delaware Basin. As of December 31, 2015, Ring has drilled 188 wells on its acreage and re-stimulated 33 existing wells on its Central Basin Acreage and has drilled one well and recompleted one existing well on its Delaware Basin acreage. As of December 31, 2015, estimated net proved reserves were comprised of approximately 91% oil and 9% natural gas.

  

·

De-risked Permian acreage position with multi-year vertical drilling inventory. As of December 31, 2015, Ring has drilled 189 gross operated wells across its leasehold position with a 100% success rate. The Company has also re-stimulated 34 existing wells with attractive well economics. Ring has identified a multi-year inventory of potential drilling locations that will drive reserves and production growth and provide attractive return opportunities. As of December 31, 2015, Ring has 212 identified proven vertical drilling locations in Andrews and Gaines Counties and 43 identified proven vertical drilling locations in Culberson and Reeves Counties in its proved undeveloped reserves. It believes it has an additional 2,478 potential locations based on 10-acre downspacing in Andrews and Gaines Counties and 489 potential locations based on 20-acre downspacing in Culberson and Reeves Counties. The Company views this drilling inventory as de-risked because of the significant production history in the area and well-established industry activity surrounding the acreage.

 

 

·

Experienced and proven management team focused on the Permian Basin. The executive team has an average of approximately 23 years of industry experience per person, most of which has been focused in the Permian Basin. The Company believes its management and technical team is one of the principal competitive strengths due to the team’s proven ability to identify and integrate acquisitions, focus on cost efficiencies while managing a large-scale development program and disciplined allocation of capital to high-returning projects. Ring’s Chief Executive Officer Kelly Hoffman has had a successful career in the Permian Basin since 1975 when he started with Amoco Production Company and found further success in West Texas when he co-founded AOCO. In addition, Chairman of the Board, Lloyd T. Rochford, and Director, Stanley M. McCabe, formed Arena Resources, Inc. (“Arena”) in 2001, which operated in the same proximate area as Ring’s Andrews and Gaines County acreage. Arena eventually sold to SandRidge Energy, Inc., in July 2010 for $1.6 billion. Ring’s management team aims to execute a similar growth strategy and development plan by leveraging its industry relationships and significant operational experience in these regions.

 

·

Concentrated acreage position with high degree of operational control. Ring operates approximately 99% of its Permian Basin and Kansas acreage positions. The operating control allows Ring to implement and benefit from its strategy of enhancing returns through operational and cost efficiencies. Additionally, as the operator of substantially all of its acreage, Ring retains the ability to adjust its capital expenditures based on well performance and commodity price forecasts.

 

Competitive Business Conditions

 

We operate in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel. Some of our competitors possess and employ financial resources substantially greater than ours and some of our competitors employ more technical personnel. These factors can be particularly important in the areas in which we operate. Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects, and to evaluate, bid for, and purchase a greater number of properties and prospects than what our financial or technical resources permit. Our ability to acquire additional properties and to find and develop reserves in the future will depend on our ability to identify, evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for capital available for investment in the oil and natural gas industry.

 

The actual price range of crude oil is largely established by major crude oil purchasers and commodities trading. Pricing for natural gas is based on regional supply and demand conditions. To this extent, we believe we receive oil and gas prices comparable to other producers. There is little risk in our ability to sell all our current production at current prices with a reasonable profit margin. The risk of domestic overproduction at current prices is not deemed significant. We view our primary pricing risk to be related to a potential decline in prices to a level which could render our current production uneconomical.

 

We are presently committed to use the services of the existing gathering systems of the companies that purchase our natural gas production. This commitment is tied to existing natural gas purchase contracts associated with our production This commitment potentially gives such gathering companies certain short-term relative monopolistic powers to set gathering and transportation costs, because obtaining the services of an alternative gathering company would require substantial additional costs (since an alternative gathering company would be required to lay new pipeline and/or obtain new rights of way to any lease from which we are selling production). We are not subject to third party gathering systems for our oil production. Some of our oil production is sold through a third party pipeline which has no regional competition. All other oil production is transported by the oil purchaser by trucks with competitive trucking costs in the area.

 

Major Customers

 

We principally sell our oil and natural gas production to end users, marketers and other purchasers that have access to nearby pipeline facilities. In areas where there is no practical access to pipelines, oil is trucked to storage facilities. Our marketing of oil and natural gas can be affected by factors beyond our control, the effects of which cannot be accurately predicted. For the fiscal year ended December 31, 2015, sales to three customers, Occidental Energy Marketing (“Oxy”), Enterprise Crude Oil LLC (“Enterprise”) and HollyFrontier Refining and Marketing (“HollyFrontier”) represented 48%, 23% and 20%, respectively, of oil and gas revenues. At December 31, 2015, Oxy represented 53% of our accounts receivable and Enterprise represented 30%. However, we believe that the loss of these customers would not materially impact our business because we could readily find other purchasers for our oil and gas produced.

 

Delivery Commitments

 

As of December 31, 2015, we were not committed to providing a fixed quantity of oil or gas under any existing contracts.

 

 

Governmental Regulations

 

Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability.

 

Regulation of Drilling and Production

 

The production of oil and natural gas is subject to regulation under a wide range of local, state and federal statutes, rules, orders and regulations. Federal, state and local statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. All of the states in which we own and operate properties have regulations governing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum allowable rates of production from oil and natural gas wells, the regulation of well spacing, and plugging and abandonment of wells. The effect of these regulations is to limit the amount of oil and natural gas that we can produce from our wells and to limit the number of wells or the locations at which we can drill, although we can apply for exceptions to such regulations or to have reductions in well spacing. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.

 

The failure to comply with these rules and regulations can result in substantial penalties. Our competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions that affect our operations.

 

Regulation of Transportation of Oil

 

Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future.

 

Our sales of crude oil are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. The Federal Energy Regulatory Commission, or the FERC, regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors. Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by pro-rationing provisions set forth in the pipelines’ published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.

 

Regulation of Transportation and Sale of Natural Gas

 

Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and regulations issued under those Acts by the FERC. In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future.

 

Since 1985, the FERC has endeavored to make natural gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis. The FERC has stated that open access policies are necessary to improve the competitive structure of the interstate natural gas pipeline industry and to create a regulatory framework that will put natural gas sellers into more direct contractual relations with natural gas buyers by, among other things, unbundling the sale of natural gas from the sale of transportation and storage services. Although the FERC’s orders do not directly regulate natural gas producers, they are intended to foster increased competition within all phases of the natural gas industry.

 

We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in markets in which our natural gas is sold. Therefore, we cannot provide any assurance that the less stringent regulatory approach established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.

 

Intrastate natural gas transportation is subject to regulation by state regulatory agencies. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is of material difference from those of our competitors.

 

 

Environmental Compliance and Risks

 

Our oil and natural gas exploration, development and production operations are subject to stringent federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Historically, most of the environmental regulation of oil and gas production has been left to state regulatory boards or agencies in those jurisdictions where there is significant gas and oil production, with limited direct regulation by such federal agencies as the Environmental Protection Agency. However, while we believe this generally to be the case for our production activities in Texas and Kansas, there are various regulations issued by the Environmental Protection Agency (“EPA”) and other governmental agencies that would govern significant spills, blow-outs, or uncontrolled emissions.

 

In Texas and Kansas specific oil and gas regulations apply to the drilling, completion and operations of wells, and the disposal of waste oil and salt water. There are also procedures incident to the plugging and abandonment of dry holes or other non-operational wells, all as governed by the applicable governing state agency.

 

At the federal level, among the more significant laws and regulations that may affect our business and the oil and gas industry are: The Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as “CERCLA” or “Superfund; the Oil Pollution Act of 1990; the Resource Conservation and Recovery Act, also known as “RCRA,”; the Clean Air Act; Federal Water Pollution Control Act of 1972, or the Clean Water Act; and the Safe Drinking Water Act of 1974.

 

Compliance with these regulations may constitute a significant cost and effort for us. No specific accounting for environmental compliance has been maintained or projected by us at this time. We are not presently aware of any environmental demands, claims, or adverse actions, litigation or administrative proceedings in which either we or our acquired properties are involved in or subject to, or arising out of any predecessor operations.

 

In the event of a breach of environmental regulations, these environmental regulatory agencies have a broad range of alternative or cumulative remedies which include: ordering a clean-up of any spills or waste material and restoration of the soil or water to conditions existing prior to the environmental violation; fines; or enjoining further drilling, completion or production activities. In certain egregious situations the agencies may also pursue criminal remedies against us or our principal officers.

 

Operational Hazards and Insurance

 

The oil business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations.

 

In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed.

 

Current Employees

 

As of December 31, 2015, we had thirty-one full-time employees. Our employees are not represented by any labor union. We consider our relations with our employees to be satisfactory and have never experienced a work stoppage or strike.

 

We also retain certain engineers, geologists, landmen, pumpers and other personnel on a contract or fee basis as necessary for our operations.

 

Seasonal Nature of Business

 

Generally, the demand for oil and natural gas fluctuates depending on the time of year. Seasonal anomalies such as mild winters or hot summers may sometimes lessen this fluctuation. Further, pipelines, utilities, local distribution companies, and industrial end users utilize oil and natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can also lessen seasonal demand.

 

Financial Information

 

Financial information regarding the geographic area in which we operate is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.” We conduct our oil and natural gas activities entirely in the United States.

 

 

Item 1A:

Risk Factors

 

The following risks and uncertainties may affect our performance, results of operations and the trading price of our common stock.

 

Risks Relating to the Oil and Natural Gas Industry and Our Business

 

A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.

 

The price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile. These markets will likely continue to be volatile in the future. The prices we receive for our production, and the levels of our production, depend on numerous factors beyond our control. These factors include, but are not limited to, the following:

 

	·	changes in global supply and demand for oil and natural gas;
	·	the actions of the Organization of Petroleum Exporting Countries, or OPEC;
	·	the price and quantity of imports of foreign oil and natural gas;
	·	political conditions, including embargoes, in or affecting other oil-producing activity;
	·	the level of global oil and natural gas exploration and production activity;
	·	the level of global oil and natural gas inventories;
	·	weather conditions;
	·	technological advances affecting energy consumption; and
	·	the price and availability of alternative fuels.

 

Lower oil and natural gas prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically. Lower prices will also negatively impact the value of our proved reserves. A substantial or extended decline in oil or natural gas prices may materially and adversely affect our future business, financial condition, results of operations, liquidity or ability to finance planned capital expenditures.

 

A substantial percentage of our proven properties are undeveloped; therefore, the risk associated with our success is greater than would be the case if the majority of our properties were categorized as proved developed producing.

 

Because a substantial percentage of our proven properties are proved undeveloped (approximately 65%) or proved developed non-producing (approximately 2%), we will require significant additional capital to develop such properties before they may become productive. Further, because of the inherent uncertainties associated with drilling for oil and gas, some of these properties may never be developed to the extent that they result in positive cash flow. Even if we are successful in our development efforts, it could take several years for a significant portion of our undeveloped properties to be converted to positive cash flow.

 

While our current business plan is to fund the development costs with cash flow from our other producing properties, if such cash flow is not sufficient we may be forced to seek alternative sources for cash, through the issuance of additional equity or debt securities, increased borrowings or other means.

 

Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations.

 

Our future success will depend on the success of our exploitation, exploration, development and production activities. Our oil and natural gas exploration and production activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Please read “—Reserve estimates depend on many assumptions that may turn out to be inaccurate. . .” (below) for a discussion of the uncertainty involved in these processes. Our cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel drilling, including the following:

 

 

	·	delays imposed by or resulting from compliance with regulatory requirements;
	·	pressure or irregularities in geological formations;
	·	shortages of or delays in obtaining equipment and qualified personnel;
	·	equipment failures or accidents;
	·	adverse weather conditions;
	·	reductions in oil and natural gas prices;
	·	title problems; and
	·	limitations in the market for oil and natural gas.

 

If our assessments of recently purchased properties are materially inaccurate, it could have a significant impact on future operations and earnings.

 

We have aggressively expanded our base of producing properties. The successful acquisition of producing properties requires assessments of many factors, which are inherently inexact and may be inaccurate, including the following:

 

	·	the amount of recoverable reserves;
	·	future oil and natural gas prices;
	·	estimates of operating costs;
	·	estimates of future development costs;
	·	estimates of the costs and timing of plugging and abandonment; and
	·	potential environmental and other liabilities.

 

Our assessment will not reveal all existing or potential problems, nor will it permit us to become familiar enough with the properties to assess fully their capabilities and deficiencies. As noted previously, we plan to undertake further development of our properties through the use of cash flow from existing production. Therefore, a material deviation in our assessments of these factors could result in less cash flow being available for such purposes than we presently anticipate, which could either delay future development operations (and delay the anticipated conversion of reserves into cash), or cause us to seek alternative sources to finance development activities.

 

Decreases in oil and natural gas prices may require us to take write-downs of the carrying values of our oil and natural gas properties, potentially requiring earlier than anticipated debt repayment and negatively impacting the trading value of our securities.

 

Accounting rules require that we review periodically the carrying value of our oil and natural gas properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties. Because our properties serve as collateral for advances under our existing credit facility, a write-down in the carrying values of our properties could require us to repay any outstanding debt earlier than we would otherwise be required. A write-down could also constitute a non-cash charge to earnings. It is likely the cumulative effect of a write-down could also negatively impact the trading price of our securities.

 

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

 

The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of our reported reserves.

 

In order to prepare our estimates, we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and natural gas reserves are inherently imprecise.

 

Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of our reported reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.

 

 

You should not assume that the present value of future net revenues from our reported proved reserves is the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we generally base the estimated discounted future net cash flows from our proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate. If future values decline or costs increase it could negatively impact our ability to finance operations, and individual properties could cease being commercially viable, affecting our decision to continue operations on producing properties or to attempt to develop properties. All of these factors would have a negative impact on earnings and net income, and most likely the trading price of our securities. These factors could also result in the acceleration of debt repayment and a reduction in our borrowing base under our credit facility.

 

Prospects that we decide to drill may not yield oil or natural gas in commercially viable quantities.

 

Our prospects are in various stages of evaluation, ranging from prospects that are currently being drilled to prospects that will require substantial additional seismic data processing and interpretation. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. This risk may be enhanced in our situation, due to the fact that a significant percentage (65%) of our proved reserves is currently proved undeveloped reserves. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. We cannot assure you that the analogies we draw from available data obtained by analyzing other wells, more fully explored prospects or producing fields will be applicable to our drilling prospects.

 

We may incur substantial losses and be subject to substantial liability claims as a result of our oil and natural gas operations.

 

We are not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect our business, financial condition or results of operations. Our oil and natural gas exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of:

 

	·	environmental hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas or other pollution into the environment, including groundwater and shoreline contamination;
	·	abnormally pressured formations;
	·	mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse;
	·	fires and explosions;
	·	personal injuries and death; and
	·	natural disasters.

 

Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to our Company. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, then it could materially and adversely affect us.

 

We are subject to complex laws that can affect the cost, manner or feasibility of doing business.

 

Exploration, development, production and sale of oil and natural gas are subject to extensive federal, state, local and international regulation. We may be required to make large expenditures to comply with governmental regulations. Matters subject to regulation include:

 

	·	discharge permits for drilling operations;
	·	drilling bonds;
	·	reports concerning operations;
	·	the spacing of wells;
	·	unitization and pooling of properties; and
	·	taxation.

 

Under these laws, we could be liable for personal injuries, property damage and other damages. Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws could change in ways that substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations.

 

 

Our operations may incur substantial liabilities to comply with the environmental laws and regulations.

 

Our oil and natural gas operations are subject to stringent federal, state and local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and impose substantial liabilities for pollution resulting from our operations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, incurrence of investigatory or remedial obligations or the imposition of injunctive relief. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to maintain compliance, and may otherwise have a material adverse effect on our results of operations, competitive position or financial condition as well as the industry in general. Under these environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or if our operations were standard in the industry at the time they were performed.

 

If our indebtedness increases, it could reduce our financial flexibility.

 

We have a credit facility in place with a $100 million borrowing base for borrowings and letters of credit. As of December 31, 2015, $45,900,000 was outstanding on our credit facility. If in the future we further utilize this facility, the level of our indebtedness could affect our operations in several ways, including the following:

 

	·	a significant portion of our cash flow could be used to service the indebtedness;
	·	a high level of debt would increase our vulnerability to general adverse economic and industry conditions;
	·	the covenants contained in our credit facility limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments, and;
	·	a high level of debt could impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes.

 

In addition, our bank borrowing base is subject to quarterly redeterminations. If we use our credit facility, we could be forced to repay a portion of our bank borrowings due to redeterminations of our borrowing base. If we are forced to do so, we may not have sufficient funds to make such repayments. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results.

 

Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flows and income.

 

Unless we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves and production, and, therefore, our cash flow and income, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. If we are unable to develop, exploit, find or acquire additional reserves to replace our current and future production, our cash flow and income will decline as production declines, until our existing properties would be incapable of sustaining commercial production.

 

If our access to markets is restricted, it could negatively impact our production, our income and ultimately our ability to retain our leases.

 

Market conditions or the unavailability of satisfactory oil and natural gas transportation arrangements may hinder our access to oil and natural gas markets or delay our production. The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends in substantial part on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business.

 

Currently, the majority of our production is sold to marketers and other purchasers that have access to nearby pipeline facilities. However, as we begin to further develop our properties, we may find production in areas with limited or no access to pipelines, thereby necessitating delivery by other means, such as trucking or requiring compression facilities. Such restrictions on our ability to sell our oil or natural gas could have several adverse effects, including higher transportation costs, fewer potential purchasers (thereby potentially resulting in a lower selling price) or, in the event we were unable to market and sustain production from a particular lease for an extended time, possibly causing us to lose a lease due to lack of production.

 

 

Hedging transactions may limit our potential gains.

 

In order to reduce commodity price uncertainty and increase cash flow predictability relating to the marketing of our crude oil and natural gas, we may enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. While intended to reduce the effects of volatile crude oil and natural gas prices, such transactions may limit our potential gains if crude oil and natural gas prices rise over the price established by the arrangements. As of December 31, 2015, we have not entered into any hedging arrangements with respect to our expected production.

 

We rely on computer and telecommunications systems, and failures in our systems or cyber security attacks could materially disrupt our business operations.

 

The oil and gas industry has become increasingly dependent upon digital technologies to conduct day-to-day operations including certain exploration, development and production activities. We depend on digital technology to estimate quantities of oil and natural gas reserves, process and record financial and operating data, analyze seismic and drilling information, and communicate with our employees and other third parties. Our business partners, including vendors, service providers, purchasers of our production and financial institutions, are also dependent on digital technology. It is possible that we could incur interruptions from cyber security attacks, computer viruses or malware. We believe that we have positive relations with our vendors and maintain satisfactory anti-virus and malware software and controls. Even so, any cyber incidents or interruptions to our computing and communications infrastructure or our information systems could lead to data corruption, communication interruption, unauthorized release, gathering, monitoring, misuse or destruction of proprietary or other information, or otherwise significantly disrupt our business operations. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.

 

Competition is intense in the oil and gas industry.

 

We operate in a highly competitive environment for acquiring properties and marketing oil and natural gas. Our competitors include multinational oil and gas companies, major oil and gas companies, independent oil and gas companies, individual producers, financial buyers as well as participants in other industries that supply energy and fuel to consumers. Many of our competitors have greater and more diverse resources than we do. Additionally, stiff competition for acquisitions may significantly increase the cost of available properties. We compete for the personnel and equipment required to explore, develop and operate properties. Our competitors also may have established long-term strategic positions and relationships in areas in which we may seek to enter. Consequently, our competitors may be able to address these competitive factors more effectively than we can. If we are not successful in our competition for oil and gas reserves or in our marketing of production, then our financial condition and operation results may be adversely affected.

 

During 2015 we recorded a $9.3 million non-cash write-down of the carrying value of our proved oil and gas properties as a result of ceiling test limitations. If oil and natural gas prices stay at current levels or decrease further, we may be required to record additional write-downs of the carrying value of our oil and gas properties in the future.

 

We follow the full cost method of accounting for our oil and gas properties. Under the full cost method, the net book value of properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling is the estimated after tax future net revenues from proved oil and gas properties, discounted at 10% per year. Discounted future net revenues are estimated using oil and natural gas spot prices based on the average price during the preceding 12-month period determined as an un-weighted, arithmetic average of the first-day-of-the-month price for each month within such period, except for changes which are fixed and determinable by existing contracts. The net book value is compared to the ceiling on a quarterly basis. The excess, if any, of the net book value above the ceiling is required to be written off as an expense. Under SEC full cost accounting rules, any write-off recorded may not be reversed even if higher oil and natural gas prices increase the ceiling applicable to future periods. Future price decreases could result in reductions in the carrying value of such assets and an equivalent charge to earnings.

 

It is difficult to predict with reasonable certainty the amount of expected future impairments given the many factors impacting the ceiling test calculation including, but not limited to, future pricing, operating costs, upward or downward reserve revisions, reserve adds, and tax attributes.

 

Risks Relating to Our Common Stock

 

We have no plans to pay dividends on our common stock. Shareholders may not receive funds without selling their shares.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our business, financial condition, results of operations, capital requirements and investment opportunities. In addition, our credit facility prohibits us from paying dividends.

 

 

Our board of directors can, without stockholder approval, cause preferred stock to be issued on terms that adversely affect common stockholders.

 

Under our Articles of Incorporation, our board of directors is authorized to issue up to 50,000,000 shares of preferred stock, of which none are issued and outstanding as of the date of this Annual Report. Also, our board of directors, without shareholder approval, may determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares. If the board causes shares of preferred stock to be issued, the rights of the holders of our common stock could be adversely affected. The board’s ability to determine the terms of preferred stock and to cause its issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Preferred shares issued by the board of directors could include voting rights, or even super voting rights, which could shift the ability to control the company to the holders of the preferred stock. Preferred shares could also have conversion rights into shares of common stock at a discount to the market price of the common stock which could negatively affect the market for our common stock. In addition, preferred shares would have preference in the event of liquidation of the Company, which means that the holders of preferred shares would be entitled to receive the net assets of the Company distributed in liquidation before the common stock holders receive any distribution of the liquidated assets. We have no current plans to issue any shares of preferred stock.

 

Provisions under Nevada law could delay or prevent a change in control of our company, which could adversely affect the price of our common stock.

 

In addition to the ability of the board of directors to issue preferred stock, the existence of some provisions under Nevada law could delay or prevent a change in control of the Company, which could adversely affect the price of our common stock. Nevada law imposes some restrictions on mergers and other business combinations between us and any holder of 10% or more of our outstanding common stock.

 

Item 1B:

Unresolved Staff Comments

 

None.

 

 

Item 2:

Properties

 

General Background

 

Ring is currently engaged in oil and natural gas acquisition, exploration, development and production, with activities currently in Texas and Kansas. Our focus will be on developing our existing properties, while continuing to pursue acquisitions of oil and gas properties with significant upside potential.

 

Management’s Business Strategy Related to Properties

 

Our goal is to increase shareholder value by investing in oil and gas projects with attractive rates of return on capital employed. We plan to achieve this goal by exploiting and developing our existing oil and natural gas properties and pursuing strategic acquisitions of additional properties. Specifically, we have focused, and plan to continue to focus, on the following:

 

Developing and Exploiting Existing Properties

 

We believe that there is significant value to be created by drilling the identified undeveloped opportunities on our properties. As of December 31, 2015, we owned interests in a total of 16,865 gross (15,978 net) developed acres and operate essentially all of the net pre-tax PV10 value of our proved undeveloped reserves. In addition, as of December 31, 2015, we owned interests in approximately 51,413 gross (38,505 net) undeveloped acres. While our focus will be toward growth through additional acquisitions and leasing, our long term plans include drilling wells on our existing acreage to develop the potential contained therein.

 

Pursuing Profitable Acquisitions

 

We have historically pursued acquisitions of properties that we believe to have exploitation and development potential comparable to our existing inventory of drilling locations. We have developed and refined an acquisition program designed to increase reserves and complement our existing core properties. We have an experienced team of management and engineering professionals who identify and evaluate acquisition opportunities, negotiate and close purchases and manage acquired properties.

 

Summary of Oil and Natural Gas Properties and Projects

 

Significant Texas Operations

 

Andrews and Gaines County leases – In 2011, we acquired a 100% working interest and a 75% net revenue interest in the initial leases in Andrews and Gaines counties. Since that time, we have acquired working and net revenue interests in additional producing leases and acquired additional undeveloped acreage in and around our Andrews County leases. The working interests range from 1-100% and the net revenue interests range from 1-80%. In total, we now own 30,663 gross acres (18,130 net), with 5,875 gross (5,169 net) acres developed and held by production and the remaining 24,789 gross acres (12,961 net) being undeveloped. We believe the Andrews and Gaines County leases contain a considerable number of remaining potential drilling locations. Our reserve estimate includes 212 PUD wells. Our reserve estimates include the capital costs required to develop these wells. Our reserve estimates also include secondary recovery (waterflood) reserves in relation to some of our Andrews County acreage.

 

Culberson and Reeves County leases – In 2015, we acquired properties consisting of 19,983 gross acres (19,679 net) with an average working interest of 98% and an average net revenue interest of 79%. Of that acreage amount, 10,190 gross (10,092 net) is developed and held by production and the remaining 9,793 gross (9,587 net) acres being undeveloped. We believe the Culberson and Reeves County leases contain a considerable number of remaining potential drilling locations. Our reserve estimate includes 43 PUD wells. Our reserve estimates include the capital costs required to develop these wells.

 

Significant Kansas Operations

 

Kansas Properties – Gray, Finney and Haskell Counties, Kansas. We acquired a 100% working interest and an 80% net revenue interest in 9,541.5 net mineral acres and a 95% working interest and a 76% net revenue interest in 1,600 net mineral acres, along with all production. We acquired a 100% working interest and an 80% net revenue interest in 4,698 net mineral acres in addition to our existing acreage acquired in 2012. We have subsequently leased additional acreage in Kansas, bringing our total acreage position to 17,631 gross acres (16,674 net). There was minimal production associated with the acquisition. In October 2013, we entered into the Joint Development Agreement, whereby Torchlight Energy Resources, Inc. agreed to pay approximately $6.2 million in development costs in return for a 50% working interest in this acreage. Development on this acreage has been temporarily halted. We conducted an extensive 3D seismic analysis, which was encouraging, and we are in discussions with our partner as to how and when we wish to proceed. There are no PUD wells from this acreage included in our reserves, but we believe this acreage has significant potential.

 

 

Title to Properties

 

We generally conduct a preliminary title examination prior to the acquisition of properties or leasehold interests. Prior to commencement of operations on such acreage, a thorough title examination will usually be conducted and any significant defects will be remedied before proceeding with operations. We believe the title to our leasehold properties is good, defensible and customary with practices in the oil and natural gas industry, subject to such exceptions that we believe do not materially detract from the use of such properties. With respect to our properties of which we are not the record owner, we rely instead on contracts with the owner or operator of the property or assignment of leases, pursuant to which, among other things, we generally have the right to have our interest placed on record.

 

Our properties are generally subject to royalty, overriding royalty and other interests customary in the industry, liens incident to agreements, current taxes and other burdens, minor encumbrances, easements and restrictions. We do not believe any of these burdens will materially interfere with our use of these properties.

 

Summary of Oil and Natural Gas Reserves

 

As of December 31, 2015, our estimated proved reserves had a pre-tax PV10 value of approximately $240.2 million and a Standardized Measure of Discounted Future Cash Flows of approximately $172.7 million, essentially 100% of which relate to our properties in Texas. We spent approximately $216.3 million on acquisitions and capital projects during 2014 and 2015. We expect to further develop these properties through additional drilling. We will closely manage our capital expenditures to our cash flow. As commodity prices change we will consider the resulting impact on our cash flow and adjust our capital expenditures up or down accordingly.

 

The following table summarizes our total net proved reserves, pre-tax PV10 value and Standardized Measure of Discounted Future Net Cash Flows as of December 31, 2015.

 

Geographic Area		Oil (Bbl)				Natural Gas (Mcf)				Total (Boe)				Pre-Tax PV10 Value				Standardized Measure of Discounted Future Net Cash Flows
Texas			22,294,050				12,539,600				24,383,983			$	239,855,340			$	172,178,210
Kansas			18,400				-				18,400				378,100				508,231
Total			22,312,450				12,539,600				24,402,383			$	240,233,440			$	172,686,441

 

Reserve Quantity Information

 

Our estimates of proved reserves and related valuations were based on internally prepared reports and audited by Cawley, Gillespie & Associates, Inc. or Williamson Petroluem Consultants, Inc., independent petroleum engineers. The estimates of proved reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, price changes and other factors.

 

Our oil and natural gas reserves are attributable solely to properties within the United States. A summary of the changes in quantities of proved (developed and undeveloped) oil and natural gas reserves is shown below.

 

		Oil (Bbl)				Gas (Mcf)
Balance, December 31, 2013			6,855,655				2,487,043
Purchase of minerals in place			2,828,530				511,921
Improved recovery			48,233				-
Extensions and discoveries			1,225,094				117,778
Production			(457,038	)			(38,735	)
Revisions of estimates			(258,183	)			(2,089,697	)
Balance, December 31, 2014			10,242,291				988,310
Purchase of minerals in place			5,561,276				8,775,407
Improved recovery			8,096,290				2,573,530
Extensions and discoveries			863,327				1,114,932
Production			(664,611	)			(472,508	)
Revisions of estimates			(1,786,123	)			(440,071	)
Balance, December 31, 2015			22,312,450				12,539,600

 

 

Our proved oil and natural gas reserves are shown below.

 

		For the Years Ended December 31,
		2014				2015
Oil (Bbls)
Developed			4,454,414				7,167,300
Undeveloped			5,787,877				15,145,150
Total			10,242,291				22,312,450
Natural Gas (Mcf)
Developed			299,188				8,541,400
Undeveloped			689,122				3,998,200
Total			988,310				12,539,600
Total (Boe)
Developed			4,504,279				8,590,867
Undeveloped			5,902,730				15,811,516
Total			10,407,009				24,402,383

 

Standardized Measure of Discounted Future Net Cash Flows

 

Our standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves and changes in the standardized measure as described below were prepared in accordance with generally accepted accounting principles.

 

Future income tax expenses are calculated by applying appropriate year-end tax rates to future pre-tax net cash flows relating to proved oil and natural gas reserves, less the tax basis of properties involved. Future income tax expenses give effect to permanent differences, tax credits and loss carryforwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows. This calculation procedure does not necessarily result in an estimate of the fair market value or the present value of our oil and natural gas properties.

 

Our reserve estimates as of December 31, 2015 are based on an average price of $48.173 for oil and $2.505 for gas compared to $85.097 for oil and $3.947 for gas as of December 31, 2014.

 

The standardized measure of discounted future net cash flows relating to the proved oil and natural gas reserves are shown below.

 

December 31,		2015				2014
Future cash flows		$	1,110,056,990			$	875,492,876
Future production costs			(361,838,780	)			(217,842,533	)
Future development costs			(127,293,170	)			(113,073,539	)
Future income taxes			(177,647,356	)			(165,083,198	)
Future net cash flows			443,277,684				379,493,606
10% annual discount for estimated timing of cash flows			(270,591,243	)			(183,148,613	)
Standardized Measure of Discounted Cash Flows		$	172,686,441			$	196,344,993

  

 

The changes in the standardized measure of discounted future net cash flows relating to the proved oil and natural gas reserves are shown below.

 

		2015				2014
Beginning of the year		$	196,344,992			$	133,947,927
Purchase of minerals in place			121,753,192				89,152,815
Extensions, discoveries and improved recovery, less related costs			215,074,627				39,903,356
Development costs incurred during the year			28,653,794				90,562,299
Sales of oil and gas produced, net of production costs			(20,502,195	)			(33,096,276	)
Sales of minerals in place			-				-
Accretion of discount			27,688,579				16,564,967
Net changes in price and production costs			(308,347,796	)			(30,191,382	)
Net change in estimated future development costs			14,823,882				(31,004,796	)
Revision of previous quantity estimates			(28,297,019	)			(15,044,380	)
Revision of estimated timing of cash flows			(137,051,390	)			(43,530,618	)
Net change in income taxes			62,545,775				(20,918,919	)
End of the Year		$	172,686,441			$	196,344,993

 

Proved Reserves

 

We have approximately 24.4 million BOE of proved reserves, which consist of approximately 91% oil and 9% natural gas, are summarized below as of December 31, 2015, on a net pre-tax PV10 value and Standardized Measure of Discounted Future Net Cash Flows basis. Our reserve estimates have not been filed with any Federal authority or agency (other than the SEC).

 

As of December 31, 2015, our Texas proved reserves had a net pre-tax PV10 value of approximately $239.9 million and Standardized Measure of Discounted Future Net Cash Flows of approximately $172.2 million and our proved reserves in Kansas had a net pre-tax PV10 value of approximately $0.4 million and Standardized Measure of Discounted Future Net Cash Flows of approximately $0.5 million.

 

As of December 31, 2015, approximately 33% of the proved reserves have been classified as proved developed producing, or “PDP”. Proved developed non-producing, or “PDNP” reserves constitute approximately 2% and proved undeveloped, or “PUD”, reserves constitute approximately 65%, of the proved reserves as of December 31, 2015.

 

Total proved reserves had a net pre-tax PV10 value as of December 31, 2015 of approximately $240.2 million and a Standardized Measure of Discounted Future Net Cash Flows of approximately $172.7 million. Approximately $103.0 million and $74.2 million, respectively, of total proved reserves are associated with the PDP reserves, which is approximately 42.9% of total proved reserves’ pre-tax PV10 value. An additional $8.7 million and $6.2 million, respectively, are associated with the PDNP reserves, which is approximately 3.6% of total proved reserves’ pre-tax PV10 value. The remaining $128.5 million and $92.2 million, respectively, are associated with PUD reserves.

 

Proved Undeveloped Reserves

 

Our reserve estimates as of December 31, 2015 include 15.8 million BOE as proved undeveloped reserves. As of December 31, 2014, our reserve estimates included approximately 5.9 million BOE as proved undeveloped reserves. Following is a description of the changes in our PUD reserves from December 31, 2014 to December 31, 2015.

 

Conversion of approximately 474,565 BOE of reserves from PUD to PDP or PDNP through development.

 

Net downward revision of approximately 654,119 BOE primarily as a result of economics with lower commodity prices.

 

Purchase of minerals in place through acquisitions resulted in the addition of approximately 2,301,500 BOE.

 

Improved Recovery and Extension of approximately 8,735,224, primarily resulting from the addition of waterflood reserves on some of the Andrews acreage.

 

Our proved reserves as of December 31, 2015 are summarized in the table below.

 

 

		Oil (Bbl)				Gas (Mcf)				Total (Boe)				% of Total Proved				Pre-tax PV10 (In thousands)				Standardized Measure of Discounted Future Net Cash Flows (In thousands)				Future Capital Expenditures (In thousands)
Texas:
PDP			6,682,900				8,416,800				8,085,700				33	%		$	102,654			$	73,689			$	-
PDNP			466,000				124,600				486,767				2	%			8,700				6,245				1,867
PUD			15,145,150				3,998,200				15,811,516				65	%			128,501				92,243				125,426
Total Proved:			22,294,050				12,539,600				24,383,983				100	%		$	239,855			$	172,178			$	127,293
Kansas:
PDP			18,400				-				18,400				0	%		$	378			$	508			$	-
Total Proved:			18,400				-				18,400				0	%		$	378			$	508			$	-
Total:
PDP			6,701,300				8,416,800				8,104,100				33	%		$	103,032			$	74,197			$	-
PDNP			466,000				124,600				486,767				2	%			8,700				6,245				1,867
PUD			15,145,150				3,998,200				15,811,516				65	%			128,501				92,243				125,426
Total Proved:			22,312,450				12,539,600				24,402,383				100	%		$	240,233			$	172,685			$	127,293

 

Estimated Costs Related to Conversion of Proved Undeveloped Reserves to Proved Developed Reserves

 

The following table indicates projected reserves that we currently estimate will be converted from proved undeveloped or proved developed non-producing to proved developed, as well as the estimated costs per year involved in such development.

 

Year		Estimated Oil Reserves Developed (Bbls)				Estimated Gas Reserves Developed (Mcf)				Total Boe				Estimated Development Costs
2016			5,997,626				3,621,501				6,601,210			$	61,887,840
2017			6,701,102				480,153				6,781,137				55,024,620
2018			2,912,422				21,146				2,915,946				10,380,710
			15,611,150				4,122,800				16,298,293			$	127,293,170

 

Internal Controls Over Reserves Estimates

 

Our reserves data and estimates were compiled and prepared internally and audited by third party independent consultants, Cawley, Gillespie & Associates, Inc. or Williamson Petroleum Consultants, Inc., as described in more detail herein, in compliance with SEC definitions and guidance and in accordance with generally accepted petroleum engineering principles. The technical persons employed by Cawley, Gillespie & Associates, Inc. and Williamson Petroleum Consultants, Inc., met the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Natural Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our reserves estimates are prepared by examination and evaluation of production data, production decline curves, reservoir pressure data, logs, geological data, and offset analogies. The third party independent consultants are provided full access to complete and accurate information pertaining to the property, and to all applicable personnel of the Company. Our reserves estimates and process for developing such estimates are reviewed and approved by its Vice President of Operations, Daniel D. Wilson, a petroleum engineer, and Chief Executive Officer, Kelly Hoffman, to ensure compliance with SEC disclosure and internal control requirements and to verify the independence of the third party consultants. Mr. Daniel Wilson, a petroleum engineer and businessman, has over 30 years of experience in operating, evaluating and exploiting oil and gas properties. Mr. Kelly Hoffman has over 40 years of well-rounded experience in the oil and gas industry. Our management is ultimately responsible for reserve estimates and reserve disclosures and ensuring that they are in accordance with the applicable regulatory requirements and industry standards and practices.

 

 

 

Estimates of oil and natural gas reserves are projections based on a process involving an independent third party engineering firm’s collection of all required geologic, geophysical, engineering and economic data, and such firm’s complete external preparation of all required estimates and are forward-looking in nature. These reports rely upon various assumptions, including assumptions required by the SEC, such as constant oil and natural gas prices, operating expenses and future capital costs. The process also requires assumptions relating to availability of funds and timing of capital expenditures for development of our proved undeveloped reserves. These reports should not be construed as the current market value of our reserves. The process of estimating oil and natural gas reserves is also dependent on geological, engineering and economic data for each reservoir. Because of the uncertainties inherent in the interpretation of this data, we cannot be certain that the reserves will ultimately be realized. Our actual results could differ materially.

 

Summary of Oil and Natural Gas Properties and Projects

 

Production Summary

 

Our estimated average daily production for the month of December 2015, is summarized below. The following table indicates the percentage of our estimated December 2015 average daily production of 2,281 BOE/d attributable to each state and to oil versus natural gas production.

 

State		Average Daily Production				Oil				Natural Gas
Texas			99.53	%			99.80	%			97.85	%
Kansas			0.47	%			0.20	%			2.15	%
Total			100.00	%			100.00	%			100.00	%

 

Acreage

 

The following table summarizes gross and net developed and undeveloped acreage at December 31, 2015 by region (net acreage is our percentage ownership of gross acreage). Acreage in which our interest is limited to royalty and overriding royalty interests is excluded.

 

		Developed Acreage								Undeveloped Acreage								Total Acreage
		Gross				Net				Gross				Net				Gross				Net
Texas			16,065				15,262				34,582				22,548				50,646				31,809
Kansas			800				716				16,831				15,958				17,631				16,674
Total			16,865				15,978				51,413				38,506				68,277				48,483

 

Production History

 

The following table presents the historical information about our produced natural gas and oil volumes.

 

		Years Ended December 31,
		2013				2014				2015
Oil production (Bbls)			109,673				457,039				664,612
Natural gas production (Mcf)			36,047				38,735				472,509
Total production (Boe)			115,681				463,495				743,363
Daily production (Boe/d)			317				1,270				2,037
Average sales price:
Oil (per Bbl)		$	92.81			$	83.04			$	44.90
Natural gas (per Mcf)			3.82				3.53				2.48
Total (per Boe)			89.17				81.18				41.72
Average production cost (per Boe)		$	10.44			$	10.77			$	13.40
Average production taxes (per Boe)			4.12				3.80				1.97

 

 

The average oil sales price amounts above are calculated by dividing revenue from oil sales by the volume of oil sold, in barrels “Bbl”. The average gas sales price amounts above are calculated by dividing revenue from gas sales by the volume of gas sold, in thousand cubic feet “Mcf”. The total average sales price amounts are calculated by dividing total revenues by total volume sold, in BOE. The average production costs above are calculated by dividing production costs by total production in BOE.

 

Productive Wells

 

The following table presents our ownership at December 31, 2015, in productive oil and natural gas wells by region (a net well is our percentage ownership of a gross well).

 

		Oil Wells								Gas wells								Total Wells
		Gross				Net				Gross				Net				Gross				Net
Texas			363				263				-				-				363				263
Kansas			3				1				1				1				4				2
Total			366				264				1				1				367				265

 

Drilling Activity

 

During 2015, we drilled 9 development wells in Texas with 20 wells being completed and producing at December 31, 2015.

 

During 2014, we drilled 135 development wells in Texas with 125 wells being completed and producing at December 31, 2014. All wells drilled in Texas during 2014 were successful. Also during 2014, we drilled 7 wells in Kansas and 6 of these wells were successful and 1 was a dry hole.

 

During 2013, we drilled 40 development wells in Texas with 38 wells being completed and producing at December 31, 2013. All of the wells drilled in 2013 were successful.

 

Cost Information

 

We conduct our oil and natural gas activities entirely in the United States. As noted previously in the table appearing under “Production History”, our average production costs, per BOE, were $10.44, $10.77 and $13.40 during the years ended December 31, 2013, 2014 and 2015, respectively, and our average production taxes, per BOE, were $4.12, $3.80 and $1.97 for the years ended December 31, 2013, 2014 and 2015, respectively. These amounts are calculated by dividing our total production costs or total production taxes by our total volume sold, in BOE.

 

Costs incurred for property acquisition, exploration and development activities during the years ended December 31, 2013, 2014 and 2015 are shown below.

 

		For the Year Ended December 31,
		2013				2014				2015
Acquisition of proved properties		$	5,192,441			$	15,812,995			$	81,264,187
Acquisition of unproved properties			-				-				-
Exploration costs			-				-				-
Development costs			29,796,379				92,182,681				31,601,990
Total Costs Incurred		$	34,988,820			$	107,995,676			$	112,866,177

 

 

Other Properties and Commitments

 

Our principal executive offices are in leased office space in Midland, Texas. The leased office space consists of approximately 15,000 square feet. Additionally, we still have a lease for our previous office space in Midland, Texas, consisting of approximately 3,700 square feet. We vacated this space as of February 28, 2015 and continue efforts to sublet this space. Additionally, we lease office space in Tulsa, Oklahoma which serves as our primary accounting office consisting of approximately 3,700 square feet. We also lease office space in Andrews, Texas for a field office consisting of approximately 2,000 square feet. We expect our current office space to be adequate as we move forward.

 

Item 3:

Legal Proceedings

 

In the ordinary course of business, we may be, from time to time, a claimant or a defendant in various legal proceedings. We do not presently have any material litigation pending or threatened requiring disclosure under this item.

 

On July 10, 2015, a purported stockholder (the “Plaintiff”) of the Company filed a putative class action lawsuit in the District Court of Clark County, Nevada, on behalf of herself and Ring stockholders against the Company, the members of our Board of Directors, and SunTrust Bank (the “Lawsuit”). The complaint is captioned Rosalyn Newman, on behalf of herself and others similarly situated, Plaintiff, v. Ring Energy, Inc., et al. Defendants, under Case No. A-15-721253-C, in the District Court of Clark County, Nevada, Dept. IV. 

 

The Lawsuit alleged, among other things, that the members of our Board of Directors breached their fiduciary duties, and that SunTrust Bank aided and abetted such breaches, in connection with our Credit Agreement as a result of certain provisions that gave SunTrust Bank the right to accelerate the debt in the event of a change in control, among other things. The complaint sought, among other things, declaratory relief, as well as an award of costs and disbursements of the Lawsuit, including attorney’s fees, experts’ fees, costs and expenses.  The Credit Agreement has been amended to eliminate and modify such provisions.  On October 27, 2015, the Court granted Ring’s Motion to Dismiss the Lawsuit. As of December 31, 2015, Plaintiff was seeking recovery of its attorney’s fees associated with the Lawsuit. Subsequent to December 31, 2015, Plaintiff and Ring entered into a settlement agreement for an insignificant amount in connection with the attorney’s fees.

 

Item 4:

Mine safety disclosures

 

Not applicable.

 

 

PART II

 

Item 5:

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market for our Common Stock

 

Our common stock is listed on the NYSE MKT under the trading symbol “REI.” We have only one class of common stock, and we have 50,000,000 authorized but unissued shares of preferred stock. The table below sets forth for the periods indicated the quarterly high and low sale prices of our common stock as reported on the NYSE MKT.

 

NYST MKT

 

Period		High Sale				Low Sale
1st Quarter 2014		$	15.35			$	11.98
2nd Quarter 2014			20.61				15.25
3rd Quarter 2014			19.35				14.25
4th Quarter 2014			17.77				7.54
1st Quarter 2015			10.93				8.32
2nd Quarter 2015			13.41				10.40
3rd Quarter 2015			11.54				7.62
4th Quarter 2015			11.53				6.57
1st Quarter 2016 (through March 14)		$	7.22			$	4.04

 

Performance Graph

 

The following graph compares the cumulative 5-year total return attained by stockholders on Ring’s common stock relative to the cumulative total returns of the S&P 500 index and that of a selected peer group, named below. The graph assumes a $100 investment at the closing price on December 31, 2010, and reinvestment of dividends on the date of payment without commission. This table is not intended to forecast future performance of our common stock.

 

 

 

*

The peer group consists of: Callon Petroleum Company, Rex Energy Corporation, Approach Resources, Inc., Resolute Energy Corporation and Clayton Williams Energy, Inc., all of which are in the oil and gas exploration and production industry.

 

The performance graph above is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and will not be incorporated by reference into any registration filed under the Securities Act of 1933 unless specifically identified therein as being incorporated by reference. The performance graph is not solicitation material subject to Regulation 14A.

 

 

Record Holders

 

As of March 4, 2016, there are approximately 3,481 holders of record of our common stock. As of March 14, 2016, 4,762,671 shares, or approximately 15.7%, of the 30,396,942 shares issued and outstanding as of such date are held by management or affiliated parties.

 

Dividend Policy

 

We have not paid any dividends on our common stock during the last three years, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our results of operations, financial condition, capital requirements and investment opportunities. In addition, our credit facility prohibits us from paying dividends.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table sets forth information concerning our executive stock compensation plans as of December 31, 2015.

 

		Number of securities to be issued upon exercise of outstanding options (#)				Weighted-average exercise price of outstanding options ($)				Number of securities remaining available for future issuance under compensation plans (excluding securities in column (a)) (#)
		(a)				(b)				(c)
Equity compensation plans approved by security holders			2,881,150			$	5.07				1,874,250
Equity compensation plans not approved by security holders			-				-				-
Total			2,881,150			$	5.07				1,874,250

 

Description of Our Long Term Incentive Plan

 

The Ring Energy, Inc. Long Term Incentive Plan (the “Plan”) was in existence with Stanford Energy, Inc. (“Stanford”) and was adopted by the Board of Directors on June 27, 2012, and assumed by the Company upon the acquisition of Stanford. The Plan was also approved by vote of a majority of shareholders on January 22, 2013. The following is a summary of the material terms of the Plan.

 

Shares Available

 

Our Plan currently authorizes 5,000,000 shares of our common stock for issuance under the Plan. If any shares of common stock subject to an Award are forfeited or if any Award based on shares of common stock is otherwise terminated without issuance of such shares of common stock or other consideration in lieu of such shares of common stock, the shares of common stock subject to such Award shall to the extent of such forfeiture or termination, again be available for Awards under the Plan if no participant shall have received any benefits of ownership in respect thereof. The shares to be delivered under the Plan shall be made available from (a) authorized but unissued shares of common stock, (b) common stock held in the treasury of the Company, or (c) previously issued shares of common stock reacquired by the Company, including shares purchased on the open market, in each situation as the Board of Directors or the Compensation Committee may determine from time to time at its sole option.

 

Administration

 

The Committee shall administer the Plan with respect to all eligible individuals or may delegate all or part of its duties under the Plan to a subcommittee or any executive officer of the Company, subject in each case to such conditions and limitations as the Board of Directors may establish. Under the Plan, “Committee” can be either the Board of Directors or a committee approved by the Board of Directors.

 

Eligibility

 

Awards may be granted pursuant to the Plan only to persons who are eligible individuals at the time of the grant thereof or in connection with the severance or retirement of Eligible Individuals. Under the Plan, “Eligible Individuals” means (a) employees, (b) non-employee Directors and (c) any other person that the Committee designates as eligible for an Award (other than for Incentive Options) because the Person performs bona fide consulting or advisory services for the Company or any of its Subsidiaries (other than services in connection with the offer or sale of securities in a capital raising transaction).

 

 

Stock Options

 

Under the Plan, the plan administrator is authorized to grant stock options. Stock options may be either designated as non-qualified stock options or incentive stock options. Incentive stock options, which are intended to meet the requirements of Section 422 of the Internal Revenue Code such that a participant can receive potentially favorable tax treatment, may only be granted to employees. Therefore, any stock option granted to consultants and non-employee directors are non-qualified stock options.

 

Options granted under the Plan become exercisable at such times as may be specified by the plan administrator. In general, options granted to participants become exercisable in five equal annual installments, subject to the optionee’s continued employment or service with our company. However, the aggregate value (determined as of the grant date) of the shares subject to incentive stock options that may become exercisable by a participant in any year may not exceed $100,000.

 

Each option will be exercisable on such date or dates, during such period, and for such number of shares of common stock as shall be determined by the plan administrator on the day on which such stock option is granted and set forth in the option agreement with respect to such stock option; provided, however, the maximum term of options granted under the Plan is ten years.

 

Restricted Stock

 

Under the Plan, the plan administrator is also authorized to make awards of restricted stock. Before the end of a restricted period and/or lapse of other restrictions established by the plan administrator, shares received as restricted stock will contain a legend restricting their transfer, and may be forfeited in the event of termination of employment or upon the failure to achieve other conditions set forth in the award agreement.

 

An award of restricted stock will be evidenced by a written agreement between us and the participant. The award agreement will specify the number of shares of common stock subject to the award, the nature and/or length of the restrictions, the conditions that will result in the automatic and complete forfeiture of the shares and the time and manner in which the restrictions will lapse, subject to the participant’s continued employment by us, and any other terms and conditions the plan administrator imposes consistent with the provisions of the Plan. Upon the lapse of the restrictions, any legends on the shares of common stock subject to the award will be re-issued to the participant without such legend.

 

The plan administrator may impose such restrictions or conditions, to the vesting of such shares as it, in its absolute discretion, deems appropriate. Prior to the vesting of a share of restricted stock granted under the Plan, no transfer of a participant’s rights to such share, whether voluntary or involuntary, by operation of law or otherwise, will vest the transferee with any interest, or right in, or with respect to, such share, but immediately upon any attempt to transfer such rights, such share, and all the rights related thereto, will be forfeited by the participant and the transfer will be of no force or effect; provided, however, that the plan administrator may, in its sole and absolute discretion, vest in the participant all or any portion of shares of restricted stock which would otherwise be forfeited.

 

Fair Market Value

 

Under the Plan, “Fair Market Value” means, for a particular day, the value determined in good faith by the plan administrator, which determination shall be conclusive for all purposes of the Plan. For purposes of valuing incentive options, the fair market value of stock: (i) shall be determined without regard to any restriction other than one that, by its terms, will never lapse; and (ii) will be determined as of the time the option with respect to such stock is granted.

 

Transferability Restrictions

 

Notwithstanding any limitation on a holder’s right to transfer an award, the plan administrator may (in its sole discretion) permit a holder to transfer an award, or may cause the Company to grant an award that otherwise would be granted to an eligible individual, in any of the following circumstances: (a) pursuant to a qualified domestic relations order; (b) to a trust established for the benefit of the eligible individual or one or more of the children, grandchildren or spouse of the eligible individual; (c) to a limited partnership or limited liability company in which all the interests are held by the eligible individual and that person’s children, grandchildren or spouse; or (d) to another person in circumstances that the plan administrator believes will result in the award continuing to provide an incentive for the eligible individual to remain in the service of the Company or its subsidiaries and apply his or her best efforts for the benefit of the Company or its subsidiaries. If the plan administrator determines to allow such transfers or issuances of awards, any holder or eligible individual desiring such transfers or issuances shall make application therefore in the manner and time that the plan administrator specifies and shall comply with such other requirements as the plan administrator may require to assure compliance with all applicable laws, including securities laws, and to assure fulfillment of the purposes of this Plan. The plan administrator shall not authorize any such transfer or issuance if it may not be made in compliance with all applicable federal and state securities laws. The granting of permission for such an issuance or transfer shall not obligate the Company to register the shares of stock to be issued under the applicable award.

 

 

Termination and Amendments to the Plan

 

The Board of Directors may (insofar as permitted by law and applicable regulations), with respect to any shares which, at the time, are not subject to awards, suspend or discontinue the Plan or revise or amend it in any respect whatsoever, and may amend any provision of the Plan or any award agreement to make the Plan or the award agreement, or both, comply with Section 16(b) of the Exchange Act and the exemptions therefrom, the Internal Revenue Code, as amended (the “Code”), the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the regulations promulgated under the Code or ERISA, or any other law, rule or regulation that may affect the Plan. The Board of Directors may also amend, modify, suspend or terminate the Plan for the purpose of meeting or addressing any changes in other legal requirements applicable to the Company or the Plan or for any other purpose permitted by law. The Plan may not be amended without the consent of the holders of a majority of the shares of common stock then outstanding to materially increase the aggregate number of shares of stock that may be issued under the Plan except for certain adjustments.

 

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities

 

None.

 

Issuer Repurchases

 

We did not make any repurchases of our equity securities during the year ending December 31, 2015.

 

Item 6:

Selected Financial Data

 

The selected financial information set forth below is derived from our balance sheets and statements of operations as of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes thereto included in this Annual Report.

 

						Successor																Predecessor
		For the				For the				For the				For the				For the Eight				For the Four
		Year ended				Year ended				Year ended				Year ended				Months ended				Months ended
		December 31,				December 31,				December 31,				December 31,				December 31,				April 30,
		2015				2014				2013				2012				2011				2011
Statement of Operations Data:
Revenues		$	31,013,892			$	38,089,443			$	10,315,701			$	1,757,444			$	388,674			$	96,956
Cost of revenues			11,426,453				6,753,372				1,684,493				868,954				191,738				76,124
Depreciation, depletion and amortization			15,175,791				11,807,794				2,284,091				506,786				89,376				2,778
Ceiling test impairment			9,312,203				-				-				-				-				-
Accretion			418,384				154,973				53,681				20,906				5,547				3,732
General and administrative			7,995,395				6,803,029				6,682,760				2,392,645				428,575				6,000
Net income (loss)			(9,052,771	)			8,420,500				(452,209	)			(1,669,283	)			63,165				8,322
Basic income (loss) per common share		$	(0.32	)		$	0.34			$	(0.03	)		$	(0.21	)		$	0.01			$	-
Diluted income (loss) per common share		$	(0.32	)		$	0.33			$	(0.03	)		$	(0.21	)		$	0.01			$	-

 

						As of December 31,
						Successor																Predecessor
		2015				2014				2013				2012				2011				2011
Balance Sheet Data:
Current assets		$	8,714,491			$	15,083,298			$	56,305,036			$	5,882,530			$	223,695			$	30,383
Oil and gas properties subject to amortization			269,590,374				166,036,400				58,040,724				23,051,904				6,597,433				306,460
Total assets			250,866,245				167,641,640				111,723,418				28,513,378				6,742,885				285,411
Total current liabilities			11,333,167				16,263,051				7,231,643				1,191,431				477,057				12,127
Total long-term liabilities			53,301,950				8,835,879				1,886,061				1,122,236				10,372,338				261,598
Total Stockholders/Owners Equity (Deficit)			186,231,128				142,542,530				102,605,714				26,199,711				(4,106,510	)			11,686

 

Reorganization into Ring – On June 28, 2012, Ring completed the acquisition of Stanford through the closing of a stock-for-stock exchange agreement dated May 3, 2012.  As a result, Stanford’s stockholders obtained control of Ring under current accounting guidance. Since the Stanford stockholders obtained a controlling interest in Ring’s Common Stock and stock options, Stanford was determined to be the accounting acquirer and its historical financial statements have been adjusted to reflect its reorganization in a manner equivalent to a 2,500-for-1 stock split. The accompanying historical financial statements prior to the reorganization into Ring are Stanford’s financial statements, adjusted to reflect the authorized capital and par value of Ring and to reflect the effects of the stock split for all periods presented.

 

 

Predecessor Carve-Out Financial Statements – On May 23, 2011, prior to Ring’s acquisition of Stanford, Stanford acquired developed and undeveloped properties referred to as the “Fisher I Property.” The Fisher I Property represents Stanford’s predecessor under Rule 405 of Regulation C of the Securities Act of 1933, as amended, as the Fisher I Property was Stanford’s first interest in producing oil and natural gas properties and Stanford’s own operations before the acquisition were insignificant relative to the operations acquired. In that regard, upon consummation of the acquisition, the historical financial statements of the Fisher I Property became the historical financial statements of the Company. The accompanying predecessor financial statements present the full carve-out revenues earned, the costs and expenses incurred and the cash flows of the predecessor owners relative to the Fisher I Property.

 

Subsequent to the acquisition of the Fisher I Property, the successor financial statements present the financial position, operations and cash flows of the assets acquired, the liabilities assumed and operations of the Fisher I Property as well as those of other properties acquired subsequently and are reflected at their purchase-date fair values. Those fair values are reflected as the cost of the assets acquired and the carrying amounts of the liabilities assumed, and are the basis of the resulting operations of the successor.

 

Prior to the acquisition of the Fisher I Property, Stanford had little activity and was a development stage company. Its planned operations were to acquire, develop and operate oil and natural gas properties. Stanford had no revenue, expenses or income during the four months ended April 30, 2011.

 

Item 7:       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes to those financial statements included elsewhere in this Annual Report. The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Annual Report.

 

Overview

 

Ring is a Midland-based exploration and production company that is engaged in oil and natural gas acquisition, exploration, development and production activities. Our exploration and production interests are currently focused in Texas and Kansas. We take a conventional approach to our drilling program and seek to develop our traditional core areas, as well as look for new growth opportunities.

 

Business Description and Plan of Operation

 

Ring is currently engaged in oil and natural gas acquisition, exploration, development and production, with activities in Texas and Kansas. We focus on developing our existing properties, while continuing to pursue acquisitions of oil and gas properties with upside potential.

 

Our goal is to increase stockholder value by investing in oil and gas projects with attractive rates of return on capital employed. We plan to achieve this goal by exploiting and developing our existing oil and natural gas properties and pursuing strategic acquisitions of additional properties. Specifically, our business strategy is to increase our stockholders value through the following:

 

·

Growing production and reserves by developing our oil-rich resource base. Our long term plan is to actively drill and develop our acreage base in an effort to maximize its value and resource potential.  However, given the current environment as it relates to commodity prices, we have scaled back our development plans to associate it, to the extent possible, with our cash flows from operations.  Ring’s portfolio of proved oil and natural gas reserves consists of 91% oil and 9% natural gas. Of those reserves, 33% of the proved reserves are classified as proved developed producing, or “PDP,” 2% are classified as proved developed non-producing, or “PDNP,” and approximately 65% are classified as proved undeveloped, or “PUD.” Through the conversion of undeveloped reserves to developed reserves, Ring seeks to increase production, reserves and cash flow while gaining favorable returns on invested capital. Through December 31, 2015, we increased our proved reserves to approximately 24.4 million BOE. Effectively 100% of our reserves relate to properties located in Texas. We spent approximately $217.3 million on acquisitions and capital projects during 2014 and 2015.

 

·

Employ industry leading drilling and completion techniques. Ring’s executive team, which has over 100 years combined experience in the oil and gas industry, intends to utilize new and innovative technological advancements and careful geological evaluation in reservoir engineering to generate value for its stockholders and to build development opportunities for years to come. Improved efficiency through employing technological advancements can provide a significant benefit in a continuous drilling program such as the one Ring contemplates for its current inventory of drilling locations. Additionally, Ring believes that the experience of its executive team will help reduce the time and cost associated with drilling and completing both conventional and horizontal wells, while potentially increasing recovery.

 

 

·

Pursue strategic acquisitions with exceptional upside potential. Ring has a history of acquiring leasehold positions that it believes to have substantial resource potential and to meet its targeted returns on invested capital. Ring has historically pursued acquisitions of properties that it believes to have exploitation and development potential comparable to its existing inventory of drilling locations. The Company has developed and refined an acquisition program designed to increase reserves and complement existing core properties. Ring’s experienced team of management and engineering professionals identify and evaluate acquisition opportunities, negotiate and close purchases and manage acquired properties. Management intends to continue to pursue strategic acquisitions that meet the Company’s operational and financial targets. The executive team, with its extensive experience in the Permian Basin, has many relationships with operators and service providers in the region. Ring believes that leveraging its relationships will be a competitive advantage in identifying acquisition targets. We believe that management’s proven ability to evaluate resource potential will allow Ring to successfully acquire acreage and bring out more value in the assets.

 

Market Conditions and Commodity Prices

 

Our financial results depend on many factors, particularly the price of natural gas and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our drilling program, production volumes or revenues. We expect oil and natural gas to remain volatile. Additionally, the ability to find and develop sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success.

 

Although commodity prices continued to decline during 2015 compared to 2014, we believe we are well-positioned to manage the challenges presented in the lower commodity pricing environment, and we can endure the current cyclical downturn in the oil and gas industry and the continued volatility in current and future commodity prices by continuing our plans to manage our development activity around our operating cash flow.

 

Results of Operations

 

The following table sets forth selected operating data for the periods indicated:

 

For the Years Ended December 31,		2013				2014				2015
Net production:
Oil (Bbls)			109,673				457,039				664,612
Natural gas (Mcf)			36,047				38,735				472,509
Net sales:
Oil		$	10,178,176			$	37,952,888			$	29,839,852
Natural gas			137,525				136,555				1,174,040
Average sales price:
Oil (per Bbl)		$	92.81			$	83.04			$	44.90
Natural gas (per Mcf)			3.82				3.53				2.48
Production costs and expenses
Oil and gas production costs		$	1,207,529			$	4,993,166			$	9,958,380
Production taxes			476,964				1,760,206				1,468,073
Depreciation, depletion and amortization expense			2,284,091				11,807,794				15,175,791
Ceiling test impairment			-				-				9,312,203
Accretion expense			53,681				154,972				418,384
General and administrative expenses			6,682,760				6,803,029				7,995,395

 

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Oil and natural gas sales. Oil and natural gas sales revenue decreased approximately $7.1 million to $31.0 million in 2015. Oil sales decreased approximately $8.1 million while natural gas sales increased approximately $1.0 million. The oil sales decrease was the result of a decrease in the average realized per barrel oil price from $83.04 in 2014 to $44.90 in 2015 partially offset by an increase in sales volume from 457,039 barrels of oil in 2014 to 664,612 barrels of oil in 2015. These per barrel amounts are calculated by dividing revenue from oil sales by the volume of oil sold, in barrels. Natural gas sales volume increased from 38,735 Mcf in 2014 to 472,509 Mcf in 2015 but was offset by a 30% decrease in the average realized per Mcf gas price from $3.53 in 2014 to $2.48 in 2015. These per Mcf amounts are calculated by dividing revenue from gas sales by the volume of gas sold, in Mcf. The volume increases for both oil and natural gas are the result of both the acquisitions we made during the year and the result of our development of existing properties.

 

Oil and gas production costs. Our aggregate oil and gas production costs increased from $4,993,166 in 2014 to $9,958,380 in 2015, and increased on a BOE basis from $10.77 in 2014 to $13.40 in 2015. These per BOE amounts are calculated by dividing our total production costs by our total volume sold, in BOE. These increases in both the aggregate production costs and the cost per BOE are the result of additional acquisitions and development.

 

Oil and gas production taxes. Oil and gas production taxes as a percentage of oil and natural gas sales were 4.62% during 2014 and increased to 4.73% in 2015. Production taxes vary from state to state. Therefore, these taxes are likely to vary in the future depending on the mix of production we generate from various states, and on the possibility that any state may raise its production tax.

 

Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by $3,367,997 to $15,175,791 in 2015. The increase was the result of an increase in production volumes, partially offset by a decrease in the average depreciation, depletion and amortization rate from $25.48 per BOE during 2014 to $20.42 per BOE during 2015. These per BOE amounts are calculated by dividing our total depreciation, depletion and amortization expense by our total volume sold, in BOE.

 

Ceiling Test Write-Down.    The Company recorded a $9.3 million non-cash write-down of the carrying value of its proved oil and natural gas properties for the period ended December 31, 2015 as a result of ceiling test limitations, which is reflected as ceiling test impairments in the accompanying Statements of Operations. The ceiling test was calculated based upon the average of quoted market prices in effect on the first day of the month for the preceding twelve month period at December 31, 2015, adjusted for market differentials, per SEC guidelines. The write-down reduced earnings in the period and will result in a lower depreciation, depletion and amortization rate in future periods. The Company did not have any write-downs related to the full cost ceiling limitation during the prior year ended December 31, 2014.

 

General and administrative expenses. General and administrative expenses increased by $1,192,366 to $7,995,395 during 2015. This increase was the result of various factors, including acquisition related costs, increased office lease rent expense and compensation related costs.

 

Interest income. Interest income was $6,984 in 2015 as compared to $85,964 in 2014. The decrease was the result of lower average cash on hand during 2015.

 

Interest expense. Interest expense increased from zero in 2014 to $749,134 in 2015. This increase was the result of drawing on our credit facility during 2015, particularly in relation to our acquisition of the properties in Culberson and Reeves counties.

 

Provision for income taxes. The provision for income taxes changed from $4,235,739 in 2014 to a negative provision of $5,003,713 in 2015. The change is due to the Company having a net loss in 2015 versus net income in 2014.

 

Net income (loss). During 2015, the Company had a net loss of $9,052,771 as compared to net income of $8,420,500 during 2014. The primary reasons for this change are the referenced ceiling test write-down and reduced revenues as a result of significantly lower received commodity prices.

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Oil and natural gas sales. Oil and natural gas sales revenue increased approximately $27.8 million to $38.1 million in 2014. Oil sales increased approximately $27.8 million while natural gas sales remained effectively the same. The oil sales increase was the result of an increase in sales volume from 109,673 barrels of oil in 2013 to 457,039 barrels of oil in 2014 offset by a decrease of 10% in the average realized per barrel oil price from $92.81 in 2013 to $83.04 in 2014. These per barrel amounts are calculated by dividing revenue from oil sales by the volume of oil sold, in barrels. Natural gas sales volume increased from 36,047 Mcf in 2013 to 38,735 Mcf in 2014 but was offset by an 8% decrease in the average realized per Mcf gas price from $3.82 in 2013 to $3.53 in 2014. These per Mcf amounts are calculated by dividing revenue from gas sales by the volume of gas sold, in Mcf. The volume increases for both oil and natural gas were the result of both the acquisitions we made during the year and the result of our development of existing properties.

 

 

Oil and gas production costs. Our aggregate oil and gas production costs increased from $1,207,500 in 2013 to $4,993,166 in 2014, and increased on a BOE basis from $10.44 in 2013 to $10.77 in 2014. These per BOE amounts are calculated by dividing our total production costs by our total volume sold, in BOE. This increase in the aggregate production costs was the result of additional acquisitions and development.

 

Oil and gas production taxes. Oil and gas production taxes as a percentage of oil and natural gas sales were 4.62% during 2013 and remained the same in 2014. Production taxes vary from state to state. Therefore, these taxes are likely to vary in the future depending on the mix of production we generate from various states, and on the possibility that any state may raise its production tax.

 

Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by $9,523,703 to $11,807,794 in 2014. The increase was a result of increased production volumes and an increase in the average depreciation, depletion and amortization rate from $19.74 per BOE during 2013 to $25.48 per BOE during 2014. These per BOE amounts are calculated by dividing our total depreciation, depletion and amortization expense by our total volume sold, in BOE.

 

General and administrative expenses. General and administrative expenses remained relatively flat, increasing by $120,269 to $6,803,029 during 2014.

 

Interest income. Interest income was $85,964 in 2014 as compared to $24,706 in 2013. The increase was the result of higher cash on hand during 2014.

 

Interest expense. Interest expense decreased by $9,890 in 2013 to no expense in 2014. The decrease was the results of having no amounts borrowed on our Credit Facility during 2014.

 

Provision for income taxes. The provision for income taxes increased from $77,701 in 2013 to $4,235,739 in 2014. The increase was due to higher net income before taxes in 2014. The effective tax rate in 2014 was 33.5%, which is less than the Company’s federal statutory rate due to the favorable tax impact of stock option exercises, partially offset by adjustments of the prior year’s tax estimate made in 2014.

 

Net income (loss). During 2014, the Company had net income of $8,420,500 as compared to a net loss of $452,209 during 2013. The primary reason for this change was increased revenues partially offset by an increase in costs of production, depreciation, depletion and amortization and provision for income taxes.

 

Liquidity and Capital Resources

 

Financing of Operations. We have historically funded our operations through cash available from operations and from equity offerings of our stock. Our primary sources of cash in 2015 were from funds generated from the sale of oil and natural gas production and borrowings under our Credit Facility. These cash flows were primarily used to fund our capital expenditures and interest payments on debt. While Ring will continue to develop its properties near term, such development will be more limited while commodity prices remain low and unstable. The Company will manage any development activity around its operating cash flow.

 

Credit Facility. 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 (“Administrative Agent”), which was amended on June 26, 2015 and July 24, 2015 (as amended, the “Credit Facility”).  The Credit Facility provides for a senior secured revolving credit facility with an initial borrowing base of $100 million (the “Borrowing Base”) with a maximum borrowing amount of $500 million. The Credit Facility matures on June 26, 2020, and is secured by 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 will be redetermined semi-annually on each May 1 and November 1, beginning November 1, 2015.  The Borrowing Base will also be reduced 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. As a result of the recent decline in commodity prices, our borrowing base and related commitments under the Credit Facility could be reduced in the future.

 

The Credit Facility allows for Eurodollar Loans and Base Rate Loans (each as 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 1.75% and 2.75% (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 plus 0.5% per annum or the (iii) adjusted LIBOR determined on a daily basis for an interest period of one-month, plus 1.00% per annum, plus (b) a margin between 2.75% and 3.75% (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 of not more than 4.0 to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of December 31, 2015, the Company was in compliance with all covenants contained in the Credit Facility, and $45,900,000 was outstanding on the Credit Facility.

 

Cash Flows. Historically, our primary sources of cash have been from operations, equity offerings and borrowings on our Credit Facility. During 2015, 2014 and 2013, we had cash inflow from operations of $9,843,744, $33,748,065 and $8,116,408, respectively. During the three years ended December 31, 2015, we financed $151,756,229 through proceeds from the sale of stock. During 2015, we had proceeds from drawdowns on our Credit Facility of $45,900,000. We primarily used this cash to fund our capital expenditures and development aggregating $250,754,563 over the three years ended December 31, 2015. At December 31, 2015, we had cash on hand of $4,431,350 with negative working capital of $2,618,676, as compared to cash on hand of $8,622,235 and negative working capital of $1,179,753 at December 31, 2014 and cash of $52,350,583 and working capital of $49,073,394 at December 31, 2013.

 

Schedule of Contractual Obligations. The following table summarizes our contractual obligations for periods subsequent to December 31, 2015. The future estimated office lease payments pertain to approximately 15,000 square feet of space for our corporate headquarters in Midland, Texas, approximately 3,700 square feet for our previous office space in Midland, Texas, as we attempt to sublet the space, approximately 3,700 square feet of office space for our accounting offices in Tulsa, Oklahoma and approximately 2,000 square feet of office space for our field office in Andrews, Texas. The Company incurred lease expenses of $526,658, $149,872 and $141,593 for the years ended December 31, 2015, 2014 and 2013, respectively. The following table reflects the outstanding balance under our Credit Facility and future minimum lease payments under the operating leases as of December 31, 2015.

 

		Payment due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Credit Facility (1)			45,900,000				-				-				45,900,000				-
Operating Lease Obligations			1,193,738				574,803				574,235				-				-
Total			47,093,738				574,803				518,935				45,900,000				-

 

(1)

Includes outstanding principal amounts at December 31, 2015. This table does not include future commitment fees, interest expense or other fees on this facility because they are floating rate instruments, and we cannot determine with accuracy the timing of future loan advances, repayments or future interest rates to be charged. As of December 31, 2015, the Credit Facility had a weighted average interest rate of 2.46%.

 

Long-term asset retirement obligation is not included in the above table as the timing of these payments cannot be reasonably predicted.

 

Effects of Inflation and Pricing

 

The oil and natural gas industry is very cyclical and the demand for goods and services of oil field companies, suppliers and others associated with the industry puts extreme pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs. Material changes in prices impact the current revenue stream, estimates of future reserves, borrowing base calculations of bank loans and the value of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and natural gas companies and their ability to raise capital, borrow money and retain personnel. We anticipate business costs will vary in accordance with commodity prices for oil and natural gas, and the associated increase or decrease in demand for services related to production and exploration.

 

Off-Balance Sheet Financing Arrangements

 

As of December 31, 2015 we had no off-balance sheet financing arrangements.

 

Critical Accounting Policies and Estimates

 

Our discussion of financial condition and results of operations is based upon the information reported in our financial statements. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. Our significant accounting policies are detailed in Note 1 to our financial statements included in this Annual Report. We have outlined below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management.

 

 

Revenue Recognition. We predominantly derive our revenue from the sale of produced crude oil and natural gas. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received; however, differences have been insignificant.

 

Full Cost Method of Accounting. We account for our oil and natural gas operations using the full cost method of accounting. Under this method, all costs associated with property acquisition, exploration and development of oil and gas reserves are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and cost of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs. All of our properties are located within the continental United States.

 

Write-down of Oil and Gas Properties.    Companies that use the full cost method of accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is performed quarterly utilizing the average of prices in effect on the first day of the month for the preceding twelve month period in accordance with SEC Release No. 33-8995. The ceiling limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved crude oil and natural gas reserves discounted at 10%, plus the lower of cost or market value of unproved properties, less any associated tax effects. If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence and results in a lower depletion, depreciation and amortization (“DD&A”) rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.

 

During 2015, the Company recorded a $9.3 million non-cash write-down of the carrying value of the Company’s proved oil and gas properties as a result of ceiling test limitations, which is reflected with ceiling test and other impairments in the accompanying Statements of Operations. The Company did not have any write-downs related to the full cost ceiling limitation in 2014 or 2013.

 

Our reserve estimates as of December 31, 2015 are based on an average price of $48.173 for oil and $2.505 for gas.

 

Oil and Natural Gas Reserve Quantities. Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion and impairment of our oil and natural gas properties. Proved oil and natural gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included in this Annual Report are prepared in accordance with guidelines established by the SEC and FASB. The accuracy of our reserve estimates is a function of:

 

	·	the quality and quantity of available data;
	·	the interpretation of that data;
	·	the accuracy of various mandated economic assumptions; and
	·	the judgments of the persons preparing the estimates.

 

Our proved reserve information included in this Annual Report was based on internal reports and audited by Cawley, Gillespie & Associates, Inc. and Williamson Petroleum Consultants, Inc., independent petroleum engineers. Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and natural gas that are ultimately recovered. We continually make revisions to reserve estimates throughout the year as additional properties are acquired. We make changes to depletion rates and impairment calculations in the same period that changes to the reserve estimates are made.

 

All capitalized costs of oil and gas properties, including estimated future costs to develop proved reserves and estimated future costs of site restoration, are amortized on the unit-of-production method using estimates of proved reserves as determined by independent engineers. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined.

 

Income Taxes. Deferred income taxes are provided for the difference between the tax basis of assets and liabilities and the carrying amount in our financial statements. This difference will result in taxable income or deductions in future years when the reported amount of the asset or liability is settled. Since our tax returns are filed after the financial statements are prepared, estimates are required in valuing tax assets and liabilities. We record adjustments to the actual values in the period we file our tax returns.

 

 

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

 

Commodity Price Risk

 

Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Market risk refers to the risk of loss from adverse changes in oil and natural gas prices. Realized pricing is primarily driven by the prevailing domestic price for crude oil and spot prices applicable to the region in which we produce natural gas. Historically, prices received for oil and natural gas production have been volatile and unpredictable. We expect pricing volatility to continue.

 

The prices we receive depend on many factors outside of our control. Oil prices we received during 2015 ranged from a low of $31.42 per barrel to a high of $56.83 per barrel. Natural gas prices we received during 2015 ranged from a low of $1.05 per Mcf to a high of $3.96 per Mcf. A significant decline in the prices of oil or natural gas could have a material adverse effect on our financial condition and results of operations. In order to reduce commodity price uncertainty and increase cash flow predictability relating to the marketing of our crude oil and natural gas, we may enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. As of December 31, 2015, the Company has not entered into any hedging or derivative instruments for our expected oil and natural gas production.

 

Customer Credit Risk

 

Our principal exposures to credit risk is through receivables from the sale of our oil and natural gas production (approximately $2.5 million at December 31, 2015). We are subject to credit risk due to the concentration of our oil and natural gas receivables with our most significant customers. We do not require our customers to post collateral, and the inability of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. For the fiscal year 2015, sales to three customers, Oxy, Enterprise and HollyFrontier represented 48%, 23% and 20%, respectively, of oil and gas revenues. At December 31, 2015, Oxy represented 53% of our accounts receivable and Enterprise represented 30%. Due to availability of other purchasers, we do not believe the loss of any single oil or natural gas customer would have a material adverse effect on our results of operations.

 

Interest Rate Risk

 

We are subject to market risk exposure related to changes in interest rates on our indebtedness under our Credit Facility, which bears variable interest based upon a prime rate and is therefore susceptible to interest rate fluctuations. Changes in interest rates affect the interest earned on the Company’s cash and cash equivalents and the interest rate paid on borrowings under the Credit Facility.

 

As of December 31, 2015, we had $45,900,000 outstanding on our Credit Facility. A 1% change in the interest rate on our Credit Facility would result in an estimated $459,000 increase in our annual interest expense. If we draw additional funds on this Credit Facility, interest rate changes will impact future results of operations and cash flows.

 

Currently, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.

 

Please also see Item 1A “Risk Factors” above for a discussion of other risks and uncertainties we face in our business.

 

Item 8:

Financial Statements and Supplementary Data

 

The financial statements and supplementary data required by this item are included beginning at page F-1 of this Annual Report.

 

Item 9:

Changes in and Disagreements with Accountants and Accounting and Financial Disclosure

 

None.

 

Item 9A:

Controls and Procedures

 

Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 

Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

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. There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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 was 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.

 

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, 2015, our internal control over financial reporting is effective based on those criteria.

 

The registered public accounting firm, Eide Bailly LLP, has audited the financial statements included in this annual report and has issued an attestation report on our internal control over financial reporting. The report is set forth under the caption “Report of Independent Registered Public Accounting Firm” in Item 8 of this annual report.

 

Item 9B:

Other Information

 

None.

 

PART III

 

Item 10:

Directors, Executive Officers and Corporate Governance

 

Executive Officers and Directors

 

The following table sets forth information regarding our executive officers, certain other officers and directors as of March 14, 2015. The Board believes that all the directors named below are highly qualified and have the skills and experience required for effective service on the Board. The directors’ and officers’ individual biographies below contain information about their experience, qualifications and skills that led the Board to nominate them.

 

Name		Age		Position
Kelly Hoffman		57		Chief Executive Officer, Director
David A. Fowler		57		President, Director
Daniel D. Wilson		55		Executive Vice President
William R. Broaddrick		38		Chief Financial Officer
Lloyd T. Rochford		69		Chairman of the Board of Directors
Stanley M. McCabe		83		Director
Anthony B. Petrelli		63		Director
Clayton E. Woodrum		75		Director

 

 

Each of the directors identified above were appointed for a term of one year (or until their successors are elected and qualified).

 

Messrs. Rochford and McCabe joined the Board in June 2012 as a part of the merger between Ring and Stanford. Messrs. Hoffman, Fowler, Woodrum and Petrelli joined the Board in January 2013. All of the Board members were re-elected at the Company’s 2015 annual shareholders’ meeting. There are no family relationships between any director or executive officer or person nominated or chosen to become a director or officer of the Company.

 

The following biographies describe the business experience of our executive officers and directors:

 

Kelly Hoffman – Chief Executive Officer and Director

 

Mr. Hoffman, 57, has organized the funding, acquisition and development of many oil and gas properties. He began his career in the Permian Basin in 1975 with Amoco Production Company. His responsibilities included oilfield construction, crew management, and drilling and completion operations. In the early 1990s, Mr. Hoffman co-founded AOCO and began acquiring properties in West Texas. In 1996, he arranged financing and purchased 10,000 acres in the Fuhrman Mascho field in Andrews, Texas. In the first six months, he organized a 60 well drilling and completion program resulting in a 600% increase in revenue and approximately 18 months later sold the properties to Lomak (Range Resources). In 1999, Mr. Hoffman again arranged financing and acquired 12,000 acres in Lubbock and Crosby counties. After drilling and completing 19 successful wells, unitizing the acreage, and instituting a secondary recovery project he sold his interest in the property to Arrow Operating Company. From April 2009 until December 2011, Mr. Hoffman served as President of Victory Park Resources, a privately held exploration and production company focused on the acquisition of oil and gas producing properties in Oklahoma, Texas and New Mexico. Mr. Hoffman has served as our Chief Executive Officer since January 2013. Mr. Hoffman currently serves as a director of Joes Jeans Inc. (NASDAQ: JOEZ), a reporting company.

 

David A. Fowler – President and Director

 

Mr. Fowler, 57, has served in several management positions for various companies in the insurance and financial services industries. In 1994, he joined Petroleum Listing Service as Vice President of Operations, overseeing oil and gas property listings, information packages, and marketing oil and gas properties to industry players. In late 1998, Mr. Fowler became the Corporate Development Coordinator for the Independent Producer Finance (“IPF”) group of Range Resources Corporation. Leaving Range IPF in April 2001, Mr. Fowlerco-founded and became President of Simplex Energy Solutions, LLC (“Simplex”). Representing Permian Basin oil and gas independent operators, Simplex became known as the Permian Basin’s premier oil and gas divestiture firm, closing over 150 projects valued at approximately $675 million. Mr. Fowler has served as President of the Company since January 2013.

 

Daniel D. Wilson – Executive Vice President

 

Mr. Wilson, 55, has over 30 years of experience in operating, evaluating and exploiting oil and gas properties. He has experience in production, drilling and reservoir engineering. From 1983 to 2012, Mr. Wilson was employed at Breck Operating Corporation (“Breck”), including 22 years as the Vice President and Manager of Operations. He had the responsibility for overseeing the building, operating and divestiture of two companies during this time. At Breck’s peak Mr. Wilson was responsible for over 750 wells in seven states and had an operating staff of 27 including engineers, foremen, pumpers and clerks. Mr. Wilson personally performed or oversaw all of the economic evaluations for both acquisition and banking purposes. Mr. Wilson has served as Vice President of Operations of the Company since January 2013.

 

William R. Broaddrick – Chief Financial Officer.

 

Mr. Broaddrick, 38, was employed from 1997 to 2000 with Amoco Production Company, performing lease revenue accounting and state production tax regulatory reporting functions. During 2000, Mr. Broaddrick was employed by Duke Energy Field Services, LLC performing state production tax functions. From 2001 until 2010, Mr. Broaddrick was employed by Arena as Vice President and Chief Financial Officer. During 2011, Mr. Broaddrick joined Stanford as Chief Financial Officer. As a result of the merger transaction between Stanford and Ring, Mr. Broaddrick became Chief Financial Officer of Ring as of July 2012.

 

In 1999, Mr. Broaddrick received a Bachelor’s Degree in Accounting from Langston University, through Oklahoma State University – Tulsa. Mr. Broaddrick is a Certified Public Accountant.

 

Lloyd T. (“Tim”) Rochford – Chairman of the Board of Directors

 

Mr. Rochford, 69, has been active as an individual consultant and entrepreneur in the oil and gas industry since 1973. During that time, he has been an operator of wells in the mid-continent of the United States, evaluated leasehold drilling and production projects, and arranged and raised in excess of $500 million in private and public financing for oil and gas projects and development.

 

 

Mr. Rochford has successfully formed, developed and sold/merged four natural resource companies, two of which were listed on the New York Stock Exchange. The most recent, Arena, was founded by Mr. Rochford and his associate Stanley McCabe in August 2000. From inception until May 2008, Mr. Rochford served as President, Chief Executive Officer and as a director of Arena. During that time, Arena received numerous accolades from publications such as Business Week (2007 Hot Growth Companies), Entrepreneur (2007 Hot 500), Fortune (2007, 2008, 2009 Fastest Growing Companies), Fortune Small Business (2007, 2008 Fastest Growing Companies) and Forbes (Best Small Companies of 2009). In May 2008, Mr. Rochford resigned from the position of Chief Executive Officer at Arena and accepted the position of Chairman of the Board. In his role as Chairman, Mr. Rochford continued to pursue opportunities that would enhance the then current, as well as long-term value of Arena. Through his efforts, Arena entered into a merger agreement and was acquired by another New York Stock Exchange company for $1.6 billion in July, 2010.

 

Stanley M. McCabe – Director

 

Mr. McCabe, 83, has been active in the oil and gas industry for over 30 years, primarily seeking individual oil and gas acquisition and development opportunities. In 1979 he founded and served as Chairman and Chief Executive Officer of Stanton Energy, Inc., a Tulsa, Oklahoma natural resource company specializing in contract drilling and operation of oil and gas wells. In 1990, Mr. McCabe co-founded with Mr. Rochford, Magnum Petroleum, Inc., serving as an officer and director. In 2000, Mr. McCabe co-founded Arena with Mr. Rochford and Mr. McCabe served as Chairman of the Board until 2008 and then as a director of Arena until 2010.

 

Anthony B. Petrelli – Director

 

Mr. Petrelli, 63, is President, a member of the Board of Directors, and Director of Investment Banking of Neidiger, Tucker, Bruner, Inc., a Denver, Colorado based financial services firm founded in 1977. Beginning his career in 1972, Mr. Petrelli has had extensive experience in the areas of operations, sales, trading, management of sales, underwriting and corporate finance. He has served on numerous regulatory and industry committees including service on the FINRA Corporate Finance Committee, the NASD Small Firm Advisory Board and as Chairman of the FINRA District Business Conduct Committee, District 3. Mr. Petrelli received his Bachelors of Science in Business (Finance) and his Masters of Business Administration (MBA) from the University of Colorado and a Masters of Arts in Counseling from Denver Seminary.

 

Clayton E. Woodrum – Director

 

Mr. Woodrum, CPA, 75, is a founding partner of Woodrum, Tate & Associates, PLLC. His financial background encompasses over 40 years of experience from serving as a Partner In Charge of the tax department of a big eight accounting firm to Chief Financial Officer of BancOklahoma Corp. and Bank of Oklahoma. His areas of expertise include business valuation, litigation support (including financial analysis, damage reports, depositions and testimony), estate planning, financing techniques for businesses, asset protection vehicles, sale and liquidation of businesses, debt restructuring, debt discharge and CFO functions for private and public companies.

 

Our executive officers are elected by, and serve at the pleasure of, our Board of Directors. Our directors serve terms of one year each, with the current directors serving until the next annual meeting of stockholders, and in each case until their respective successors are duly elected and qualified.

 

Involvement in Certain Legal Proceedings

 

During the past ten years, there have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any of our directors or executive officers, and none of our executive officers or directors has been involved in any judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity, any judicial or administrative proceedings based on violations of federal or state securities, commodities, banking or insurance laws or regulations, and any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization.

 

Board Committees

 

Our Board of Directors has established an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee, and an Executive Committee, the composition and responsibilities of which are briefly described below. The charters for each of these committees shall be provided to any person without charge, upon request. The charters are also available on the Company’s website at www.ringenergy.com. Requests may be directed to Ring Energy, Inc., 6555 S. Lewis Ave., Suite 200, Tulsa, Oklahoma 74136, Attention William R. Broaddrick, or by calling (918) 499-3880.

 

 

Audit Committee

 

The Audit Committee’s principal functions are to assist the Board in monitoring the integrity of our financial statements, the independent auditor’s qualifications and independence, the performance of our independent auditors and our compliance with legal and regulatory requirements. The Audit Committee has the sole authority to retain and terminate our independent auditors and to approve the compensation paid to our independent auditors. The Audit Committee is also responsible for overseeing our internal audit function. The Audit Committee is comprised of Messrs. Woodrum, Petrelli and McCabe, with Mr. Woodrum acting as the chairman. Our Board of Directors determined that Mr. Woodrum qualified as “audit committee financial expert” as defined in Item 407 of Regulation S-K promulgated by the Securities and Exchange Commission (see the biographical information for Mr. Woodrum, infra, in this discussion of “Directors and Executive Officers”). Each of Messrs. Woodrum, Petrelli and McCabe further qualified as “independent” in accordance with the applicable regulations of the NYSE MKT, LLC definition of independent director set forth in the Company Guide, Part 8, Section 803(A). (see the biographical information for Messrs. Woodrum, Petrelli and McCabe, infra, in this discussion of “Directors and Executive Officers”).

 

Compensation Committee

 

The Compensation Committee’s principal function is to make recommendations regarding the compensation of the Company’s officers. In accordance with the rules of the NYSE MKT, LLC, the compensation of our chief executive officer is recommended to the Board (in a proceeding in which the chief executive officer does not participate) by the Compensation Committee. Compensation for all other officers is also recommended to the Board for determination by the Compensation Committee. The Compensation Committee is comprised of Messrs. Rochford and McCabe, with Mr. Rochford acting as the chairman.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee’s principal functions are to (a) identify and recommend qualified candidates to the Board of Directors for nomination as members of the Board and its committees, and (b) develop and recommend to the Board corporate governance principles applicable to the Company. The Nominating and Corporate Governance Committee is comprised of Messrs. Rochford and McCabe, with Mr. Rochford acting as the chairman.

 

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

 

Executive Committee

 

The Executive Committee’s principal function is to exercise the powers and duties of the Board between Board meetings and while the Board is not in session, and implement the policy decisions of the Board. The Executive Committee is comprised of Messrs. Rochford and McCabe.

 

Our Board may establish other committees from time to time to facilitate our management.

 

Code of Ethics

 

We have adopted a Code of Ethics that applies to our Chief Executive Officer, President, Chief Financial Officer, and Corporate Controller, as well as the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions to ensure the highest standard of ethical conduct and fair dealing.

 

We have also adopted a Code of Business Conduct covering a wide range of business practices that applies to all of our officers, directors, and employees to help promote honest and ethical conduct. The Code of Business Conduct covers standards for professional conduct, including, among others, conflicts of interest, insider trading, confidential information, protection and proper use of Company assets, and compliance with all laws and regulations applicable to the Company’s business.

 

These documents are available on the Company’s website at www.ringenergy.com. We shall also provide any person without charge, upon request, a copy of the Code of Ethics or Code of Business Conduct. Requests may be directed to Ring Energy, Inc., 6555 S. Lewis Ave., Suite 200, Tulsa, Oklahoma 74136, Attention William R. Broaddrick, or by calling (918) 499-3880.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

 

Based solely upon a review of Section 16(a) reports furnished to us for our most recent fiscal year, we know of no director, officer or beneficial owner of more than ten percent of our common stock who failed to file on a timely basis reports of beneficial ownership of the our common stock as required by Section 16(a) of the Securities Exchange Act of 1934, as amended.

 

 

Item 11: Executive Compensation

 

Compensation Discussion & Analysis

 

This Compensation Discussion and Analysis (1) provides an overview of our compensation policies and programs; (2) explains our compensation objectives, policies and practices with respect to our executive officers; and (3) identifies the elements of compensation for each of the individuals identified in the following table, whom we refer to in this annual report as our “Named Executive Officers” for the fiscal year ending December 31, 2015.

 

Name		Principal Position
Kelly Hoffman		Chief Executive Officer, effective January 1, 2013
David A. Fowler		President, effective January 1, 2013
Daniel D. Wilson		Executive Vice President, effective January 1, 2013
William R. Broaddrick		Chief Financial Officer, effective July 1, 2012

 

This section contains a discussion of the material elements of compensation awarded to, earned by or paid to (i) all individuals serving as the Company’s principal executive officer or acting in a similar capacity during the last completed fiscal year (“PEO”), regardless of compensation level, and (ii) all individuals serving as the Company’s principal financial officer or acting in a similar capacity during the last completed fiscal year (“PFO”), regardless of compensation level. As of the end of the last completed fiscal year, the Company had two executive officers other than the PEO and PFO, and this discussion includes the material elements of compensation awarded to, earned by, or paid to such executive officers. This section omits tables and columns if there has been no compensation awarded to, earned by, or paid to any of the Named Executive Officers or directors required to be reported in such table or column in any fiscal year covered by such table.

 

Objectives and Philosophy of Our Executive Compensation Program

 

Ring strives to attract, motivate and retain high-quality executives by providing total compensation that is performance-based and competitive within the labor market in which the Company competes for executive talent as a public company. Our compensation program is intended to align the interests of management with the interests of stockholders by linking pay with performance, thereby incentivizing performance and furthering the ultimate goal of increasing stockholder value.

 

Setting Executive Compensation

 

Our current executive compensation programs are determined and approved by our Compensation Committee. The Compensation Committee takes into consideration the recommendations by our Chairman of the Board and our Chief Executive Officer as to the compensation of executive officers other than the Chief Executive Officer. None of the Named Executive Officers are members of the Compensation Committee. The Compensation Committee has the direct responsibility and authority to review and approve the Company’s goals and objectives relative to the compensation of the Named Executive Officers, and to determine and approve (either as a committee or with the other members of the Company’s Board of Directors who qualify as “independent” directors under applicable guidelines adopted by the NYSE MKT, LLC) the compensation levels of the Named Executive Officers.

 

Our current executive compensation programs are intended to achieve two objectives. The primary objective is to enhance the profitability of the Company, and thus, shareholder value. The second objective is to attract, motivate, reward and retain employees, including executive personnel, who contribute to the long-term success of the Company. As described in more detail below, the material elements of our current executive compensation program for Named Executive Officers include three major elements: a base salary, discretionary annual bonuses and discretionary stock options grants.

 

General

 

The Company believes that each element of the executive compensation program helps to achieve one or both of the Company’s compensation objectives outlined above. Our executive’s compensation is based on individual and Company performance and designed to attract, retain and motivate highly qualified executives while creating a strong connection to financial and operational performance and stockholder value. The table below lists each material element of our executive compensation program and the compensation objective or objectives that it is designed to achieve.

 

 

Compensation Element		Compensation Objectives
Base Salary		Attract and retain qualified executives Motivate and reward executives performance
Bonus Compensation		Motivate and reward executive’s performance Enhance profitability of Company and shareholder value
Equity-Based Compensation – stock options and restricted stock grants		Enhance profitability of Company and shareholder value by aligning long-term incentives with shareholders’ long-term interests

 

As illustrated by the table above, base salary is primarily intended to attract and retain qualified executives. This is the element of the Company’s current executive compensation program where the value of the benefit in any given year is not wholly dependent on performance. Base salaries are intended to attract and retain qualified executives as well as to reward and/or motivate executives. Base salaries are reviewed annually and take into account: experience and retention considerations; past performance; improvement in historical performance; anticipated future potential performance; and other issues specific to the individual executive.

 

There are specific elements of the current executive compensation program that are designed to reward performance and enhance profitability and shareholder value, and therefore the value of these benefits is based on performance. The Company’s discretionary annual bonus plan is primarily intended to motivate and reward Named Executive Officers’ performance to achieve specific strategies and operating objectives, as well as improved financial performance. The Company also awards stock options and restricted stock grants to promote long-term value creation for stockholders and to retain talented executives for an extended period.

 

The Compensation Committee does not currently benchmark executive compensation to any other companies. The Compensation Committee believes that bonuses and equity compensation should fluctuate with the Company’s success in achieving financial, operating and strategic goals. The Committee’s philosophy is that the Company should continue to use long-term compensation such as stock options to align shareholder and executives’ interests and should allocate a portion of long-term compensation to the entire executive compensation package.

 

The Company has never retained an outside consultant in establishing its compensation program or in establishing any specific compensation for an executive officer.

 

In determining 2015 executive compensation, the Compensation Committee considered the outcome of the say-on-pay vote at the most recent annual meeting as supportive of our pay practices and programs. As a result, the Compensation Committee concluded that the 2015 compensation paid to our Named Executive Officers and our overall pay practices did not require changes; although the Compensation Committee will continue to evaluate the Company’s compensation program to ensure competitiveness, the alignment of the Company’s executive compensation with stockholders’ interests and to met other compensation objectives..

 

Current Executive Compensation Program Elements

 

Base Salaries

 

The Compensation Committee believes base salary is an integral element of executive compensation to provide executive officers with a base level of monthly income. Similar to most companies within the industry, our policy is to pay Named Executive Officers’ base salaries in cash. Base salary is reviewed annually by the Compensation Committee. The base salary of each Named Executive Officer is reviewed annually, with the salary of the Chief Executive Officer being established by the Compensation Committee and the salaries of the other executive officers being determined and approved by the Compensation Committee after consideration of recommendations by the Chairman of the Board and Chief Executive Officer.

 

Effective July 1, 2012, the Compensation Committee designated a salary of $100,000 for Mr. Broaddrick. Effective September 1, 2012 the Compensation Committee recommended an increase of $25,000 for Mr. Broaddrick.

 

Mr. Hoffman joined the Company effective January 1, 2013 and the Compensation Committee designated a salary of $175,000.

 

Mr. Fowler joined the Company effective January 1, 2013 and the Compensation Committee designated a salary of $150,000.

 

Mr. Wilson joined the Company effective January 1, 2013 and the Compensation Committee designated a salary of $150,000.

 

Annual Bonuses

 

The Company does not have a formal policy regarding bonuses, and payment of bonuses has been purely discretionary and is largely based on the recommendations of the Compensation Committee. Cash incentive bonuses are designed to provide our executive officers with an incentive to achieve the Company’s business goals and objectives. Cash bonuses are not expected to be a significant portion of the executive compensation package. Cash bonuses are determined for Named Executive Officers based on his or her performance in the prior year, his or her expected future contribution to the performance of the Company, and other competitive data on grant values of peer companies.

 

 

Cash bonuses were granted to all employees in December 2013. The annual discretionary bonus is reported in the “Bonus” column of the “Summary Compensation Table” for each Named Executive Officer.

 

Equity-Based Compensation – Options and Restricted Stock Grants

 

It is our policy that the Named Executive Officers’ long-term compensation should be directly linked to enhancing profitability and value provided to the Company’s stockholders. Accordingly, the Compensation Committee grants equity awards under the Company’s long term incentive plan designed to link an increase in shareholder value to compensation. Mr. Broaddrick was granted non-qualified stock options in 2012, 2013, 2014 and 2015. Messrs. Hoffman, Fowler and Wilson were granted non-qualified stock options in 2013, 2014 and 2015.

 

Stock option grants are valued using the Black-Scholes Model and are calculated as a part of the executive compensation package for the year based on the amount of the requisite service period served. Non-qualified stock options for Named Executive Officers and other key employees generally vest ratably over five years. No restricted stock was granted to any of the Named Executive Officers.’ The Compensation Committee believes that these awards encourage Named Executive Officers to continue to use their best professional skills and to retain Named Executive Officers for longer terms.

 

Grants are determined for Named Executive Officers based on his or her performance in the prior year, his or her expected future contribution to the performance of the Company, and other competitive data on grant values of peer companies. Awards may be granted to new key employees or Named Executive Officers on their respective hire dates. Other grant date determinations are made by the Compensation Committee, which are based upon the date the Committee met and proper communication was made to the Named Executive Officer or key employee as defined in the definition of grant date by generally accepted accounting principles. Exercise prices are equal to the value of the Company’s stock on the close of business on the determined grant date. The Company has no program or practice to coordinate timing of grants with release of material, nonpublic information.

 

The grant date fair value as determined under generally accepted accounting principles is shown in the “Summary Compensation Table” below.

 

Pension Plans, Non-Qualified Deferred Compensation Plans, Change-In-Control Arrangements and Retirement Plans

 

The Company does not have any pension plans, non-qualified deferred compensation plans or severance, retirement, termination, constructive termination or change in control arrangements for any of its Named Executive Officers for the year ended December 31, 2015.

 

Other Benefits

 

Our Named Executive Officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life, and short and long-term disability, in each case, on the same basis as other employees, subject to applicable laws. We also provide vacation and other paid holidays to all employees, including our Named Executive Officers.

 

Tax Considerations

 

Although our Compensation Committee considers the tax and accounting treatment associated with the cash and equity grants it makes, these considerations are not dispositive. Section 162(m) of the Code places a limit of $1.0 million per person on the amount of compensation that we may deduct in any year with respect to our chief executive officer, chief financial officer and our three most highly compensated executive officers other than the chief executive officer and the chief financial officer. There is an exemption from the $1.0 million limitation for performance-based compensation that meets certain requirements. Our benefit plans are generally designed to permit compensation to be structured to meet the qualified performance-based compensation exception. To maintain flexibility in compensating Named Executive Officers in a manner designed to promote our Company goals and objectives, our Compensation Committee has not adopted a policy requiring all compensation to be deductible. The Compensation Committee retains the ability to evaluate the performance of our executive officers and to pay appropriate compensation, even if some of it may be non-deductible, to ensure competitive levels of total compensation is paid to certain individuals.

 

We account for stock-based awards based on their grant date fair value, as determined under FASB ASC Topic 718.  In connection with its approval of stock-based awards, the Compensation Committee is cognizant of and sensitive to the impact of such awards on stockholder dilution.  The Compensation Committee also endeavors to avoid stock-based awards made subject to a market condition, which may result in an expense that must be marked to market on a quarterly basis.  The accounting treatment for stock-based awards does not otherwise impact the Compensation Committee’s compensation decisions.

 

 

Risk Considerations in our Overall Compensation Program

 

When establishing and reviewing our executive compensation program, the Compensation Committee has considered whether the program encourages unnecessary or excessive risk taking and has concluded that it does not. While behavior that may result in inappropriate risk taking cannot necessarily be prevented by the structure of compensation practices, we believe that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us. Our compensation program is comprised of both fixed and incentive-based elements. The fixed compensation (i.e., base salary) provides reliable, foreseeable income that mitigates the focus of our employees on our immediate financial performance or our stock price, encouraging employees to make decisions in our best long-term interests. The incentive components are designed to be sensitive to our short-term and long-term goals, performance and stock price. In combination, we believe that our compensation structures do not encourage our officers and employees to take unnecessary or excessive risks in performing their duties. In conclusion, we believe that our compensation policies and practices for all employees, including executive officers, do not create risks that are reasonably likely to have a material adverse effect on our Company.

 

Compensation of Named Executive Officers

 

The “Summary Compensation Table” set forth below should be read in connection with the tables and narrative descriptions that follow. The “Outstanding Equity Awards at Fiscal Year End Table” and “Option Exercises and Stock Vested Table” provide further information on the Named Executive Officers’ potential realizable value and actual value realized with respect to their equity awards.

  

Summary Compensation Table

 

Name and Principal Position		Year		Salary ($)				Bonus ($)				Option Awards (1) ($)				All Other Compensation ($)				Total ($)
Kelly Hoffman,		2015			175,000				-				260,762				24,000	(2)			459,762
Chief Executive Officer		2014			175,000				-				196,728				24,000	(2)			395,728
		2013			175,000				5,000				2,336,928				122,500	(3)			2,639,428
David Fowler,		2015			150,000				-				260,762				24,000	(2)			434,762
President		2014			150,000				-				196,728				24,000	(2)			370,728
		2013			150,000				5,000				2,336,928				22,500	(4)			2,514,428
Daniel D. Wilson,		2015			150,000				-				238,167				-				388,167
Executive Vice President		2014			150,000				-				163,940				-				313,940
		2013			150,000				5,000				1,454,044				-				1,609,044
William R. Broaddrick,		2015			125,000				-				238,167				-				363,167
Chief Financial Officer		2014			125,000				-				163,940				-				288,940
		2013			125,000				5,000				207,549				-				337,549

 

(1) See discussion of assumptions made in valuing these awards in the notes to our financial statements.

(2) 2015 and 2014 Other Compensation for Mssrs. Hoffman and Fowler consists of $24,000 in directors fees.

(3) 2013 Other Compensation to Mr. Hoffman includes a $100,000 signing bonus and $22,500 in director’s fees.

(4) David Fowler received $22,500 in director’s fees during 2013.

 

On December 9, 2015, Ring issued option awards to its named executive officers and directors. On January 13, 2016, upon the recommendation of the Compensation Committee, Ring rescinded the option awards granted to its employees and directors (other than Messrs McCabe and Rochford, who are the members of the Compensation Committee) as the result of a significant decline in the stock price and re-issued the the option awards as of that date to meet the goals and objectives of the Company’s equity based compensation program.

 

 

The Company awards stock options to key employees and the Named Executive Officers either on the initial date of employment or based on performance incentives throughout the year. The following table reflects the stock options granted during 2015.

 

Grants of Plan-Based Awards

 

Name		Grant Date		All Other Option Awards: Number of Securities Underlying Options (#)				Exercise or Base Price of Option Awards ($)				Fair Value of Option Awards on Grant Date ($)
Kelly Hoffman		12/9/2015			40,000			$	8.25			$	260,762
David Fowler		12/9/2015			40,000				8.25				260,762
Daniel D. Wilson		12/9/2015			35,000				8.25				238,167
William R. Broaddrick		12/9/2015			35,000				8.25				238,167

 

On December 9, 2015, Ring issued option awards to its named executive officers and directors. On January 13, 2016, upon the recommendation of the Compensation Committee, Ring rescinded the option awards granted to its employees and directors (other than Messrs McCabe and Rochford, who are the members of the Compensation Committee) as the result of a significant decline in the stock price and re-issued the the option awards as of that date to meet the goals and objectives of the Company’s equity based compensation program.

 

Named Executive Officers are not separately entitled to receive dividend equivalent rights with respect to each stock option. Each nonqualified stock option award described in the “Grants of Plan-Based Awards Table” above expires ten years from the grant date and vests in equal installments over the course of five years.

 

The following table provides certain information regarding unexercised stock options outstanding for each Named Executive Officer as of December 31, 2015.

 

Outstanding Equity Awards

 

Name		Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Options Exercise Price ($)				Option Grant Date		Option Expiration Date
Kelly Hoffman			180,000				50,000			$	2.00			12/01/11		12/01/21
			200,000				300,000				4.50			01/01/13		01/01/23
			10,000				15,000				10.00			12/16/13		12/16/23
			6,000				24,000				8.00			12/01/14		12/01/24
			-				40,000				8.25			12/09/15		12/09/25
David Fowler			200,000				300,000				4.50			01/01/13		01/01/23
			10,000				15,000				10.00			12/16/13		12/16/23
			6,000				24,000				8.00			12/01/14		12/01/24
			-				40,000				8.25			12/09/15		12/09/25
Daniel D. Wilson			120,000				180,000				4.50			01/01/13		01/01/23
			8,000				12,000				10.00			12/16/13		12/16/23
			5,000				20,000				8.00			12/01/14		12/01/24
			-				35,000				8.25			12/09/15		12/09/25
William R. Broaddrick			40,000				20,000				2.00			12/01/11		12/01/21
			20,000				20,000				4.50			01/01/13		09/01/22
			8,000				12,000				10.00			12/16/13		12/16/23
			5,000				20,000				8.00			12/01/14		12/01/24
			-				35,000				8.25			12/09/15		12/09/25

  

All granted options vest at the rate of 20% each year over five years beginning one year from the date granted and expire ten years from the grant date.

 

 

The following table provides information regarding options exercised by Named Executive Officers during 2014 and 2015.

 

Option Exercises and Stock Vesting

 

				Option Awards
Year		Name		Number of Shares Acquired on Exercise (#)				Value Realized on Exercise ($)
2014		William R. Broaddrick			50,000			$	809,000
2015		Kelly Hoffman			20,000				325,600

 

There were no option exercises by Named Executive Officers during 2013.

 

Director Compensation

 

All directors receive a monthly stipend of $2,000. In 2015, each outside director also received 25,000 stock options with an exercise price of $8.25 per share as an annual bonus. Director compensation to Messrs. Fowler and Hoffman is included here but is also included in the executive compensation schedule above. No director receives a salary as a director.

 

Director Compensation Table

 

Name			Fees Earned or Paid in Cash ($)				Option Awards ($) (1)				All Other Compensation ($)				Total ($)
Lloyd T. Rochford	(2)		$	24,000			$	162,976			$	-			$	186,976
Stanley M. McCabe	(3)			24,000				162,976				-				186,976
David A. Fowler	(4)			24,000				162,976				-				186,976
Kelly Hoffman	(5)			24,000				162,976				-				186,976
Clayton E. Woodrum	(6)			24,000				162,976				-				186,976
Anthony B. Petrelli	(7)			24,000				162,976				-				186,976

 

(1) See discussion of assumptions made in valuing these awards in the notes to our financial statements.

(2) Lloyd T. Rochford has 165,000 options to purchase Ring stock.

(3) Stanley McCabe has 165,000 options to purchase Ring stock.

(4) David A. Fowler has an aggregate of 595,000 options to purchase Ring stock.

(5) Kelly Hoffman has an aggregate of 825,000 options to purchase Ring stock.

(6) Clayton E. Woodrum has 165,000 options to purchase Ring stock.

(7) Anthony B. Petrelli has 165,000 options to purchase Ring stock.

 

On December 9, 2015, Ring issued option awards to its named executive officers and directors. On January 13, 2016, upon the recommendation of the Compensation Committee, Ring rescinded the option awards granted to its employees and directors (other than Messrs McCabe and Rochford, who are the members of the Compensation Committee) as the result of a significant decline in the stock price and re-issued the the option awards as of that date to meet the goals and objectives of the Company’s equity based compensation program.

 

Compensation Committee Report

 

Among the duties imposed on our Compensation Committee under its charter, is the direct responsibility and authority to review and approve the Company’s goals and objectives relevant to the compensation of the Company’s Chief Executive Officer and other executive officers, to evaluate the performance of such officers in accordance with the policies and principles established by the Compensation Committee and to determine and approve, either as a Committee, or (as directed by the Board) with the other “independent” Board members (as defined by the NYSE MKT listing standards), the compensation level of the Chief Executive Officer and the other executive officers. During 2015 the Compensation Committee was comprised of the two non-employee Directors named at the end of this report each of whom is “independent” as defined by the NYSE MKT listing standards.

 

The Compensation Committee has reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis section of this Item 11, as required by Item 402(b) of Regulation S-K. Based upon this review and our discussions, the Compensation Committee recommended to its Board of Directors that the Compensation Discussion and Analysis section be included in this annual report on Form 10-K for the fiscal year ended December 31, 2015.

 

Compensation Committee of the Board of Directors

Lloyd T. Rochford (Chair)

Stanley McCabe

 

(1) SEC filings sometimes “incorporate information by reference.” This means the Company is referring you to information that has previously been filed with the SEC, and that this information should be considered as part of the filing you are reading. Unless the Company specifically states otherwise, this Compensation Committee Report shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933 as amended, or the Securities Exchange act of 1934, as amended.

 

 

Compensation Committee Interlocks and Insider Participation

 

As of December 31, 2015, the Compensation Committee was comprised of two directors, Messrs. Rochford and McCabe, with Mr. Rochford acting as the chairman. Messrs. Rochford and McCabe are currently serving as the members of the Compensation Committee. Neither of our directors who currently serve as members of our Compensation Committee is, or has at any time in the past been, an officer or employee of the Company or any of its subsidiaries. The office space being leased by the Company in Tulsa, Oklahoma, is owned by Arenaco, LLC, a company that is owned by Mr. Rochford, Chairman of the Board of the Company, and Mr. McCabe, a Director of the Company. During the years ended December 31, 2013 through December 31, 2015, the Company paid an aggregate of $172,000 to Arenaco, LLC.

 

None of our executive officers serves, or has served, during the last completed fiscal year, on the compensation committee or board of directors of any other company that has one or more executive officers serving on our Compensation Committee or Board.

 

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Securities Authorized for Issuance Under Equity Compensation Plan

 

The following table sets forth information concerning our executive stock compensation plans as of December 31, 2015.

 

		Number of securities to be issued upon exercise of outstanding options				Weighted-average exercise price of outstanding options				Number of securities remaining available for future issuance under compensation plans (excluding securities in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by security holders			2,881,150			$	5.07				1,874,250
Equity compensation plans not approved by security holders			-				-				-
Total			2,881,150			$	5.07				1,874,250

 

The Plan was in existence with Stanford and was adopted by the Board of Directors on June 27, 2012, and assumed by the Company upon the acquisition of Stanford. The Plan was subsequently approved by vote of a majority of shareholders on January 22, 2013. Information regarding the material terms of this plans may be found in this Annual Report under Part II, Item 5.

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information furnished by current management and others, concerning the ownership of our common stock as of March 14, 2016, of (i) each person who is known to us to be the beneficial owner of more than five percent of our common stock, without regard to any limitations on conversion or exercise of convertible securities or warrants; (ii) all directors and Named Executive Officers; and (iii) our directors and executive officers as a group. The mailing address for each of the persons indicated in the table below is our corporate headquarters. The percentage ownership is based on 30,396,942 shares outstanding at March 14, 2016.

 

Beneficial ownership is determined under the rules of the Securities and Exchange Commission. In general, these rules attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities and includes, among other things, securities that an individual has the right to acquire within 60 days. Unless otherwise indicated, the stockholders identified in the following table have sole voting and investment power with respect to all shares shown as beneficially owned by them.

 

 

		Shares of Common Stock Beneficially Owned
Name		Number				Percent
Kelly Hoffman			503,546	(1)			2	%
David A. Fowler			491,200	(2)			2	%
Daniel D. Wilson			308,000	(3)			1	%
William R. Broaddrick			173,000	(4)			1	%
Lloyd T. Rochford			2,148,000	(5)			7	%
Stanley M. McCabe			2,329,502	(6)			8	%
Anthony B. Petrelli			128,000	(7)			*
Clayton E. Woodrum			106,423	(8)			*
All directors and executive officers as a group (8 persons)			6,192,671	(9)			20	%

 

*       Represents beneficial ownership of less than 1%

 

(1)

Includes 496,000 shares issuable upon the exercise of stock options that are currently exercisable.

(2)

Includes 316,000 shares issuable upon the exercise of stock options that are currently exercisable.

(3)

Includes 193,000 shares issuable upon the exercise of stock options that are currently exercisable.

(4)

Includes 73,000 shares issuable upon the exercise of stock options that are currently exercisable.

(5)

Includes (i) 88,000 shares issuable upon the exercise of stock options that are currently exercisable and (ii) 2,060,000 shares held by a family trust controlled by Mr. Rochford.

(6)

Includes (i) 88,000 shares issuable upon the exercise of stock options that are currently exercisable and (ii) 1,646,502 shares held by a family trust controlled by Mr. McCabe.

(7)

Includes 88,000 shares issuable upon the exercise of stock options that are currently exercisable.

(8)

Includes 88,000 shares issuable upon the exercise of stock options that are currently exercisable.

(9)

Includes 1,430,000 shares issuable upon the exercise of stock options that are currently exercisable.

 

Changes in Control

 

There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.

 

Item 13: Certain Relationships and Related Transactions, and Director Independence

 

Transactions with Related Persons

 

The office space being leased by the Company in Tulsa, Oklahoma, is owned by Arenaco, LLC, a company that is owned by Mr. Rochford, Chairman of the Board of the Company, and Mr. McCabe, a Director of the Company. During the years ended December 31, 2015, 2014 and 2013, the Company paid an aggregate of $172,000 to Arenaco, LLC for the lease of the office space.

 

The Audit Committee reviews any related party transactions. Annually each Board member is required to submit an Independence Certificate, disclosing any affiliations or relationships for evaluation as related party transactions.

 

Review, Approval or Ratification of Transactions with Related Parties

 

The Board of Directors reviews and approves all relationships and transactions in which it and its directors, director nominees and executive officers and their immediate family members, as well as holders of more than 5% of any class of its voting securities and their family members, have a direct or indirect material interest. In approving or rejecting such proposed relationships and transactions, the Board shall consider the relevant facts and circumstances available and deemed relevant to this determination. In each case the standard applied in approving the transaction is the best interests of the Company without regard to the interests of the individual officer or director involved in the transaction. These procedures for reviewing and approving conflict of interest transactions are based on the Company’s past practice and are not contained in any written policy.

 

 

Director Independence

 

The standards relied upon by the Board in determining whether a director is “independent” are those set forth in the rules of the NYSE MKT. The NYSE MKT generally defines the term “independent director” as a person other than an executive officer or employee of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Because the Board of Directors believes it is not possible to anticipate or provide for all circumstances that might give rise to conflicts of interest or that might bear on the materiality of a relationship between a director and the Company, the Board has not established specific objective criteria, apart from the criteria set forth in the NYSE MKT, LLC rules, to determine “independence”. In addition to such criteria, in making the determination of “independence”, the Board of Directors considers such other matters including (i) the business and non-business relationships that each independent director has or may have had with the Company and its other Directors and executive officers, (ii) the stock ownership in the Company held by each such Director, (iii) the existence of any familial relationships with any executive officer or Director of the Company, and (iv) any other relevant factors which could cause any such Director to not exercise his independent judgment.

 

Consistent with these standards, the Board of Directors has determined that Messrs. Woodrum and Petrelli, are each “independent” directors within the meaning the NYSE MKT, LLC definition of independent director set forth in the Company Guide, Part 8, Section 803(A). The Board has also determined that Messrs. Rochford and McCabe are “independent” directors under the same definitions.

 

 

Item 14:

Principal Accounting Fees and Services

 

The firm of Hansen, Barnett & Maxwell, P.C., (“HBM”) served as the Company’s independent auditors effective April 15, 2012. On September 1, 2013, HBM resigned as the independent registered public accounting firm of Ring Energy, Inc. and entered into an agreement with Eide Bailly LLP (“Eide Bailly”), pursuant to which Eide Bailly acquired the operations of HBM. Concurrent with the resignation of HBM, the Company, through and with the approval of its Audit Committee, engaged Eide Bailly as its independent registered public accounting firm for the fiscal year ended December 31, 2013. The Audit Committee selected Eide Bailly as its independent registered public accounting firm for the fiscal years ended December 31, 2014 and 2015. The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services and other services performed by the independent auditor.

 

Fees and Independence

 

Audit Fees. Eide Bailly billed the Company an aggregage of $100,000 for professional services rendered for the review of the Company’s financial statements included in its Form 10-Q’s for 2014 and the audit of the Company’s financial statements for the year ended December 31, 2014 and an aggregate of $105,000 for professional services rendered for the review of the Company’s financial statements included in its Form 10-Q’s for 2015 and the audit of the Company’s financial statements for the year ended December 31, 2015.

 

Audit Related Fees. Eide Bailly billed the Company $21,325 and $11,936, respectively, for the years ended December 31, 2015 and 2014 for services related to the Company’s filing of registration statements and $27,467 in 2015 for property audits in relation to an acquisition.

 

Tax Fees. Eide Bailly billed the Company $10,000 and $8,500, respectively, for professional services rendered for tax compliance, tax advice and tax planning for the years ended December 31, 2015 and 2014.

 

All Other Fees. No other fees were billed by Eide Bailly to the Company during 2015 and 2014.

 

The Audit Committee of the Board of Directors has determined that the provision of services by Eide Bailly described above is compatible with maintaining Eide Bailly’s independence as the Company’s principal accountant. The policy of the Audit Committee and our Board, as applicable, is to pre-approve all services by our independent registered public accounting firm. The Audit Committee has adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other non-audit services that may be provided by our independent registered public accounting firm. The policy (a) identifies the guiding principles that must be considered by the Audit Committee in approving services to ensure that the independent registered public accounting firm’s independence is not impaired; (b) describes the audit, audit-related, tax and other services that may be provided and the non-audit services that are prohibited; and (c) sets forth the pre-approval requirements for all permitted services. Under the policy, all services to be provided by our independent registered public accounting firm must be pre-approved by the Audit Committee.

 

PART IV

 

Item 15:

Exhibits, Financial Statement Schedules

 

(a)

Financial Statements

 

The following financial statements are filed with this Annual Report:

 

Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2015 and 2014
Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Statements of Cash Flows for the year ended December 31, 2015, 2014 and 2013
Notes to Financial Statements
Supplemental Information on Oil and Gas Producing Activities

 

 

Exhibit		Incorporated by Reference				Filed
Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Here-with
2.1	Stock for Stock Exchange Agreement dated May 3, 2012	8-K	000-53920	2.1	7/5/12
2.2	Merger Agreement dated November 7, 2012	8-K	000-53920	2.1	11/26/12
3.1	Articles of Incorporation (as amended)	10-K	000-53920	3.1	4/1/13
3.2	Current Bylaws	8-K	000-53920	3.2	1/24/13
10.1	Letter Agreement with Patriot Royalty & Land, LLC entered into on March 1, 2012	10-K	000-53920	10.1	3/20/12
10.2*	Ring Energy Inc. Long Term Incentive Plan, as Amended	8-K	000-53920	99.3	1/24/13
10.3*	Form of Option Grant for Long-Term Incentive Plan	10-Q	000-53920	10.2	8/14/12
10.4	Executive Committee Charter	10-K	000-53920	3.1	4/1/13
10.5	Audit Committee Charter	10-K	000-53920	3.1	4/1/13
10.6	Compensation Committee Charter	10-K	000-53920	3.1	4/1/13
10.7	Nominating and Corporate Governance Committee Charter	10-K	000-53920	3.1	4/1/13
10.8	Credit Agreement dated July 1, 2014 with SunTrust Bank	8-K	001-36057	10.1	7/3/14
10.9	First Amendment to Credit Agreement with SunTrust Bank	8-K	001-36057	10.1	6/29/15
10.10	Second Amendment to Credit Agreement with SunTrust Bank	8-K	001-36057	10.1	7/29/15
10.11	Development Agreement with Torchlight Energy Resources, Inc.	8-K	001-36057	10.1	10/18/13
10.12	Purchase and Sale Agreement, dated February 4, 2014, between Ring Energy, Inc. and Raw Oil & Gas, Inc., JDH Raw LC, and Smith Energy Company	8-K	001-36057	10.1	2/7/14
10.13	Purchase and Sale Agreement effective May 1, 2015, with Finley Production Co., LP, BDT Oil & Gas, LP, Metcalfe Oil, LP, Grasslands Energy, LP, Buffalo Oil & Gas, LP and Finley Resources, Inc.	8-K	001-36057	2.1	5/22/15
14.1	Code of Ethics	8-K	000-53920	14.1	1/24/13
16.1	Letter dated April 19, 2012, from Haynie & Company	8-K	000-53920	16.1	4/19/12
23.1	Consent of Cawley, Gillespie & Associated, Inc.					X
23.2	Consent of Williamson Petroleum Consultants, Inc.					X
23.3	Consent of Eide Bailly LLC					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
99.2	Reserve Report of William Petroleum Consultants, Inc.					X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

 

 

* Management contract

 

 

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/ Kelly Hoffman
Mr. Kelly Hoffman
Chief Executive Officer
Date: March 15, 2016
By:	/s/ William R. Broaddrick
Mr. William R. Broaddrick
Chief Financial Officer
Date: March 15, 2016

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

/s/ Lloyd T. Rochford		/s/ Anthony B. Petrelli
Mr. Lloyd T. Rochford		Mr. Anthony B. Petrelli
Director		Director
Date: March 15, 2016		Date: March 15, 2016
/s/ Stanley McCabe		/s/ David A. Fowler
Mr. Stanley McCabe		Mr. David A. Fowler
Director		Director
Date: March 15, 2016		Date: March 15, 2016
/s/ Clayton E. Woodrum		/s/ Kelly Hoffman
Mr. Clayton E. Woodrum		Mr. Kelly Hoffman
Director		Director
Date: March 15, 2016		Date: March 15, 2016

 

 

RING ENERGY, INC.

 

INDEX TO FINANCIAL STATEMENTS

 

	Page
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets	F-3
Statements of Operations	F-4
Statements of Stockholders’ Equity	F-5
Statements of Cash Flows	F-6
Notes to Financial Statements	F-7
Supplemental Information on Oil and Gas Producing Activities	F-16

 

 

 

 

 

To the Board of Directors and
Stockholders of Ring Energy, Inc.

 

We have audited the accompanying balance sheets of Ring Energy, Inc. (Ring Energy) as of December 31, 2015, and 2014, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. We also have audited Ring Energy’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.

 

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.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ring Energy as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Ring Energy maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

   

/s/ EideBailly LLP
Salt Lake City, Utah
March 15, 2016

 

www.eidebailly.com

 

5 Triad Center, Ste. 750 | Salt Lake City, UT 84180-1128 | T 801.532.2200 | F 801.532.7944 | EOE

 

 

RING ENERGY, INC.

BALANCE SHEETS

 

As of December 31,		2015				2014
ASSETS
Current Assets
Cash		$	4,431,350			$	8,622,235
Accounts receivable			2,507,858				3,616,676
Joint interest billing receivable			1,629,165				2,683,787
Prepaid expenses and retainers			146,118				160,600
Total Current Assets			8,714,491				15,083,298
Properties and Equipment
Oil and natural gas properties subject to amortization			269,590,374				166,036,400
Fixed assets subject to depreciation			1,539,991				1,209,809
Total Properties and Equipment			271,130,365				167,246,209
Accumulated depreciation, depletion and amortization			(29,863,838	)			(14,688,047	)
Net Properties and Equipment			241,266,527				152,558,162
Deferred Income Taxes			64,323				-
Deferred Financing Costs			820,904				-
Total Assets		$	250,866,245			$	167,641,460
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	11,023,269			$	16,241,022
Other accured liabilities			309,898				22,029
Total Current Liabilities			11,333,167				16,263,051
Deferred income taxes			-				4,939,390
Long term debt			45,900,000
Asset retirement obligations			7,401,950				3,896,489
Total Liabilities			64,635,117				25,098,930
Stockholders' Equity
Preferred stock - $0.001 par value; 50,000,000 shares authorized; no shares issued or outstanding			-				-
Common stock - $0.001 par value; 150,000,000 shares authorized; 30,391,942 shares and 25,734,467 shares issued and outstanding, respectively			30,392				25,734
Additional paid-in capital			193,269,034				140,532,323
Retained earnings (accumulated deficit)			(7,068,298	)			1,984,473
Total Stockholders' Equity			186,231,128				142,542,530
Total Liabilities and Stockholders' Equity		$	250,866,245			$	167,641,460

 

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

 

 

RING ENERGY, INC.

STATEMENTS OF OPERATIONS

 

For the years ended December 31,		2015				2014				2013
Oil and Gas Revenues		$	31,013,892			$	38,089,443			$	10,315,701
Costs and Operating Expenses
Oil and gas production costs			9,958,380				4,993,166				1,207,529
Oil and gas production taxes			1,468,073				1,760,206				476,964
Depreciation, depletion and amortization			15,175,791				11,807,794				2,284,091
Ceiling test impairment			9,312,203				-				-
Asset retirement obligation accretion			418,384				154,973				53,681
General and administrative expense			7,995,395				6,803,029				6,682,760
Total Costs and Operating Expenses			44,328,226				25,519,168				10,705,025
Income (Loss) from Operations			(13,314,334	)			12,570,275				(389,324	)
Other Income (Expense)
Interest income			6,984				85,964				24,706
Interest expense			(749,134	)			-				(9,890	)
Net Other Income (Expense)			(742,150	)			85,964				14,816
Income (Loss) Before Provision for Income Taxes			(14,056,484	)			12,656,239				(374,508	)
(Provision for) Benefit from Income Taxes			5,003,713				(4,235,739	)			(77,701	)
			.
Net Income (Loss)		$	(9,052,771	)		$	8,420,500			$	(452,209	)
Basic Earnings (Loss) per share		$	(0.32	)		$	0.34			$	(0.03	)
Diluted Earnings (Loss) per share		$	(0.32	)		$	0.33			$	(0.03	)

 

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

 

 

RING ENERGY, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

 

																		Total
										Additional				Retained Earnings				Stockholders'
		Common Stock								Paid-in				(Accumulated				Equity
		Shares				Amount				Capital				Deficit)				(Deficit)
Balance, December 31, 2012			14,166,011			$	14,166			$	32,169,363			$	(5,983,818	)		$	26,199,711
Share-based compensation			-				-				3,489,022				-				3,489,022
Common stock issued for cash			9,378,580				9,378				73,192,312				-				73,201,690
Common stock issued for services			10,000				10				99,990				-				100,000
Options exercised (cashless exercise)			6,722				7				(7	)			-				-
Options exercised			15,000				15				67,485				-				67,500
Net loss			-				-				-				(452,209	)			(452,209	)
Balance, December 31, 2013			23,576,313			$	23,576			$	109,018,165			$	(6,436,027	)		$	102,605,714
Share-based compensation			-				-				2,517,211				-				2,517,211
Options exercised (cashless exercise)			68,547				68				(68	)			-				-
Options exercised			70,000				70				214,930				-				215,000
Common stock issued for cash, net			2,000,001				2,000				28,512,686				-				28,514,686
Common stock issued for services			5,000				5				87,045								87,050
Common stock issued as consideration in property acquisitions			14,606				15				182,354								182,369
Net income			-				-				-				8,420,500				8,420,500
Balance, December 31, 2014			25,734,467			$	25,734			$	140,532,323			$	1,984,473			$	142,542,530
Share-based compensation			-				-				2,566,716				-				2,566,716
Options exercised (cashless exercise)			16,875				17				(17	)			-				-
Options exercised			40,000				41				134,759				-				134,800
Common stock issued for cash, net			4,600,000				4,600				50,035,253				-				50,039,853
Net loss			-				-				-				(9,052,771	)			(9,052,771	)
Balance, December 31, 2015			30,391,342			$	30,392			$	193,269,034			$	(7,068,298	)		$	186,231,128

 

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

 

 

RING ENERGY, INC.

STATEMENTS OF CASH FLOWS

 

For the Years Ended December 31,		2015				2014				2013
Cash Flows From Operating Activities
Net income (loss)		$	(9,052,771	)		$	8,420,500			$	(452,209	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			15,175,791				11,807,794				2,284,091
Ceiling test impairment			9,312,203				-				-
Accretion expense			418,384				154,973				53,681
Share-based compensation			2,566,716				2,517,211				3,489,022
Stock issued for services			-				87,050				100,000
Deferred income tax expense (benefit)			(5,003,713	)			4,235,739				77,701
Changes in assets and liabilities:
Accounts receivable			2,163,440				(2,412,061	)			(3,470,437	)
Prepaid expenses			(806,422	)			(94,549	)			(5,653	)
Accounts payable			(4,929,884	)			9,031,408				6,040,212
Net Cash Provided by Operating Activities			9,843,744				33,748,065				8,116,408
Cash Flows From Investing Activities
Payments to purchase oil and natural gas properties			(77,902,553	)			(15,054,649	)			(5,192,441	)
Payments to develop oil and natural gas properties			(31,430,355	)			(90,160,236	)			(29,103,392	)
Purchase of equipment, vehicles and leasehold improvements			(330,182	)			(951,898	)			(82,805	)
Plugging and abandonment cost incurred			(446,192	)			(39,316	)			(60,544	)
Net Cash Used in Investing Activities			(110,109,282	)			(106,206,099	)			(34,439,182	)
Cash Flows From Financing Activities
Proceeds from issuance of notes payable			45,900,000				-				-
Proceeds from issuance of common stock			50,039,853				28,514,686				73,201,690
Proceeds from option exercise			134,800				215,000				67,500
Net Cash Provided by Financing Activities			96,074,653				28,729,686				73,269,190
Net Increase (Decrease) in Cash			(4,190,885	)			(43,728,348	)			46,946,416
Cash at Beginning of Period			8,622,235				52,350,583				5,404,167
Cash at End of Period		$	4,431,350			$	8,622,235			$	52,350,583
Supplemental Cash Flow Information
Cash paid for interest		$	426,742			$	-			$	9,890
Noncash Investing and Financing Activities
Stock issued as consideration in property acquisition		$	-			$	182,369			$	-
Asset retirement obligation acquired			3,361,634				575,977				-
Asset retirement obligation incurred during development			171,635				2,022,445				481,296
Revision of asset retirement obligation estimate			-				-				211,691

 

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

 

 

RING ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of Operations – Ring Energy, Inc. is a Nevada corporation. Ring Energy, Inc. is referred to herein as the “Company.” The Company owns interests in oil and gas properties located in Texas and Kansas and is engaged primarily in the acquisition, exploration and development of oil and gas properties and the production and sale of oil and natural gas.

 

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 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 managements’ 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 $4,181,350 at December 31, 2015. The Company places its cash with a high credit quality financial institution.

 

Substantially all of the Company’s accounts receivable is from purchasers of oil and gas. Oil and gas sales are generally unsecured. The Company has not had any significant credit losses in the past and believes its accounts receivable are fully collectable. Accordingly, no allowance for doubtful accounts has been provided at December 31, 2015 and 2014. The Company also has a joint interest billing receivable. Joint interest billing receivables are collateralized by the pro rata revenue attributable to the joint interest holders and further by the interest itself.

 

Cash – The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Oil and Gas Properties – The Company uses the full cost method of accounting for oil and gas properties. Under this method, all costs associated with acquisition, exploration, and development of oil and 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 relate to future plugging and abandonment expenses of its oil and gas properties and related facilities disposal.

 

All capitalized costs of oil and 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 gas properties, are amortized on the unit-of-production method using estimates of proved reserves as determined by independent 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 depletion per barrel-of-oil-equivalent rate, for the years ended December 31, 2015, 2014 and 2013.

 

 

		For the Years Ended December 31,
		2015				2014				2013
Depletion		$	14,889,487			$	11,680,537			$	2,223,477
Depletion rate, per barrel-of-oil-equivalent (BOE)		$	20.03			$	25.20			$	20.27

 

In addition, capitalized costs less accumulated 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, 2015, the Company took a write down on oil and gas properties as a result of the ceiling test in the amount of $9,312,203. No impairment was recorded for the years ended December 31, 2013 or 2014.

 

Land, Buildings, Equipment and Leasehold Improvements – Land, buildings, equipment and leasehold improvements are valued at historical cost, adjusted for impairment loss less 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 and equipment is calculated using the straight-line method based upon the following estimated useful lives:

 

Buildings and improvements		30 years
Office equipment and software		5-7 years
Machinery and equipment		5-7 years

 

Depreciation expense was $286,304, $127,257 and $60,614 for the years ended December 31, 2015, 2014 and 2013, respectively.

 

Revenue recognition – The Company predominantly derives its revenue from the sale of produced crude oil and natural gas. Revenue is recorded in the month the product is delivered to the purchaser. At the end of each month, the Company estimates the amount of production delivered to purchasers and the price received. Variances between the Company’s estimated revenue and actual payment are recorded in the month the payment is received; however, differences have been insignificant.

 

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 bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

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 state income tax returns in Texas and Kansas in which it operates as “major” tax jurisdictions. The Company’s federal and Kansas income tax returns for the years ended December 31, 2012 through 2015 remain subject to examination. The Company’s franchise tax returns in Texas remain subject to examination for 2011 through 2015. 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 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, 2015, sales to three customers represented 48%, 23% and 20%, respectively of total sales. At December 31, 2015, these two customers made up 30%, 53% and 0%, respectively, of accounts receivable. During the year ended December 31, 2014, sales to two customers represented 75% and 18% of total sales, respectively. At December 31, 2014, these two customers made up 45% and 37%, respectively, of accounts receivable. During the year ended December 31, 2013, sales to one customer represented 97% of total sales, respectively. At December 31, 2013, this one customer made up 99% of accounts receivable. The loss of any of our customers would not have a material adverse effect on the Company as there is an available market for its crude oil and natural gas production from other purchasers.

 

Stock-Based Employee and Non-Employee Compensation – The Company has outstanding stock options to directors, employees and contract employees, which are described more fully in Note 8. The Company accounts for its stock options grants in accordance with generally accepted accounting principles. Generally accepted accounting principles require the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. Generally accepted accounting principles also requires stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period).

 

Stock-based employee compensation incurred for the years ended December 31, 2015, 2014 and 2013 was $2,566,716, $2,517,211 and $3,489,022, respectively.

 

Recently Adopted Accounting Pronouncement – In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU No. 2015-17”). The guidance eliminates the requirement to present deferred tax assets and liabilities as current and noncurrent amounts in a classified balance sheet. The new standard requires deferred tax assets and liabilities to be classified as noncurrent. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period and may be applied either prospectively or retrospectively to all periods presented. The Company is currently evaluating the impact of adoption of ASU No. 2015-17. The adoption of this guidance will have no impact on our results of operations, cash flows or presentation of our financial position.

 

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. (“ASU No. 2015-03”). The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the update. For public entities, the guidance is effective for reporting periods beginning after December 15, 2015. In August 2015, the FASB issued ASU 2015-15,  Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements which allows for debt issuance costs related to line-of-credit arrangements to be presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangements, regardless of whether there are any outstanding borrowings on the line-of-credit arrangements. For public entities, the guidance is effective for reporting periods beginning after December 15, 2015, and it is not expected to have a material impact on our financial statements.

 

NOTE 2 – EARNINGS (LOSS) PER SHARE INFORMATION

 

For the years ended December 31,		2015				2014				2013
Net Income (Loss)		$	(9,052,771	)		$	8,420,500			$	(452,209	)
Basic Weighted-Average Shares Outstanding			28,176,924				24,739,795				16,376,911
Effect of dilutive securities:
Stock options			-				1,150,490				-
Diluted Weighted-Average Shares Outstanding			28,176,924				25,890,285				16,376,911
Basic Earnings (Loss) per Share		$	(0.32	)		$	0.34			$	(0.03	)
Diluted Earnings (Loss) per Share		$	(0.32	)		$	0.33			$	(0.03	)

 

Stock options to purchase 2,881,150, 455,500 and 2,647,500 shares of common stock were excluded from the computation of diluted earnings (loss) per share during the years ended December 31, 2015, 2014 and 2013, respectively, as their effect would have been anti-dilutive.

 

 

NOTE 3 – ACQUISITIONS

In June 2015, Ring completed the acquisition of oil and gas assets and properties in the Ford West Field and Ford Geraldine Unit in Reeves and Culberson Counties, Texas. The acquired properties consist of 19,983 gross (19,679 net) acres and include a 98% average working interest and a 79% average net revenue interest. Consideration given by the Company consisted of cash payments totaling $75,000,000 and the assumption of accounts receivable of approximately $286,563 and accounts payable of approximately $742,332. The Company incurred approximately $129,896 in acquisition related costs, which were recognized in general and administrative expense during the year ended December 31, 2015. 

 

The acquisition was recognized as a business combination whereby Ring recorded the assets acquired and the liabilities assumed at their fair values as of May 1, 2015, which is the date the Company obtained control of the properties and was the acquisition date for financial reporting purposes. The estimated fair value of the acquired properties approximated the consideration paid, which the Company concluded approximated the fair value that would be paid by a typical market participant. The following table summarizes the fair values of the assets acquired and the liabilities assumed:

 

Assets acquired
Proved oil and natural gas properties		$	78,361,634
Accounts receivable			400,629
Liabilities assumed
Accounts payable			(1,562,147	)
Asset retirement obligations			(3,361,634	)
Total Identifiable Net Assets		$	73,838,482

 

The following unaudited pro forma information is presented to reflect the operations of the Company as if the Ford West Field and Ford Geraldine Unit acquisition had been completed on January 1, 2015, 2014 and 2013, respectively.

 

For the years ended December 31,		2015				2014				2013
Oil and Gas Revenues		$	37,253,437			$	74,303,242			$	58,279,167
Net Income (Loss)		$	(9,097,288	)		$	18,186,433			$	16,377,036
Basic Earnings (Loss) per Share		$	(0.32	)		$	0.34			$	(0.03	)
Diluted Earnings (Loss) per Share		$	(0.32	)		$	0.33			$	(0.03	)

 

NOTE 4 – OIL AND GAS PRODUCING ACTIVITIES

 

Set forth below is certain information regarding the aggregate capitalized costs of oil and gas properties and costs incurred by the Company for its oil and gas property acquisitions, development and exploration activities:

 

Capitalized Costs Relating to Oil and Natural Gas Producing Activities

 

As of December 31,		2015				2014
Proved oil and natural gas properties		$	269,590,374			$	166,036,400
Office equipment			1,539,991				1,209,809
Total capitalized costs			271,130,365				167,246,209
Accumulated depletion, depreciation and amortization			(29,863,838	)			(14,688,047	)
Net Capitalized Costs		$	241,266,527			$	152,558,162

 

Net Costs Incurred in Oil and Gas Producing Activities

 

For the years Ended December 31,		2015				2014
Acquisition of proved properties		$	81,264,187			$	15,812,995
Development costs			31,601,990				92,182,681
Total Net Costs Incurred		$	112,866,177			$	107,995,676

 

 

NOTE 5 – NOTES PAYABLE

 

Notes Payable – In July 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 (“Administrative Agent”), which was amended in July 2014 and June 2015 (as amended, the “Credit Facility”).  The Credit Facility provides for a senior secured revolving credit facility with an initial borrowing base of $100 million (the “Borrowing Base”) with a maximum borrowing amount of $500 million. The Credit Facility matures on June 26, 2020, and is secured by 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 will be redetermined semi-annually on each May 1 and November 1, beginning November 1, 2015.  The Borrowing Base will also be reduced 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 (each as 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 1.75% and 2.75% (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 plus 0.5% per annum or the (iii) adjusted LIBOR determined on a daily basis for an interest period of one-month, plus 1.00% per annum, plus (b) a margin between 2.75% and 3.75% (depending on the then-current level of borrowing base usage).  As of December 31, 2015, the credit facility had a weighted average interest rate of 2.46%. 

 

The Credit Facility contains certain covenants, which, among other things, require the maintenance of (i) a total leverage ratio of not more than 4.0 to 1.0 and (ii) a minimum current ratio of 1.0 to 1.0. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of December 31, 2015, the Company was in compliance with all covenants contained in the Credit Facility, and $45,900,000 was outstanding on the Credit Facility.

 

NOTE 6 – ASSET RETIREMENT OBLIGATION

 

A reconciliation of the asset retirement obligation for the years ended December 31, 2013, 2014 and 2015 is as follows:

 

Balance, December 31, 2012		$	496,286
Liabilities incurred			481,296
Revision of estimate			211,691
Liabilities settled			(60,544	)
Accretion expense			53,681
Balance, December 31, 2013		$	1,182,410
Liabilities acquired			575,977
Liabilities incurred			2,022,445
Liabilities settled			(39,316	)
Accretion expense			154,973
Balance, December 31, 2014		$	3,896,489
Liabilities acquired			3,361,634
Liabilities incurred			171,635
Liabilities settled			(446,192	)
Accretion expense			418,384
Balance, December 31, 2015		$	7,401,950

 

NOTE 7 – STOCKHOLDERS’ EQUITY

 

The Company is authorized to issue 150,000,000 common shares, with a par value of $0.001 per share and 50,000,000 shares of Preferred Stock.

 

Common Stock Issued in Private Offering – In January 2013, the Company issued 100,000 shares of common stock, valued at $450,000, or $4.50 per share, in a private placement. There were no related offering costs.

 

 

In June 2013, the Company issued 3,528,580 shares of common stock, valued at $19,407,190, or $5.50 per share, in a private placement. Proceeds from the offering totaled $18,522,657, net of offering costs and expenses paid of $884,533.

 

In June 2014, the Company closed on an offering of 2,000,001 shares of common stock at $15.00 per share for gross proceeds of $30,000,015. The shares were sold without registration under the Securities Act by reason of the exemption from the registration afforded by the provisions of Section 4(a)(2) and/or Section 4(a)(5) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder for sales of unregistered securities. Offering costs totaled $1,485,328. The Company filed a registration statement with the SEC to register such shares, which was declared effective September 3, 2014.

 

Common Stock Issued in Public Offering – In December 2013, the Company issued 5,750,000 shares of common stock, valued at $57,500,000, or $10.00 per share, in a public offering. Proceeds from the offering totaled $54,229,033, net of underwriters fees, offering costs and expenses paid totaling $3,270,967.

 

In June 2015, the Company closed an underwritten public offering of 4,500,000 shares of its common stock at $11.50 per share for gross proceeds of $51,750,000. In July 2015, the Company closed on the over-allotment associated with this offering, resulting in the issuance of an additional 100,000 shares of common stock at $11.50 per share, for gross proceeds of $1,150,000. Total net proceeds from the offering were $50,039,853, after deducting commissions and offering expenses payable by the Company of approximately $2,860,147.

 

Common Stock Issued for Services – In October 2013, the Company issued 10,000 shares of common stock, valued at $100,000, or $10.00 per share, as compensation for services provided.

 

In July 2014, the Company issued 5,000 shares of common stock, valued at $87,050, or $17.41 per share, as compensation for services provided.

 

Common Stock Issued for option exercises – During 2014 the Company issued a total of 138,547 shares of common stock as a result of option exercises. Of these shares, 68,547 were the result of cashless exercises of 79,000 options. The Company withheld an aggregate of 10,543 shares as a part of the exercise. The remaining 70,000 options were the result of cash exercises for which the Company received the exercise price of $215,000.

 

During 2015, the Company issued a total 57,475 shares of common stock as a result of operation exercises. Of the shares, 16,875 were the result of cashless exercises of 25,000 options. The Company withheld an aggregate of 8,125 shares as a part of the exercise. The remaining 40,600 options were the result of cash exercises for which the Company received the exercise price of $134,800.

 

Common Stock Issued as Consideration for Property Acquisitions – In September 2014, the Company issued 8,783 shares of common stock, valued at $130,428, or $14.85 per share, as consideration in a property acquisition.

 

In December 2014, the Company issued 5,823 shares of common stock, valued at $51,941, or $8.92 per share, as consideration in property acquisitions.

 

NOTE 8 – EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK AWARD PLAN

 

In 2011, the Company’s Board of Directors approved and adopted a long term incentive plan, which was subsequently approved and amended by the shareholders. There were 1,874,250 shares eligible for grant, either as options or as restricted stock, at December 31, 2015.

 

Employee Stock Options – Following is a table reflecting the issuances during 2013, 2014 and 2015 and their related exercise prices:

 

Grant date		# of options				Exercise price
January 1, 2013			1,375,000			$	4.50
February 13, 2013			25,000				4.50
March 15, 2013			150,000				5.50
June 25, 2013			35,000				7.50
December 16, 2013			100,000				10.00
April 11, 2014			5,000			$	16.99
September 25, 2014			23,000				14.54
October 13, 2014			2,500				13.12
November 18, 2014			45,000				12.79
December 1, 2014			293,000				8.00
April 1, 2015			3,750			$	10.89
December 9, 2015			291,000				8.25
			2,348,250

 

 

All granted options vest at the rate of 20% each year over five years beginning one year from the date granted and expire ten years from the grant date. A summary of the status of the stock options as of December 31, 2015, 2014 and 2013 and changes during the years ended December 31, 2015, 2014 and 2013 is as follows:

 

		2015								2014								2013
		Options				Weighted- Average Exercise Price				Options				Weighted- Average Exercise Price				Options				Weighted- Average Exercise Price
Outstanding at beginning of the year			2,684,500			$	4.67				2,647,500			$	4.01				1,125,000			$	2.37
Issued			294,750				8.28				368,500				9.15				1,685,000				4.98
Forfeited			(32,500	)			4.47				(177,500	)			5.62				(137,500	)			2.55
Exercised			(65,600	)			3.46				(154,000	)			2.90				(25,000	)			3.50
Outstanding at end of year			2,881,150			$	5.07				2,684,500			$	4.67				2,647,500			$	4.01
Exercisable at end of year			1,214,000			$	3.85				728,000			$	3.22				662,500			$	3.13
Weighted average fair value of options granted during the year						$	6.55							$	7.55							$	4.35

 

The Company uses the Black-Scholes option pricing model to calculate the fair-value of each option grant. The expected volatility is based on the historical price volatility of the Company’s common stock. We elected to use the simplified method for estimating the expected term as allowed by generally accepted accounting principles for options granted during the years ended December 31, 2015, 2014 and 2013. Under the simplified method, the expected term is equal to the midpoint between the vesting period and the contractual term of the stock option. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents the Company’s anticipated cash dividend over the expected life of the stock options. The following are the Black-Scholes weighted-average assumptions used for options granted during the periods ended December 31, 2015, 2014 and 2013:

 

		Risk free interest rate				Expected life (years)				Dividend yield				Volatility
January 1, 2013			0.76	%			6.5				-				138	%
February 13, 2013			0.92	%			6.5				-				137	%
March 15, 2013			0.84	%			6.5				-				132	%
June 25, 2013			1.49	%			6.5				-				128	%
December 16, 2013			1.55	%			6.5				-				119	%
April 11, 2014			1.58	%			6.5				-				114	%
September 25, 2014			1.75	%			6.5				-				108	%
October 13, 2014			1.45	%			6.5				-				107	%
November 18, 2014			1.66	%			6.5				-				106	%
December 1, 2014			1.52	%			6.5				-				108	%
April 1, 2015			1.32	%			6.5				-				103	%
December 9, 2015			1.64	%			6.5				-				100	%

 

 

As of December 31, 2015, there was $4,259,234 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of 2.5 years. The aggregate intrinsic value of options vested and expected to vest at December 31, 2015 was $7,149,300. The aggregate intrinsic value of options exercisable at December 31, 2015 was $4,170,000. The year end intrinsic values are based on a December 31, 2015 closing price of $7.05.

 

Options exercised of 65,600 in 2015, 154,000 in 2014 and 25,000 in 2013, had an aggregate intrinsic value on the date of exercise of $476,642, $2,159,330 and $149,000, respectively.

 

The following table summarizes information related to the Company’s stock options outstanding at December 31, 2015:

 

				Options Outstanding
Exercise price				Number Outstanding				Weighted-Average Remaining Contractual Life (in years)				Number Exercisable
	2.00				695,000				5.92				545,000
	4.50				1,385,000				6.98				540,000
	5.50				25,000				7.20				10,000
	7.50				29,000				7.48				11,000
	10.00				90,000				7.96				36,000
	16.99				5,000				8.28				1,000
	14.54				20,000				8.73				4,000
	12.79				45,000				8.88				9,000
	8.00				292,400				8.92				58,000
	10.89				3,750				9.25				-
	8.25				291,000				9.94				-
					2,881,150				7.31				1,214,000

 

Any excess tax benefits from the exercise of stock options will not be recognized in paid-in capital until the Company is in a current tax paying position. Presently, the company has a net loss and therefore not yet subject to income taxes. Accordingly, no excess tax benefits have been recognized for the years ended December 31, 2015, 2014 or 2013.

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

The Company is leasing office space from Arenaco, LLC, a company that is owned by two of stockholders’ of the Company, Mr. Rochford, Chairman of the Board of the Company, and Mr. McCabe, a Director of the Company. During the years ended December 31, 2015, 2014 and 2013, the Company paid $60,000, $60,000 and $52,000, respectively, to this company.

 

NOTE 10 – COMMITMENTS AND CONTINGENT LIABILITIES

 

Standby Letters of Credit – A commercial bank has issued standby letters of credit on behalf of the Company to the states of Texas and Kansas totaling $280,000 to allow the Company to do business in those states. The Company intends to renew the standby letters of credit for as long as the Company does business in those states. No amounts have been drawn under the standby letters of credit.

 

Operating leases – The following table summarizes our future estimated office lease payments for periods subsequent to December 31, 2015. The leases pertain to approximately 15,000 square feet of space for our corporate headquarters in Midland, Texas, approximately 3,700 square feet that was our former corporate headquarters in Midland, Texas, which we have vacated and will attempt to sublet, approximately 3,700 square feet of office space for our accounting offices in Tulsa, Oklahoma and approximately 2,000 square feet of office space for our field office in Andrews, Texas. The Company incurred lease expenses of $526,658, $167,120 and $141,593 for the years ended December 31, 2015, 2014 and 2013, respectively. The following table reflects the future minimum lease payments under the operating lease as of December 31, 2015.

 

 

Year		Lease Obligation
2016		$	574,803
2017			547,235
2018			71,700
		$	1,193,738

 

Litigation – On July 10, 2015, a purported stockholder (the “Plaintiff”) of the Company filed a putative class action lawsuit in the District Court of Clark County, Nevada, on behalf of herself and Ring stockholders against the Company, the members of our Board of Directors, and SunTrust Bank (the “Lawsuit”). The complaint is captioned Rosalyn Newman, on behalf of herself and others similarly situated, Plaintiff, v. Ring Energy, Inc., et al. Defendants, under Case No. A-15-721253-C, in the District Court of Clark County, Nevada, Dept. IV.  The Lawsuit alleged, among other things, that the members of our Board of Directors breached their fiduciary duties, and that SunTrust Bank aided and abetted such breaches, in connection with our Credit Agreement as a result of certain provisions that gives SunTrust Bank the right to accelerate the debt in the event of a change in control, among other things.  On October 27, 2015, the Court granted Ring’s Motion to Dismiss the Lawsuit. Subsequent to December 31, 2015, Plaintiff and Ring entered into a settlement agreement for an insignicifant amount in connection with the attorney’s fees associated with the Lawsuit.

 

NOTE 11 – INCOME TAXES

 

For the years ended December 31, 2015, 2014 and 2013, components of our provision for income taxes are as follows:

 

Provision for Income Taxes		2015				2014				2013
Deferred taxes		$	(5,003,713	)		$	4,235,739			$	77,701
Provision for (Benefit from) Income Taxes		$	(5,003,713	)		$	4,235,739			$	77,701

 

The following is a reconciliation of income taxes computed using the U.S. federal statutory rate to the provision for income taxes:

  

Rate Reconciliation		2015				2014				2013
Tax at federal statutory rate (34%)		$	(4,779,205	)		$	4,303,121			$	(127,333	)
Non-deductible expenses			6,599				4,465				4,450
Excess tax benefit from stock option exercises			(89,597	)			(595,322	)			-
Adjust prior estimates to tax return			-				396,061				213,431
States taxes, net of Federal benefit			(141,510	)			127,414				(17,864	)
Effect of tax rates lower than statutory rate			-				-				5,017
Provision for (Benefit from) Income Taxes		$	(5,003,713	)		$	4,235,739			$	77,701

 

The net deferred taxes consisted of the following at December 31, 2015 and 2014:

 

Deferred Taxes:		2015				2014
Deferred tax liabilities
Property and equipment		$	24,398,458			$	25,683,495
Deferred tax assets
Stock-based compensation			3,066,518				2,253,286
Operating loss and IDC carryforwards			21,396,263				18,490,819
Deferred tax assets			24,462,781				20,744,105
Net deferred income tax liability (asset)		$	(64,323	)		$	4,939,390

 

As of December 31, 2015, the Company had net operating loss carry forwards for federal income tax reporting purposes of approximately $63.1 million which, if unused, will begin to expire in 2027 and fully expire in 2035.

 

NOTE 12 – QUARTERLY FINANCIAL DATE (UNAUDITED)

 

		2013
		Three Months Ended
		March 31				June 30				September 30				December 31
Revenues		$	1,151,597			$	1,291,579			$	2,820,731			$	5,051,794
Operating Income (Loss)			(965,280	)			(890,393	)			(143,735	)			1,610,084
Net Income (Loss)			(965,280	)			(890,393	)			(131,493	)			1,534,957
Basic Net Income (Loss) Per Share		$	(0.07	)		$	(0.06	)		$	(0.01	)		$	0.08
Diluted New Income (Loss) Per Share			(0.07	)			(0.06	)		$	(0.01	)			0.08

 

 

		2014
		Three Months Ended
		March 31				June 30				September 30				December 31
Revenues		$	5,970,452			$	11,204,238			$	10,929,771			$	9,984,982
Operating Income			1,804,352				4,459,373				2,724,204				3,582,346
Net Income			1,163,689				2,821,738				1,726,469				2,708,604
Basic Net Income Per Share		$	0.05			$	0.12			$	0.07			$	0.11
Diluted New Income Per Share			0.05				0.11				0.06				0.10

 

		2015
		Three Months Ended
		March 31				June 30				September 30				December 31
Revenues		$	6,045,701			$	8,976,790			$	8,629,007			$	7,362,394
Operating Income (Loss)			(1,549,389	)			1,019,686				(1,473,514	)			(11,311,117	)
Net Income (Loss)			(975,624	)			534,167				(1,138,268	)			(7,473,046	)
Basic Net Income (Loss) Per Share		$	(0.04	)		$	0.02			$	(0.04	)		$	(0.25	)
Diluted New Income (Loss) Per Share			(0.04	)			0.02				(0.04	)			(0.25	)

 

NOTE 13 – SUBSEQUENT EVENTS

 

We have evaluated subsequent events after the balance sheet date of December 31, 2015 through the time of filing with the SEC on March 15, 2016, which is the date the financial statements were issued.

 

On December 9, 2015, Ring issued option awards to its named executive officers and directors. On January 13, 2016, upon the recommendation of the Compensation Committee, Ring rescinded the option awards granted to its employees and directors (other than Messrs McCabe and Rochford, who are the members of the Compensation Committee) as the result of a significant decline in the stock price and re-issued the the option awards as of that date to meet the goals and objectives of the Company’s equity based compensation program.

 

RING ENERGY, INC.

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

(Unaudited)

 

Results of Operations from Oil and Gas Producing Activities – The Company’s results of operations from oil and gas producing activities exclude interest expense, gain from change in fair value of put options, and other financing expense. Income taxes are based on statutory tax rates, reflecting allowable deductions.

 

For the years ended December 31,		2015				2014				2013
Oil and gas sales		$	31,013,392			$	38,089,443			$	10,315,701
Production costs			(9,958,380	)			(4,993,167	)			(1,207,529	)
Production taxes			(1,468,073	)			(1,760,206	)			(476,964	)
Depreciation, depletion, amortization and accretion			(15,594,175	)			(11,962,766	)			(2,337,772	)
Ceiling test impairment			(9,312,203	)			-				-
General and administrative (exclusive of corporate overhead)			(1,242,524	)			(660,862	)			(646,625	)
Results of Oil and Gas Producing Operations		$	(6,561,963	)		$	18,712,442			$	5,646,811

 

Reserve Quantities Information – The following estimates of proved and proved developed reserve quantities and related standardized measure of discounted 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 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.

 

 

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.

 

The standardized measure of discounted future net cash flows is computed by applying the price according to the SEC guidelines for oil and gas to the estimated future production of proved oil and 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.

 

For the Year Ended December 31,		2015								2014
		Oil (1)				Natural Gas (1)				Oil (1)				Natural Gas (1)
Proved Developed and Undeveloped Reserves
Beginning of year			10,242,291				988,310				6,855,655				2,487,042
Purchases of minerals in place			5,561,276				8,775,407				2,828,530				511,921
Improved recovery and extensions			8,959,617				3,688,462				1,273,327				117,778
Sale of minerals in place			-				-				-				-
Production			(664,611	)			(472,508	)			(456,852	)			(70,534	)
Revision of previous estimate			(1,786,123	)			(440,071	)			(258,369	)			(2,057,898	)
End of year			22,312,450				12,539,600				10,242,291				988,309
Proved Developed at end of year			6,701,300				8,416,800				4,454,414				299,188

 

¹ Oil reserves are stated in barrels; gas reserves are stated in thousand cubic feet.

 

Standardized Measure of Discounted Cash Flows
December 31,		2015				2014
Future cash flows		$	1,110,056,990			$	875,492,876
Future production costs			(361,838,780	)			(217,842,533	)
Future development costs			(127,293,170	)			(113,073,539	)
Future income taxes			(177,647,356	)			(165,083,198	)
Future net cash flows			443,277,684				379,493,606
10% annual discount for estimated timing of cash flows			(270,591,243	)			(183,148,613	)
Standardized Measure of Discounted Cash Flows		$	172,686,441			$	196,344,993

 

Changes in Standardized Measure of Discounted Future Net Cash Flows

 

		2015				2014
Beginning of the year		$	196,344,992			$	133,947,927
Purchase of minerals in place			121,753,192				89,152,815
Extensions, discoveries and improved recovery, less related costs			215,074,627				39,903,356
Development costs incurred during the year			28,653,794				90,562,299
Sales of oil and gas produced, net of production costs			(20,502,195	)			(33,096,276	)
Sales of minerals in place			-				-
Accretion of discount			27,688,579				16,564,967
Net changes in price and production costs			(308,347,796	)			(30,191,382	)
Net change in estimated future development costs			14,823,882				(31,004,796	)
Revision of previous quantity estimates			(28,297,019	)			(15,044,380	)
Revision of estimated timing of cash flows			(137,051,390	)			(43,530,618	)
Net change in income taxes			62,545,775				(20,918,919	)
End of the Year		$	172,686,441			$	196,344,993