Overview – Ring Energy, Inc. is filing this Annual Report on Form 10-K for the year ended December 31, 2019 which contains financial statements for the years ended December 31, 2018 and 2017 and quarterly unaudited financial information for the three months ended March 31, 2019 and 2018, the three and six months ended June 30, 2019 and 2018 and the three and nine months ended September 30, 2019 and 2018. The unaudited financial statements for the quarter and year to date periods ended March 31, 2019, June 30, 2019 and September 30, 2019 have been restated. The restatement of the financial statements for the quarter and

year to date periods included herein restates and replaces Ring’s previously issued unaudited quarterly and year to date financial statements and related financial information, which was originally filed on Form 10-Q with the Securities and Exchange commission (“SEC”) on May 8, 2019, August 7, 2019 and November 6, 2019, respectively. The restatement principally adjusts the income tax provision related to equity compensation. The Company does not intend to file amendments to the previously filed Forms 10-Q.

Background – On February 27, 2020, the Company issued a press release announcing that the Audit Committee of the Company’s Board of Directors, upon the recommendation of the Company’s management, concluded that the previously issued financial statements for the three months ended March 31, 2019, the three and six months ended June 30, 2019 and the three and nine months ended September 30, 2019 contained an error.

Restated Statement of Operations for the three months ended March 31, 2019 (unaudited)

Restated Statement of Stockholders’ Equity for the three months ended March 31, 2019 (unaudited)

Restated Statement of Cash Flow for the three months ended March 31, 2019 (unaudited)

NOTE A1 - ABRIDGED BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Condensed Financial Statements - The accompanying condensed financial statements prepared by Ring Energy, Inc. (the "Company" or "Ring") have not been audited by an independent registered public accounting firm. In the opinion of the Company's management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.

Certain notes and other disclosures have been omitted from these interim financial statements. Therefore, these financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 2018.

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.

In January 2017, the Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718.) The Company used the modified retrospective method to account for unrecognized excess tax benefits from prior periods. For the three months ended March 31, 2019, we recorded an increase of $2,946,615 to our income tax provision. For the three months ended March 31, 2018, we recorded an increase of $1,158,604 to our income tax provision.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The SEC subsequently issued a Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. Among other changes, the Tax Act lowered the corporate tax rate to 21%.

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

Under the Company's natural gas sales contracts, the Company delivers unprocessed natural gas to a midstream processing entity at the wellhead. The midstream processing entity obtains control of the natural gas at the wellhead. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sale of natural gas. Under these agreements, the Company recognizes revenue when control transfers to the purchaser at the point of delivery.

Under the Company's natural gas liquids sales contracts, the Company delivers natural gas liquids to a midstream entity. The Company recognizes revenue at the price received when control transfers to the purchaser at the point of delivery.

Disaggregation of Revenue. The following table presents revenues disaggregated by product for the three months ended March 31, 2019 and 2018:

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

Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842). This guidance attempts to increase transparency and comparability among organizations by recognizing certain lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP methodology and the method proposed by this new guidance is the recognition on the balance sheet of certain lease assets and lease liabilities by lessees for those leases that were classified as operating leases under previous GAAP.

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

The Company has operating leases for our offices in Midland, Texas and Tulsa, Oklahoma with terms through January 31, 2020. The office space being leased in Tulsa is owned by Arenaco, LLC, a company that is owned by Mr. Rochford, Chairman of the Board of the Company, and Mr. McCabe, a Director of the Company. Future lease payments associated with these operating leases as of March 31, 2019 are as follows:

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

Stock options to purchase 993,500 shares of common stock and 326,200 shares of unvested restricted stock were excluded from the computation of diluted earnings per share during the three months ended March 31, 2019, as their effect would have been anti-dilutive.

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

The $15 million draw on the revolving line of credit was the deposit placed at the signing of the Purchase and Sale Agreement on February 25, 2019. The Acquisition payable to be settled through equity was settled at the closing on April 9, 2019 through the issuance of 4,581,001 shares of common stock, of which 2,538,071 shares are being held in escrow to satisfy potential indemnification claims. The Acquisition payable to be settled through cash payment was settled at closing with the amendment and restatement of the Credit Facility as discussed further in Note H1.

The Company will continue to evaluate the fair value of the assets and liabilities reflected above and will record any adjustments, if needed, in future periods.

The following unaudited pro forma information for the three months ended March 31, 2019 and 2018, respectively, is presented to reflect the operations of the Company as if the acquisition of assets had been completed on January 1, 2019 and 2018, respectively:

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

During March 2019, the Company entered into new derivative contracts in the form of costless collars of WTI Crude Oil prices in order to protect the Company’s cash flow from price fluctuation and maintain its capital programs. “Costless collars” are the combination of two options, a put option (floor) and call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. The trades were for a total of 3,500 barrels of oil per day and were for the period of April 2019 through December 2019. The following is a table reflects the put and call prices of those contracts:

On September 25, 2017, the Company entered into derivative contracts in the form of costless collars for the period of January 2018 through December 2018 for 1,000 barrels per day with a put price of $49.00 and a call price of $54.60.

On October 27, 2017, the Company entered into costless collars of WTI Crude Oil for the period of January 2018 through December 2018 for an additional 1,000 barrels of oil per day with a put price of $51.00 and a call price of $54.80.

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

The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. At March 31, 2019, 100% of our volumes subject to derivative instruments are with lenders under our Credit Facility (as defined in Note H1).

The Company entered into additional derivative contracts subsequent to March 31, 2019. These contracts were for an additional 2,000 barrels per day for the period April 2019 through December 2019 and for 2,000 barrels per day for the period January 2020 through December 2020.

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

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

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

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

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

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

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

In June 2018, the borrowing base (the “Borrowing Base”) for the Credit Facility was increased from $60 million to $175 million. 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. 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).

The Credit Facility contains certain covenants, which, among other things, require the maintenance of (i) a total Leverage Ratio (as defined in the Credit Facility) of not more than 4.0 to 1.0 and (ii) a minimum Current Ratio (as defined in the Credit Facility) of 1.0 to 1.0. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of March 31, 2019, $84,500,000 was outstanding on the Credit Facility. We are in compliance with all covenants contained in the Credit Facility.

Subsequent to March 31, 2019, the Company amended and restated its Credit Facility with SunTrust Bank, as lender, issuing bank and administrative agent for several banks and other financial institutions and lenders (the “Amended and Restated Senior Credit Facility”). The Amended and Restated Senior Credit Facility, among other things, increases the maximum facility amount to $1 billion, increases the Borrowing Base to $425 million, extends the maturity date and makes other modifications to the terms of the Credit Facility. The Amended and Restated Senior Credit Facility is secured by a first lien with substantially the same collateral requirements as the Credit Facility, has substantially the same covenants as the Credit Facility and is for a term of five years.

The Company provides for the obligation to plug and abandon oil and gas wells at the dates properties are either acquired or the wells are drilled. The asset retirement obligation is adjusted each quarter for any liabilities incurred or settled during the period, accretion expense and any revisions made to the estimated cash flows. The asset retirement obligation incurred at the time of drilling was computed using the annual credit-adjusted risk-free discount rate at the applicable dates. Changes in the asset retirement obligation were as follows:

Common Stock Issued in Public Offering – In February 2018, the Company closed on an underwritten public offering of 6,164,000 shares of its common stock, including 804,000 shares sold pursuant to the full exercise of an over-allotment option, at $14.00 per share for gross proceeds of $86,296,000. Total net proceeds from the offering were $81,819,073, after deducting underwriting commissions and offering expenses payable by the Company of $4,476,927.

Compensation expense charged against income for share-based awards during the three months ended March 31, 2019, was $834,465, as compared to $1,081,199 for the three months ended March 31, 2018. These amounts are included in general and administrative expense in the accompanying financial statements.

In 2011, the board of directors and stockholders approved and adopted a long-term incentive plan which allowed for the issuance of up to 2,500,000 shares of common stock through the grant of qualified stock options, non-qualified stock options and restricted stock. In 2013, the Company’s board of directors and stockholders approved an amendment to the long-term incentive plan, increasing the number of shares eligible under the plan to 5,000,000 shares. As of March 31, 2019, there were 684,020 shares remaining eligible for issuance under the plan.

A summary of the stock option activity as of March 31, 2019, and changes during the three months then ended is as follows:

The intrinsic value was calculated using the closing price on March 29, 2019 of $5.87. As of March 31, 2019, there was $1,501,300 of unrecognized compensation cost related to stock options that is expected be recognized over a weighted-average period of 1.8 years.

A summary of the restricted stock activity as of March 31, 2019, and changes during the three months then ended is as follows:

As of March 31, 2019, there was $2,547,688 of unrecognized compensation cost related to restricted stock grants that will be recognized over a weighted average period of 2.3 years.

Standby Letters of Credit – A commercial bank issued a standby letter of credit on behalf of the Company to the state of Texas for $250,000 to allow the Company to do business there. The standby letter of credit is valid until cancelled or matured and is collateralized by the revolving credit facility with the bank. The terms of the letter of credit are extended for a term of one year at a time. The Company intends to renew the standby letters of credit for as long as the Company does business in the state of Texas. No amounts have been drawn under the standby letters of credit.

Restatement of Statement of Operations for the three and six months ended June 30, 2019 (unaudited)

Restatement of Statement of Shareholder’ Equity for the six month period ended June 30, 2019 (unaudited)

Restatement of Statement of Cash Flows for the six months ended June 30, 2019 (unaudited)

NOTE A2 – ABRIDGED BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Condensed Financial Statements – The accompanying condensed financial statements prepared by Ring Energy, Inc. (the “Company” or “Ring”) have not been audited by an independent registered public accounting firm. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The results of operations for the three and six months ended June 30, 2019, are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.

Certain notes and other disclosures have been omitted from these interim financial statements. Therefore, these financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2018.

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.

In January 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718.) The Company used the modified retrospective method to account for unrecognized excess tax benefits from prior periods. For the three and six months ended June 30, 2019, we recorded an increase of $434,720 and $3,380,940, respectively, to our income tax provision. For the three months ended June 30, 2018, the Company recorded no change in the income tax provision. For the six months ended June 30, 2018, we recorded an increase of $1,158,604 to our income tax provision.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The SEC subsequently issued a Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act”, which provides guidance on accounting for the tax effects of the Tax Act. Among other changes, the Tax Act lowered the corporate tax rate to 21%.

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

Under the Company’s natural gas sales contracts, the Company delivers unprocessed natural gas to a midstream processing entity at the wellhead. The midstream processing entity obtains control of the natural gas at the wellhead. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sale of natural gas. Under these agreements, the Company recognizes revenue when control transfers to the purchaser at the point of delivery.

Disaggregation of Revenue. The following table presents revenues disaggregated by product for the three and six months ended June 30, 2019 and 2018:

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

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

The Company has operating leases for our offices in Midland, Texas and Tulsa, Oklahoma with terms through January 31, 2020. The office space being leased in Tulsa is owned by Arenaco, LLC, a company that is owned by Mr. Rochford, Chairman of the Board of the Company, and Mr. McCabe, a Director of the Company. The Company has financing leases for vehicles. Future lease payments associated with these operating leases as of June 30, 2019 are as follows:

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

NOTE D2 – EARNINGS PER SHARE INFORMATION


	For the Three Months Ended June 30, 2019						For the Six Months Ended June 30, 2019
	As Previously		Restatement				As Previously		Restatement
	Reported		Adjustment		As Restated		Reported		Adjustment		As Restated
Net Income	$	12,375,254	$	(1,032,657)	$	11,342,597	$	23,464,697	$	(7,852,840)	$	15,611,857
Basic Weighted-Average Shares Outstanding		67,357,645		67,357,645		67,357,645		65,305,081		65,305,081		65,305,081
Effect of dilutive securities:
Stock options		217,472		217,472		217,472		418,397		418,397		418,397
Restricted stock		95,142		95,142		95,142		128,870		128,870		128,870
Diluted Weighted-Average Shares Outstanding		67,670,259		67,670,259		67,670,259		65,852,348		65,852,348		65,852,348
Basic Income per Share	$	0.18	$	(0.02)	$	0.17	$	0.36	$	(0.12)	$	0.24
Diluted Income per Share	$	0.18	$	(0.02)	$	0.17	$	0.36	$	(0.12)	$	0.24

Stock options to purchase 1,013,500 shares of common stock and 276,860 shares of unvested restricted stock were excluded from the computation of diluted earnings per share during the three months ended June 30, 2019, as their effect would have been anti-dilutive. Stock options to purchase 2,353,500 shares of common stock and 276,860 shares of unvested restricted stock were excluded from the computation of diluted earnings per share during the six months ended June 30, 2019, as their effect would have been anti-dilutive.

NOTE E2 – ACQUISITIONS

On April 9, 2019, the Company completed the acquisition of oil and gas properties from Wishbone Energy Partners, LLC, Wishbone Texas Operating Company LLC and WB WaterWorks LLC on the Northwest Shelf in Gaines, Yoakum, Runnels and Coke Counties, Texas and Lea County, New Mexico (the “Acquisition”). The acquired properties consist of 49,754 gross (38,230 net) acres and include a 77% average working interest and a 58% average net revenue interest. The Company incurred approximately $4.1 million in acquisition related costs, which were recognized in general and administrative expense during the six months ended June 30, 2019. Total consideration after purchase price adjustments included a cash payment of approximately $264.1 million and the issuance of 4,581,001 shares of common stock, of which 2,538,071 shares are being held in escrow to satisfy potential indemnification claims. The full amount of the shares placed into escrow remain in escrow as of June 30, 2019. The escrow shares will be released pursuant to the terms of the Purchase and Sale Agreement. The shares were valued at the price on the date of the signing of the Purchase and Sale Agreement, February 25, 2019, of $6.19 per share.


Assets acquired:
Proved oil and gas properties	$	296,910,774
Joint interest billing receivable		1,464,394
Prepaid assets		2,864,554
Liabilities assumed
Accounts and revenues payable		(1,234,862)
Asset retirement obligations		(2,979,645)
Total Identifiable Net Assets	$	297,025,215

The Company will continue to evaluate the fair value of the assets and liabilities reflected above and will record any adjustments, if needed, in future periods.

The following unaudited pro forma information for the three and six months ended June 30, 2019 and 2018, respectively, is presented to reflect the operations of the Company as if the acquisition of assets had been completed on January 1, 2019 and 2018, respectively:


	For The Three Months				For The Six Months
	Ended June 30,				Ended June 30,
	2019		2018		2019		2018

Oil and Gas Revenues	$	57,999,639	$	48,490,870	$	99,797,954	$	91,250,272
Net Income	$	12,435,698	$	12,990,504	$	23,525,139	$	24,721,646

Basic Earnings per Share	$	0.18	$	0.21	$	0.35	$	0.41
Diluted Earnings per Share	$	0.18	$	0.21	$	0.34	$	0.40

NOTE F2 – DERIVATIVE FINANCIAL INSTRUMENTS

During March and April 2019, the Company entered into new derivative contracts in the form of costless collars of WTI Crude Oil prices in order to protect the Company’s cash flow from price fluctuation and maintain its capital programs. “Costless collars” are the combination of two options, a put option (floor) and a call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. The trades were for a total of 5,500 barrels of oil per day for the period of April 2019 through December 2019 and 2,000 barrels of oil per day for the period of January 2020 through December 2020. The following table reflects the put and call prices of those contracts:


Date entered into	Barrels per day	Put price		Call price
2019 contracts
03/12/19	1,500	$	50.00	$	66.00
03/13/19	500		50.00		67.40
03/20/19	500		50.00		67.90
03/20/19	1,000		50.00		68.71
04/01/19	1,000		50.00		69.50
04/03/19	1,000		50.00		70.20

2020 contracts
04/01/19	1,000		50.00		65.83
04/01/19	1,000		50.00		65.40

The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. At June 30, 2019, 100% of our volumes subject to derivative instruments are with lenders under our Credit Facility (as defined in Note H2).

NOTE G2 – FAIR VALUE MEASUREMENTS

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


	Fair Value Measurement Classification
	Quoted prices in
	Actives Markets
	for Identical Assets		Significant Other		Significant
	or (Liabilities)		Observable Inputs		Unobservable
	(Level 1)		(Level 2)		Inputs (Level 3)		Total
As of June 30, 2019
Oil and gas derivative contracts	$	—	$	1,189,545	$	—	$	1,189,545
Total	$	—	$	1,189,545	$	—	$	1,189,545

NOTE H2 – REVOLVING LINE OF CREDIT

On July 1, 2014, the Company entered into a Credit Agreement with SunTrust Bank, as lender, issuing bank and administrative agent for several banks and other financial institutions and lenders (the “Administrative Agent”), which was amended on June 14, 2018, May 18, 2016, July 24, 2015, and June 26, 2015. In April 2019, the Company amended and restated its Credit Agreement with the Administrative Agent (as amended and restated, the “Credit Facility”). The amendment and restatement of the Credit Facility, among other things, increases the maximum borrowing amount to $1 billion, increases the borrowing base (the “Borrowing Base”) to $425 million, extends the maturity date through April 2024 and makes other modifications to the terms of the Credit Facility. The Credit Facility is secured by a first lien on substantially all of the Company’s assets.

The Borrowing Base is subject to periodic redeterminations, mandatory reductions and further adjustments from time to time. The Borrowing Base will be redetermined semi-annually on each May 1 and November 1. 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.

(ii) the Federal Funds Rate (as defined in the Credit Facility) plus 0.5% per annum, the (iii) adjusted LIBOR determined on a daily basis for an interest period of one-month, plus 1.00% per annum and (iv) 0.00% per annum, plus (b) a margin between 0.75% and 1.75% (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 (as defined in the Credit Facility) of not more than 4.0 to 1.0 and (ii) a minimum current ratio of Current Assets to Current Liabilities (as such terms are defined in the Credit Facility) of 1.0 to 1.0. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of June 30, 2019, $360,500,000 was outstanding on the Credit Facility. We are in compliance with all covenants contained in the Credit Facility.

NOTE I2 – ASSET RETIREMENT OBLIGATION


Balance, December 31, 2018	$	13,055,797
Liabilities acquired		2,979,645
Liabilities incurred		441,244
Liabilities settled		(384,956)
Accretion expense		445,179
Balance, June 30, 2019	$	16,536,909

NOTE J2 – STOCKHOLDERS’ EQUITY

Common Stock Issued in Public Offering – In April 2019, the Company completed the acquisition of assets from Wishbone Partners, LLC as disclosed in Note E2. As a part of the consideration for the acquisition, the Company issued 4,581,001 shares of common stock, of which 2,538,071 shares are being held in escrow to satisfy potential indemnification claims arising under the Purchase Agreement. The full amount of the shares placed into escrow remain in escrow as of June 30, 2019. The escrow shares will be released pursuant to the terms of the Purchase and Sale Agreement. The shares were valued at February 25, 2019, the date of the signing of the Purchase and Sale Agreement. The price on February 25, 2019 was $6.19 per share. The aggregate value of the shares issued, based on this price, was $28,356,396.

In February 2018, the Company closed on an underwritten public offering of 6,164,000 shares of its common stock, including 804,000 shares sold pursuant to the full exercise of an over-allotment option, at $14.00 per share for gross proceeds of $86,296,000. Total net proceeds from the offering were $81,819,073, after deducting underwriting commissions and offering expenses payable by the Company of $4,476,927.

NOTE K2 – EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK AWARD PLAN

Compensation expense charged against income for share-based awards during the three and six months ended June 30, 2019, was $808,734 and $1,643,199, respectively, as compared to $1,081,199 and $2,083,547, respectively, for the three and six months ended June 30, 2018. These amounts are included in general and administrative expense in the accompanying financial statements.

In 2011, the board of directors and stockholders approved and adopted a long-term incentive plan which allowed for the issuance of up to 2,500,000 shares of common stock through the grant of qualified stock options, non-qualified stock options and restricted stock. In 2013, the Company’s board of directors and stockholders approved an amendment to the long-term incentive plan, increasing the number of shares eligible under the plan to 5,000,000 shares. As of June 30, 2019, there were 668,340 shares remaining eligible for issuance under the plan.

Stock Options

A summary of the stock option activity as of June 30, 2019, and changes during the six months then ended is as follows:


				Weighted-
		Weighted-		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value
Outstanding, December 31, 2018	2,751,000	$	6.28
Granted	—	$	—
Forfeited or rescinded	(2,500)	$	11.70
Vested	—	$	—
Outstanding, June 30, 2019	2,748,500	$	6.28	4.5 Years	$	493,750
Exercisable, June 30, 2019	2,327,400	$	5.42	4.0 Years

The intrinsic value was calculated using the closing price on June 28, 2019 of $3.25. As of June 30, 2019, there was $1,239,664 of unrecognized compensation cost related to stock options that is expected be recognized over a weighted-average period of 1.7 years.

Restricted Stock

A summary of the restricted stock activity as of June 30, 2019, and changes during the six months then ended is as follows:


		Weighted-
		Average Grant
	Restricted stock	Date Fair Value
Outstanding, December 31, 2018	878,360	$	7.36
Granted	15,400		5.01
Forfeited or rescinded	(4,120)		7.13
Vested	(400)		13.32
Outstanding, June 30, 2018	889,240	$	7.31

As of June 30, 2019, there was $4,046,963 of unrecognized compensation cost related to restricted stock grants that will be recognized over a weighted average period of 1.9 years.

NOTE L2 – CONTINGENCIES AND COMMITMENTS

Standby Letters of Credit – A commercial bank issued standby letters of credit on behalf of the Company totaling $260,000 to state and federal agencies and $741,000 to an electric utility company. The standby letters of credit are valid until cancelled or matured and is collateralized by the revolving credit facility with the bank. The terms of the letters of credit to the state and federal agencies are extended for a term of one year at a time. The Company intends to renew the standby letters of credit to the state and federal agencies for as long as the Company does business in the States of Texas and New Mexico. The letters of credit to the utility company should not require renewal after the initial one year term. No amounts have been drawn under the standby letters of credit.

Surety Bonds - An insurance company issued surety bonds on behalf of the Company totaling $500,438 to various State of New Mexico agencies in order for the Company to do business in the State of New Mexico. The surety bonds are valid until canceled or matured. The terms of the surety bonds are extended for a term of one year at a time. The Company intends to renew the surety bonds on $400,000 as long as the Company does business in the State of New Mexico. The remaining $100,438 should not require renewal after the initial one year term.

Effect of Restatement on Previously Filed September 30, 2019 Form 10-Q

Restatement of Balance Sheet as of September 30, 2019 (unaudited)


	As of September 30, 2019
	As Previously		Restatement
	Reported		Adjustment		As Restated
ASSETS
Current Assets
Cash	$	7,599,089			$	7,599,089
Accounts receivable		18,291,698				18,291,698
Joint interest billing receivable		2,025,180				2,025,180
Operating lease asset		169,115				169,115
Derivative asset		2,386,066				2,386,066
Prepaid expenses and retainers		3,340,178				3,340,178
Total Current Assets		33,811,326				33,811,326
Properties and Equipment
Oil and natural gas properties subject to depletion and amortization		1,059,284,347				1,059,284,347
Financing lease asset		947,435				947,435
Fixed assets subject to depreciation		1,465,551				1,465,551
Total Properties and Equipment		1,061,697,333				1,061,697,333
Accumulated depreciation, depletion and amortization		(142,235,581)				(142,235,581)
Net Properties and Equipment		919,461,752				919,461,752
Derivative asset		680,847				680,847
Deferred Income Taxes		5,434,238		(5,434,238)		—
Deferred Financing Costs		3,403,491				3,403,491
Total Assets	$	962,791,654	$	(5,434,238)	$	957,357,416

LIABILITIES AND STOCKHOLDERS' EQUITY						—
Current Liabilities						—
Accounts payable	$	51,813,690			$	51,813,690
Financing lease liability		272,498				272,498
Operating lease liability		169,115				169,115
Total Current Liabilities		52,255,303				52,255,303
						—
Deferred income taxes		—		3,448,958		3,448,958
Revolving line of credit		366,500,000				366,500,000
Financing lease liability		588,251				588,251
Asset retirement obligations		16,703,186				16,703,186
Total Liabilities		436,046,740		3,448,958		439,495,698
Stockholders' Equity
Preferred stock - $0.001 par value; 50,000,000 shares authorized; no shares issued or outstanding		—				—
Common stock - $0.001 par value; 150,000,000 shares authorized; 67,811,111 shares and 63,229,710 shares issued and outstanding, respectively		67,812				67,812
Additional paid-in capital		525,679,942				525,679,942
Accumulated deficit		997,160		(8,883,196)		(7,886,036)
Total Stockholders' Equity		526,744,914		(8,883,196)		517,861,718
Total Liabilities and Stockholders' Equity	$	962,791,654	$	(5,434,238)	$	957,357,416

Restatement of Statement of Operations for the three and nine months ended September 30, 2019 (unaudited)


	For the Three Months Ended September 30, 2019						For the Nine Months Ended September 30, 2019
	As Previously		Restatement				As Previously		Restatement
	Reported		Adjustment		As Restated		Reported		Adjustment		As Restated
Oil and Gas Revenues	$	50,339,105			$	50,339,105	$	143,471,645			$	143,471,645
Costs and Operating Expenses
Oil and gas production costs		15,478,052				15,478,052		36,455,925				36,455,925
Oil and gas production taxes		2,307,226				2,307,226		6,802,996				6,802,996
Depreciation, depletion and amortization		14,115,170				14,115,170		41,659,494				41,659,494
Asset retirement obligation accretion		236,207				236,207		681,386				681,386
Lease expense		114,112				114,112		370,462				370,462
General and administrative expense		3,745,928				3,745,928		15,287,072				15,287,072

Total Costs and Operating Expenses		35,996,695				35,996,695		101,257,335				101,257,335

Income from Operations		14,342,410				14,342,410		42,214,310				42,214,310

Other Income (Expense)
Interest income		9				9		13,505				13,505
Interest expense		(4,556,509)				(4,556,509)		(9,589,434)				(9,589,434)
Realized loss on derivatives		—				—		—				—
Unrealized gain on change in fair value of derivatives		1,877,368				1,877,368		3,066,913				3,066,913

Net Other Income (Expense)		(2,679,132)				(2,679,132)		(6,509,016)				(6,509,016)

Income before tax provision		11,663,278				11,663,278		35,705,294				35,705,294

Benefit from (Provision for) Income Taxes		(1,774,922)		(1,030,356)		(2,805,278)		(2,352,241)		(8,883,196)		(11,235,437)

Net Income	$	9,888,356	$	(1,030,356)	$	8,858,000	$	33,353,053	$	(8,883,196)	$	24,469,857

Basic Income per Share	$	0.15	$	(0.02)	$	0.13	$	0.50	$	(0.13)	$	0.37
Diluted Income per Share	$	0.15	$	(0.02)	$	0.13	$	0.50	$	(0.13)	$	0.37

Restatement of Statement of Shareholders’ Equity for the nine months ended September 30, 2019 (unaudited)


				Additional		Retained Earnings		Total
	Common Stock			Paid-in		(Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit)		Equity
For the Nine Months Ended September 30, 2019
Balance, December 31, 2018	63,229,710	$	63,230	$	494,892,093	$	(32,355,893)	$	462,599,430
Share-based compensation	—		—		834,465		—		834,465
Net income	—		—		—		11,089,443		11,089,443
Balance, March 31, 2019	63,229,710	$	63,230	$	495,726,558	$	(21,266,450)	$	474,523,338
Common stock issued as consideration in asset acquisition	4,581,001		4,581		28,351,815		—		28,356,396
Restricted stock vested	400		—		—		—		—
Share-based compensation	—		—		808,734		—		808,734
Net income	—		—		—		12,375,254		12,375,254
Balance, June 30, 2019	67,811,111	$	67,811	$	524,887,107	$	(8,891,196)	$	516,063,722
Share-based compensation	—		—		792,836		—		792,836
Restricted stock vested	500		1		(1)		—		—
Net income	—		—		—		9,888,356		9,888,356
As Reported Balance, September 30, 2019	67,811,611	$	67,812	$	525,679,942	$	997,160	$	526,744,914
Restatement Adjustment							(8,883,196)		(8,883,196)
As Restated	67,811,611	$	67,812	$	525,679,942	$	(7,886,036)	$	517,861,718

Restatement of Statement of Cash Flows for the nine months ended September 30, 2019 (unaudited)


	For the Nine Months Ended September 30, 2019
	As Previously		Restatement
	Reported		Adjustment		As Restated
Cash Flows From Operating Activities
Net income	$	33,353,053	$	(8,883,196)	$	24,469,857
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization		41,659,494				41,659,494
Accretion expense		681,386				681,386
Share-based compensation		2,436,035				2,436,035
Deferred income tax provision		7,498,112				7,498,112
Excess tax deficiency related to share-based compensation		(5,145,871)		8,883,196		3,737,325
Change in fair value of derivative instruments		(3,066,913)				(3,066,913)
Changes in assets and liabilities:
Accounts receivable		(7,095,256)				(7,095,256)
Prepaid expenses and retainers		(6,060,699)				(6,060,699)
Accounts payable		(1,055,397)				(1,055,397)
Settlement of asset retirement obligation		(615,732)				(615,732)
Net Cash Provided by (Used in) Operating Activities		62,588,212		—		62,588,212
Cash Flows From Investing Activities
Payments to purchase oil and natural gas properties		(263,262,046)				(263,262,046)
Payments to develop oil and natural gas properties		(122,004,117)				(122,004,117)
Proceeds from disposal of fixed assets subject to depreciation		—				—
Net Cash Used in Investing Activities		(385,266,163)				(385,266,163)
Cash Flows From Financing Activities
Proceeds from revolving line of credit		327,000,000				327,000,000
Proceeds from issuance of common stock, net of offering costs		—				—
Reduction of financing lease liability		(86,686)				(86,686)
Net Cash Provided by Financing Activities		326,913,314		—		326,913,314
Net Change in Cash		4,235,363				4,235,363
Cash at Beginning of Period		3,363,726				3,363,726
Cash at End of Period	$	7,599,089				7,599,089
Supplemental Cash Flow Information
Cash paid for interest	$	5,821,545			$	5,821,545
Noncash Investing and Financing Activities
Asset retirement obligation incurred during development	$	602,090				602,090
Operating lease assets obtained in exchange for new operating lease liability		539,577				539,577
Financing lease assets obtained in exchange for new financing lease liability		947,435				947,435
Capitalized expenditures attributable to drilling projects financed through current liabilities		26,958,655				26,958,655
Acquisition of oil and gas properties
Assumption of joint interest billing receivable		1,464,394				1,464,394
Assumption of prepaid assets		2,864,554				2,864,554
Assumption of accounts and revenue payables		(1,234,862)				(1,234,862)
Asset retirement obligation incurred through acquisition		(2,979,645)				(2,979,645)
Common stock issued as partial consideration in asset acquisition		(28,356,396)				(28,356,396)
Oil and gas properties subject to amortization		296,910,774				296,910,774

NOTE A3 – ABRIDGED BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Condensed Financial Statements – The accompanying condensed financial statements prepared by Ring Energy, Inc. (the “Company” or “Ring”) have not been audited by an independent registered public accounting firm. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.

Certain notes and other disclosures have been omitted from these interim financial statements. Therefore, these financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2018.

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

In January 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718) The Company used the modified retrospective method to account for unrecognized excess tax benefits from prior periods. For the three and nine months ended September 30, 2019, we recorded an increase of $355,990 and $3,737,325, respectively, to our income tax provision. For the three and nine months ended September 30, 2018, we recorded a decrease of $724,073 and an increase of $434,530, respectively, to our income tax provision.

NOTE B3 – REVENUE RECOGNITION

Oil sales

Natural gas sales

Disaggregation of Revenue. The following table presents revenues disaggregated by product for the three and nine months ended September 30, 2019 and 2018:


	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
	2019		2018		2019		2018
Operating revenues
Oil	$	49,502,656	$	31,633,777	$	141,174,111	$	89,736,822
Natural gas		836,449		1,053,402		2,297,534		2,766,631

Total operating revenues	$	50,339,105	$	32,687,179	$	143,471,645	$	92,503,453

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

NOTE C3 – LEASES

The Company has operating leases for our offices in Midland, Texas and Tulsa, Oklahoma with terms through January 31, 2020. The office space being leased in Tulsa is owned by Arenaco, LLC, a company that is owned by Mr. Rochford, Chairman of the Board of the Company, and Mr. McCabe, a Director of the Company. The Company has financing leases for vehicles. Future lease payments associated with these operating leases as of September 30, 2019 are as follows:


	2019		2020		2021		2022
Operating lease payments (1)	$	128,175	$	42,725	$	—	$	—
Financing lease payments (2)		77,802		311,206		311,206		132,499

(1)	The weighted average discount rate as of September 30, 2019 for operating leases was 5.01%. Based on this rate, the future lease payments above include imputed interest of $1,785.

(2)	The weighted average discount rate as of September 30, 2019 for financing leases was 5.26%. Based on this rate, the future lease payments above include imputed interest of $71,116.

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


	2019
Operating lease costs	$	384,525
Short term lease costs (1)		461,277
Financing lease costs:
Amortization of financing lease assets (2)		98,868
Interest on lease liabilities (3)		15,019

(1)	Amount included in Oil and gas production costs

(2)	Amount included in Depreciation, depletion and amortization

(3)	Amount included in Interest expense

NOTE D3 – EARNINGS PER SHARE INFORMATION


	For the Three Months Ended September 30, 2019						For the Nine Months Ended September 30, 2019
	As Previously		Restatement				As Previously		Restatement
	Reported		Adjustment		As Restated		Reported		Adjustment		As Restated
Net Income	$	9,888,356	$	(1,030,356)	$	8,858,000	$	33,353,053	$	(8,883,196)	$	24,469,857
Basic Weighted-Average Shares Outstanding		67,811,127		67,811,127		67,811,127		66,149,469		66,149,469		66,149,469
Effect of dilutive securities:
Stock options		25,841		25,841		25,841		204,639		204,639		204,639
Restricted stock		—		—		—		47,314		47,314		47,314
Diluted Weighted-Average Shares Outstanding		67,836,968		67,836,968		67,836,968		66,401,422		66,401,422		66,401,422
Basic Income per Share	$	0.15	$	(0.02)	$	0.13	$	0.50	$	(0.13)	$	0.37
Diluted Income per Share	$	0.15	$	(0.02)	$	0.13	$	0.50	$	(0.13)	$	0.37

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

NOTE E3 – ACQUISITIONS

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


Assets acquired:
Proved oil and gas properties	$	296,910,774
Joint interest billing receivable		1,464,394
Prepaid assets		2,864,554
Liabilities assumed
Accounts and revenues payable		(1,234,862)
Asset retirement obligations		(2,979,645)
Total Identifiable Net Assets	$	297,025,215

The Company will continue to evaluate the fair value of the assets and liabilities reflected above and will record any adjustments, if needed, in future periods.

The following unaudited pro forma information for the three and nine months ended September 30, 2019 and 2018, respectively, is presented to reflect the operations of the Company as if the acquisition of assets had been completed on January 1, 2019 and 2018, respectively:


	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
	2019		2018		2019		2018

Oil and Gas Revenues	$	57,004,519	$	51,167,164	$	150,137,059	$	142,417,436
Net Income	$	9,948,798	$	14,004,402	$	33,413,495	$	38,125,515

Basic Earnings per Share	$	0.15	$	0.23	$	0.49	$	0.63
Diluted Earnings per Share	$	0.15	$	0.22	$	0.49	$	0.61

NOTE F3 – DERIVATIVE FINANCIAL INSTRUMENTS


Date entered into	Barrels per day	Put price		Call price
2019 contracts
03/12/19	1,500	$	50.00	$	66.00
03/13/19	500		50.00		67.40
03/20/19	500		50.00		67.90
03/20/19	1,000		50.00		68.71
04/01/19	1,000		50.00		69.50
04/03/19	1,000		50.00		70.20

2020 contracts
04/01/19	1,000		50.00		65.83
04/01/19	1,000		50.00		65.40

On August 27, 2018, the Company entered into additional costless collars of WTI Crude Oil. This trade is for the period January 1, 2019 through December 31, 2019 for 2,000 barrels of oil per day with a put price of $60.00 and a call price of $70.05. Subsequent to September 30, 2018, the Company terminated all of the costless collars for calendar year 2019 described above through the payment of $3,438,300.

The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. At September 30, 2019, 100% of our volumes subject to derivative instruments are with lenders under our Credit Facility (as defined in Note H3).

NOTE G3 – FAIR VALUE MEASUREMENTS

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


	Fair Value Measurement Classification
	Quoted prices in
	Actives Markets
	for Identical Assets		Significant Other		Significant
	or (Liabilities)		Observable Inputs		Unobservable
	(Level 1)		(Level 2)		Inputs (Level 3)		Total
As of September 30, 2019
Oil and gas derivative contracts	$	—	$	3,066,913	$	—	$	3,066,913
Total	$	—	$	3,066,913	$	—	$	3,066,913

NOTE H3 – REVOLVING LINE OF CREDIT

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. 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 (as defined in the Credit Facility) plus 0.5% per annum, the (iii) adjusted LIBOR determined on a daily basis for an interest period of one-month, plus 1.00% per annum and (iv) 0.00% per annum, plus (b) a margin between 0.75% and 1.75% (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 (as defined in the Credit Facility) of not more than 4.0 to 1.0 and (ii) a minimum current ratio of Current Assets to Current Liabilities (as such terms are defined in the Credit Facility) of 1.0 to 1.0. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of September 30, 2019, $366,500,000 was outstanding on the Credit Facility. We are in compliance with all covenants contained in the Credit Facility.

NOTE I3 – ASSET RETIREMENT OBLIGATION


Balance, December 31, 2018	$	13,055,797
Liabilities acquired		2,979,645
Liabilities incurred		602,090
Liabilities settled		(615,732)
Accretion expense		681,386
Balance, September 30, 2019	$	16,703,186

NOTE J3 – STOCKHOLDERS’ EQUITY

Common Stock Issued in Public Offering – In April 2019, the Company completed the acquisition of assets from Wishbone Partners, LLC as disclosed in Note E3. As a part of the consideration for the acquisition, the Company issued 4,581,001 shares of common stock, of which 2,538,071 shares are being held in escrow to satisfy potential indemnification claims arising under the Purchase Agreement. The full amount of the shares placed into escrow remain in escrow as of September 30, 2019. The escrow shares will be released pursuant to the terms of the Purchase and Sale Agreement. The shares were valued at February 25, 2019, the date of the signing of the Purchase and Sale Agreement. The price on February 25, 2019 was $6.19 per share. The aggregate value of the shares issued, based on this price, was $28,356,396.

Common Stock Issued in Option Exercise – During the nine months ended September 30, 2018, the Company issued 103,113 shares of common stock as the result of cashless option exercises. The following table presents the details of those exercises:


	Exercise	Shares	Shares	Stock price on	Aggregate value of
Options exercised	price ($)	issued	retained	date of exercise ($)	shares retained ($)
25,000	7.50	9,829	15,171	12.36	187,500
3,000	8.00	1,059	1,941	12.36	24,000
3,000	5.25	1,750	1,250	12.36	15,750
2,000	11.75	100	1,900	12.36	23,500
110,000	2.00	90,375	19,625	11.21	220,000

Totals		143,000				103,113		39,887				470,750
Average				3.29						11.80

NOTE K3 – EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK AWARD PLAN

Compensation expense charged against income for share-based awards during the three and nine months ended September 30, 2019, was $792,836 and $2,436,035, respectively, as compared to $1,007,789 and $3,091,336, respectively, for the three and nine months ended September 30, 2018. These amounts are included in general and administrative expense in the accompanying financial statements.

In 2011, the board of directors and stockholders approved and adopted a long-term incentive plan which allowed for the issuance of up to 2,500,000 shares of common stock through the grant of qualified stock options, non-qualified stock options and restricted stock. In 2013, the Company’s board of directors and stockholders approved an amendment to the long-term incentive plan, increasing the number of shares eligible under the plan to 5,000,000 shares. As of September 30, 2019, there were 665,160 shares remaining eligible for issuance under the plan.

Stock Options

A summary of the stock option activity as of September 30, 2019, and changes during the nine months then ended is as follows:


				Weighted-
		Weighted-		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value
Outstanding, December 31, 2017	3,193,000	$	6.07
Granted	—	$	—
Forfeited or rescinded	(24,500)	$	11.39
Exercised	(143,000)	$	3.29
Outstanding, September 30, 2018	3,025,500	$	6.15	5.3 Years	$	12,470,645
Exercisable, September 30, 2018	2,265,400	$	4.92	4.6 Years

Outstanding, December 31, 2018	2,751,000	$	6.28
Granted	—	$	—
Forfeited or rescinded	(2,500)	$	11.70
Vested	—	$	—
Outstanding, September 30, 2019	2,748,500	$	6.28	4.2 Years	$	—
Exercisable, September 30, 2019	2,329,400	$	5.43	3.7 Years

The intrinsic value was calculated using the closing price on September 30, 2018 and 2019 of $9.91 and $1.64, respectively. As of September 30, 2019, there was $919,908 of unrecognized compensation cost related to stock options that is expected be recognized over a weighted-average period of 1.6 years.

Restricted Stock

A summary of the restricted stock activity as of September 30, 2019, and changes during the nine months then ended is as follows:


		Weighted-
		Average Grant
	Restricted stock	Date Fair Value
Outstanding, December 31, 2017	330,900	$	13.44
Granted	4,500		11.40
Forfeited or rescinded	(4,000)		13.44
Vested	—		—
Outstanding, September 30, 2018	331,400	$	13.41

Outstanding, December 31, 2018	878,360	$	7.36
Granted	20,400		4.59
Forfeited or rescinded	(5,940)		6.88
Vested	(900)		11.40
Outstanding, September 30, 2019	891,920	$	7.30

As of September 30, 2019, there was $3,451,385 of unrecognized compensation cost related to restricted stock grants that will be recognized over a weighted average period of 1.1 years.

NOTE L3 – CONTINGENCIES AND COMMITMENTS