Business Context and Reporting Period
Ring Energy, Inc. (REI) filed this Form 8-K on February 22, 2020, to disclose a material accounting error in its previously issued unaudited condensed financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019. The error, identified by the Audit Committee and senior management, relates to the calculation of the provision for/benefit from income taxes. The company intends to restate these periods in its upcoming Form 10-K for the year ended December 31, 2019.
Key Financial Metrics and Restatement Impacts
The error was non-cash in nature, affecting deferred tax assets/liabilities and the income tax provision. Consequently, it reduced previously reported Net Income, Total Assets, and Stockholders' Equity. The filing explicitly states there is no effect on cash flows, EBITDA, or liquidity.
| Period Ended | Net Income (As Reported) | Correction Amount | Net Income (As Restated) | EPS Impact (Basic) |
|---|---|---|---|---|
| March 31, 2019 | $11,089,443 | $(6,820,183) | $4,269,260 | $0.18 to $0.07 |
| June 30, 2019 | $23,464,697 | $(7,852,840) | $15,611,857 | $0.36 to $0.24 |
| September 30, 2019 | $33,353,055 | $(8,883,196) | $24,469,857 | $0.50 to $0.37 |
Balance Sheet Adjustments (Nine Months Ended Sept 30, 2019):
- Total Assets: Reduced from $962,791,654 to $957,357,416.
- Total Liabilities: Increased from $436,046,740 to $439,495,698 due to reclassification of deferred taxes.
- Total Stockholders' Equity: Reduced from $526,744,914 to $517,861,718.
Material Changes Versus Prior Periods
The material change is the downward revision of profitability metrics for the first three quarters of 2019. Specifically, the "Benefit from Income Taxes" reported in Q1 2019 was overstated, and the "Provision for Income Taxes" in Q2 and Q3 2019 was understated. This resulted in a cumulative reduction of $8,883,196 to Net Income for the nine-month period. There were no changes to revenue, operating expenses, or cash flow figures.
Guidance, Outlook, and Risks
Management Commentary: Management concluded the error had no effect on cash flows, liquidity, or future operations. The company is currently assessing remedial actions regarding accounting controls, staffing, and process improvements.
Risks and Contingencies: The primary risk identified is the potential weakness in internal accounting controls related to tax provision calculations. The Audit Committee has discussed the matter with the independent registered public accounting firm, Eide Bailly LLP.
Unusual Items: The filing notes that while Net Income decreased, the cash flow statement adjustments offset the change in Net Income through the "Excess tax deficiency related to share-based compensation" line item, resulting in no net change to cash flows from operating activities.
Investor Verification Checklist
- Verify the restated financial statements in the upcoming Form 10-K for the year ended December 31, 2019.
- Review the company's disclosure regarding the specific remedial actions taken to address internal control deficiencies.
- Confirm that the error was strictly non-cash and did not impact actual tax payments or cash reserves.
- Monitor future filings for any additional restatements or regulatory inquiries related to the accounting error.