RING ENERGY, INC. current report, 28 June 2012

Business Context and Reporting Period

Company: Ring Energy, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: June 28, 2012
Event: Completion of the acquisition of Stanford Energy, Inc. ("Stanford"), a Texas corporation engaged in oil and natural gas acquisition, exploration, development, and production in Texas. Stanford is now a wholly-owned subsidiary of Ring Energy.

Key Financial Metrics and Transaction Details

  • Consideration: Issuance of 3,440,000 common shares (2,220,000 to L. Tim Rochford; 1,220,000 to Stanley McCabe) in exchange for all outstanding Stanford shares.
  • Debt Assumption/Loans: Ring Energy had previously loaned Stanford $2,000,000. These loans bear 5% interest and are due on or before January 31, 2013.
  • Equity Compensation: Assumed Stanford's equity plan, including options to purchase up to 1,125,000 shares of Ring Energy common stock at $2.00 per share.
  • Liquidity: Stanford holds a revolving line of credit for $10,000,000 from an Oklahoma bank.
  • Valuation Basis: Purchase price determined based principally on an independent engineering report reflecting a PW10% valuation of Stanford's leases.

Material Changes Versus Prior Period

  • Ownership Structure: The issuance of 3,440,000 shares represents approximately 34% of the Company's outstanding voting shares, resulting in a significant change in control dynamics.
  • Management Changes: Messrs. Rochford and McCabe were appointed as directors. William R. Broaddrick (former Stanford CFO) was appointed Treasurer and Comptroller.
  • Operational Focus: Expanded operations to include Stanford's properties in Andrews County, Texas. Ring Energy now holds approximately a 90% leasehold interest in these leases following a separate $473 purchase of an additional 0.5% interest on June 25, 2012.
  • Corporate Address: Principal executive offices moved to 6555 South Lewis Street, Tulsa, OK 74136.

Guidance, Outlook, Risks, and Unusual Items

  • Management Outlook: Management intends to rely heavily on Messrs. Rochford and McCabe for the direction of future operations due to their familiarity with Stanford's oil and gas activities.
  • Financial Reporting: Audited financial statements for Stanford and pro forma financial information are not included in this filing. They will be filed by amendment within 71 calendar days.
  • Related Party Transactions: Mr. Rochford is the brother-in-law of Steve Owens, Ring Energy's CEO and CFO. Both Rochford and McCabe held Ring Energy stock and options prior to the closing.
  • Securities Restrictions: Shares issued in the transaction were unregistered under Section 4(a)(5) and/or 4(a)(2) of the Securities Act and Rule 506. They carry restrictive legends and cannot be sold absent registration or an applicable exemption.

Investor Verification Checklist

  • Verify the upcoming amendment filing (within 71 days) for Stanford's audited financial statements and pro forma information.
  • Confirm the exact dilution impact of the 3,440,000 new shares on existing shareholders.
  • Review the terms of the $2,000,000 intercompany loans and the $10,000,000 revolving credit line for covenants or maturity risks.
  • Assess the valuation methodology (PW10%) used to determine the stock-for-stock exchange ratio.
  • Monitor the vesting schedule of the assumed options (20% annually over five years starting December 1, 2012).