RING ENERGY, INC.REI
RING ENERGY, INC. Stock Compensation Disclosure
NOTE 10 – 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 677,120 shares eligible for grant, either as options or as restricted stock, at December 31, 2018.
Employee Stock Options
– Following is a table reflecting the issuances during 2016 and 2017 and their related exercise prices (No options were granted in 2018):Grant date | # of options | Exercise price | ||||||
January 13, 2016 (1) | 241,000 | $ | 5.25 | |||||
| May 3, 2016 | 15,000 | 6.42 | ||||||
| December 13, 2016 | 582,500 | 11.75 | ||||||
| April 20, 2017 | 7,500 | $ | 11.70 | |||||
| 846,000 | ||||||||
(1) On December 9, 2015, Ring issued option awards to its Named Executive Officers and directors. On January 13, 2016, the Board ratified the Compensation Committee decision to rescind 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 option awards as of that date to meet the goals and objectives of the Company’s equity based compensation program. The amounts shown as Option Awards include the additional fair value of the new options over the original grant. On December 26, 2018, the Compensation Committee rescinded the options granted in 2016. No adjustment has been made to account for the reduction in compensation.
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, 2018, 2017 and 2016 and changes during the years ended December 31, 2018, 2017 and 2016 is as follows:
2018 | 2017 | 2016 | ||||||||||||||||||||||
Options | Weighted- Average Exercise Price | Options | Weighted- Average Exercise Price | Options | Weighted- Average Exercise Price | |||||||||||||||||||
| Outstanding at beginning of the year | 3,193,000 | $ | 5.90 | 3,362,350 | $ | 5.90 | 2,881,750 | $ | 5.07 | |||||||||||||||
| Issued | - | - | 7,500 | 11.70 | 838,500 | 9.79 | ||||||||||||||||||
| Forfeited or rescinded | (249,000 | ) | 6.09 | (11,450 | ) | 10.12 | (331,400 | ) | 8.62 | |||||||||||||||
| Exercised | (193,000 | ) | 2.96 | (165,400 | ) | 2.63 | (26,500 | ) | 4.41 | |||||||||||||||
| Outstanding at end of year | 2,751,000 | $ | 6.28 | 3,193,000 | $ | 6.07 | 3,362,350 | $ | 5.90 | |||||||||||||||
| Exercisable at end of year | 2,323,900 | $ | 5.42 | 2,091,900 | $ | 4.85 | 1,722,850 | $ | 4.01 | |||||||||||||||
| Weighted average fair value of | ||||||||||||||||||||||||
| options granted during the year | $ | - | $ | 9.14 | $ | 9.72 | ||||||||||||||||||
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, 2018, 2017 and 2016. 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, 2017 and 2016:
Risk free interest rate | Expected life (years) | Dividend yield | Volatility | |||||||||||||
| January 13, 2016 | 1.51 | % | 6.5 | - | 100 | % | ||||||||||
| May 3, 2016 | 1.25 | % | 6.5 | - | 99 | % | ||||||||||
| December 13, 2016 | 1.92 | % | 6.5 | - | 96 | % | ||||||||||
| April 20, 2017 | 1.78 | % | 6.5 | - | 94 | % | ||||||||||
No options were granted during 2018.
For the years ended December 31, 2018, 2017 and 2016, the Company incurred stock based compensation expense related to stock options of $1,853,913, $3,618,309 and $2,267,053, respectively. As of December 31, 2018, there was $1,650,573 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of 1.9 years. The aggregate intrinsic value of options vested and expected to vest at December 31, 2018 was $1,993,800. The aggregate intrinsic value of options exercisable at December 31, 2018 was $1,993,800. The year-end intrinsic values are based on a December 31, 2018 closing price of $5.08.
Options exercised of 193,000 in 2018, 165,400 in 2017 and 25,900 in 2016 had an aggregate intrinsic value on the date of exercise of $1,470,230, $1,744,047 and $65,089, respectively.
The following table summarizes information related to the Company’s stock options outstanding at December 31, 2018:
Options Outstanding | ||||||||||||||
Exercise price | Number Outstanding | Weighted- Average Remaining Contractual Life (in years) | Number Exercisable | |||||||||||
| 2.00 | 395,000 | 2.92 | 395,000 | |||||||||||
| 4.50 | 1,340,000 | 3.62 | 1,340,000 | |||||||||||
| 5.50 | 5,000 | 4.00 | 5,000 | |||||||||||
| 7.50 | 4,000 | 4.20 | 4,000 | |||||||||||
| 10.00 | 90,000 | 4.48 | 90,000 | |||||||||||
| 14.54 | 10,000 | 4.96 | 8,000 | |||||||||||
| 8.00 | 277,500 | 5.73 | 221,600 | |||||||||||
| 8.25 | 50,000 | 6.94 | 30,000 | |||||||||||
| 6.42 | 15,000 | 7.34 | 6,000 | |||||||||||
| 11.75 | 557,000 | 7.95 | 222,800 | |||||||||||
| 11.70 | 7,500 | 8.30 | 1,500 | |||||||||||
| 2,751,000 | 4.96 | 2,323,900 | ||||||||||||
Restricted stock grants
Grant date | # of shares of restricted stock | |||
| December 19, 2017 | 330,900 | |||
| April 4, 2018 | 2,000 | |||
| September 27, 2018 | 2,500 | |||
| December 26, 2018 | 615,380 | |||
All restricted stock grants vest at the rate of 20% each year over five years beginning one year from the date granted. A summary of the status of restricted stock grants as of December 31, 2018 and 2017 and changes during the years ended December 31, 2018 and 2017 is as follows:
2018 | 2017 | |||||||||||||||
Restricted stock | Weighted- Average Grant Date Fair Value | Restricted stock | Weighted- Average Grant Date Fair Value | |||||||||||||
| Outstanding at beginning of the year | 330,900 | $ | 13.44 | - | $ | - | ||||||||||
| Granted | 619,880 | 4.82 | 330,900 | 13.44 | ||||||||||||
| Forfeited or rescinded | (7,800 | ) | 13.44 | - | - | |||||||||||
| Vested | (64,620 | ) | - | - | - | |||||||||||
| Outstanding at end of year | 878,360 | $ | 13.44 | 330,900 | $ | 13.44 | ||||||||||
No restricted stock was granted prior to 2017.
For the years ended December 31, 2018 and 2017, the Company incurred stock based compensation expense related to restricted stock grants of 2,017,021 and $66,770. No such expense was incurred during 2016. As of December 31, 2018, there was $5,182,221 of unrecognized compensation cost related to restricted stock grants that will be recognized over a weighted average period of 1.0 years.
No restricted stock vested during 2017. During 2018, 64,620 shares of restricted stock vested. At the date of vesting those shares were had an aggregate intrinsic value of $304,360.
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About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.