Item 1.01 Entry into a Material Definitive Agreement.
Description of Purchase Agreement
On July 1, 2022, Ring
Energy, Inc. (“Ring” or the “Company”), as buyer, and Stronghold Energy II Operating, LLC,
a Delaware limited liability company (“Stronghold OpCo”) and Stronghold Energy II Royalties, LP, a Delaware limited partnership
(“Stronghold RoyaltyCo”, together with Stronghold OpCo, collectively, “Stronghold”), as seller, entered
into a purchase and sale agreement (the “Purchase Agreement”).
General. Pursuant to
the Purchase Agreement, Ring will acquire (the “Stronghold Acquisition”) interests in oil and gas leases and related
property of Stronghold located in the Central Basin Platform of Texas, for a purchase price (the “Purchase Price”)
of approximately $465 million, of which $215 million will be in cash and the remainder will be in the form of stock consideration consisting
of either (i) 63,888,889 shares of Ring Common Stock if stockholder approval of the issuance is obtained prior to closing of the Stronghold
Acquisition (“Pre-Closing Stockholder Approval”) or (ii) in the event that the Pre-Closing Stockholder Approval is
not obtained, 21,339,986 shares of Ring Common Stock and 153,176 shares of newly created Series A Convertible Preferred Stock, par value
$0.001 (“Preferred Stock”), as more fully described below. The Purchase Price is subject to customary purchase price
adjustments with an effective date of June 1, 2022. On July 5, 2022, in connection with the Purchase Agreement, Ring deposited $46,500,000
in cash into a third-party escrow account as a deposit pursuant to the Purchase Agreement (the “Deposit Amount”), which
will be credited against the purchase price upon closing of the Stronghold Acquisition. At the closing of the Stronghold Acquisition,
(i) $8,250,000 of cash and (ii) either (a) 6,458,333 shares of Ring Common Stock if Pre-Closing Stockholder Approval is received or (b)
23,249 shares of Preferred Stock if Pre-Closing Stockholder Approval is not received, will be deposited (or retained in the case of the
cash portion) in an escrow account to satisfy potential indemnity obligations of Stronghold.
Representations
and Warranties. The Purchase Agreement contains customary representations and warranties for transactions of this nature. The
Purchase Agreement also contains customary pre-closing covenants of the parties, including the obligation of Stronghold to conduct business
in an ordinary course consistent with past practice and to refrain from taking certain specified actions, subject to certain exceptions.
Due
Diligence Period. The Purchase Agreement grants Ring the right to access and inspect the assets proposed to be purchased under
the Purchase Agreement and their related books and records during the period prior to closing for the primary purpose of reviewing property
title and environmental matters.
Termination. The Purchase Agreement may
be: (i) mutually terminated by both parties in writing; (ii) terminated by Stronghold if Ring materially breaches the Purchase Agreement
subject to cure within 10 days’ notice (but only if Stronghold is not in material breach); (iii) terminated by Ring if Stronghold
materially breaches the Purchase Agreement subject to cure within 10 days’ notice (but only if Ring is not in material breach);
(iv) terminated by either party if the closing has not occurred on or before September 30, 2022 (provided the terminating party is not
in material breach of the Purchase Agreement) (the “Outside Closing Date”); (v) terminated by either Stronghold or
Ring if there is any legal requirement or government order prohibiting the consummation of the Stronghold Acquisition; (vi) terminated
by Stronghold if (a) the sum of the asserted title defects and environmental defects relating to the assets being purchased, (b) reduction
in value of assets transferred under the Purchase Agreement due to the exercise of third-party preferential purchase rights which are
triggered by the Purchase Agreement and (c) reduction in value due to failure to receive required third-party consents related to the
assets being transferred, in the aggregate, exceeds 15% of the unadjusted Purchase Price, and (vii) terminated by Ring if the sum of (a)
amounts relating to certain title defects and environmental defects of the assets being purchased, (b) reduction in value of assets transferred
under the Purchase Agreement due to the exercise of third-party preferential purchase rights which are triggered by the Purchase Agreement
and (c) reduction in value due to failure to receive required third-party consents related to the assets being transferred, in the aggregate,
exceeds 15% of the unadjusted Purchase Price.
In connection with a termination of the Purchase
Agreement, Stronghold will have the right to retain the Deposit Amount under the following circumstances: (i) Stronghold terminates the
agreement due to a material breach by Ring that causes any of the conditions to closing not to be satisfied; (ii) Stronghold terminates
the agreement due to a failure to close by the Outside Closing Date but only if Stronghold could have terminated the Agreement due to
material breach by Ring that causes any of the conditions to closing not to be satisfied (without taking into consideration any cure period);
or (iii) Ring terminates the agreement due to failure to close by the Outside Closing Date but only if Stronghold could have terminated
the Agreement due to a material breach by Ring that causes any of the conditions to closing not to be satisfied (without taking into consideration
any cure period).
Stockholder
Approval Requirement. Ring’s Common Stock is traded on the NYSE American stock exchange, and under applicable rules of the
exchange, the Company may not issue or sell to Stronghold under the Purchase Agreement shares of Common Stock in excess of 21,339,986
shares, which represents approximately 19.9% of the 107,236,111 shares of Ring’s Common Stock that were outstanding immediately
prior to the execution of the Purchase Agreement (the “Stock Issuance Cap”), unless Ring obtains the Pre-Closing Stockholder
Approval to issue shares of Common Stock in excess of the Stock Issuance Cap. If Ring is able to obtain stockholder approval to issue
the excess shares prior to the closing date, it will issue an additional 42,548,903 shares of Common Stock at closing (the “Excess
Shares”) for a total of 63,888,889 shares of Common Stock. If
Ring is unable to obtain the Pre-Closing Stockholder Approval to issue the Excess Shares prior to the closing date, Ring will file a
certificate of designation with the Nevada Secretary of State creating the Series A Convertible Preferred Stock and issue 153,176 shares
of the Preferred Stock at the closing in addition to the 21,339,986 shares of Common Stock.
Pursuant to the Purchase Agreement, Ring will call
and hold a special meeting of stockholders to submit for the consideration of its stockholders a proposal to approve the issuance of the
Excess Shares. In connection with this matter, Ring intends to file with the Securities and Exchange Commission (“SEC”) a
proxy statement and other relevant materials.
Anticipated Closing Date
and Closing Conditions. The Acquisition is expected to close in the third quarter of 2022, subject to the satisfaction of several
closing conditions, including (but not limited to) (i) specified materiality standards with respect to the accuracy of the applicable
party’s representations and warranties in the Purchase Agreement, (ii) the applicable party’s performance or compliance in
all material respects with the covenants contained in the Purchase Agreement, (iii) the absence of certain legal matters prohibiting the
Stronghold Acquisition, (iv) each party being ready to deliver specified closing deliverables, (v) the shares of Ring Common Stock being
approved and authorized for listing on the NYSE American stock exchange, and (vi) if applicable, the expiration of any waiting period
under the Hart-Scott-Rodino Improvements Act of 1976, as amended.
Registration
Rights. In connection with the closing of the Purchase Agreement, Ring will also enter into a customary registration rights
agreement with Stronghold and their respective equity holders containing provisions by which Ring will, among other things, file a registration
statement on Form S-3 (or other available form) with the SEC providing for the registration of any of the shares of Ring Common Stock
issued to Stronghold in connection with the Stronghold Acquisition and cooperate in certain underwritten offerings thereof. The form of
Registration Rights Agreement is included in Exhibit 2.1 to this Current Report on Form 8-K.
Lock-Up
Agreements. In connection with the closing of the Purchase Agreement, Ring will also enter into a customary lock-up agreements
with Stronghold and their respective equity holders providing that such holders will not transfer, subject to limited exceptions, shares
of Ring Common Stock until 90 days (60 days in the case of certain non-affiliates) after the closing of the Stronghold Acquisition. The
form of Lock-Up Agreement is included in Exhibit 2.1 to this Current Report on Form 8-K.
Description of Preferred Stock
The powers, preferences, rights,
qualifications, limitations and restrictions applicable to the Preferred Stock that may be issued as described herein are set forth in
the Company’s Form of Certificate of Designation of the Series A Convertible Preferred Stock (the “Certificate of Designation”),
which is included in Exhibit 2.1 to this Current Report on Form 8-K. The Certificate of Designation, in the form attached hereto, will
be filed with the Nevada Secretary of State to the extent shares of Preferred Stock are required to be issued at closing as described
herein.
Rank
The Preferred Stock will rank as to dividends or
distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily, as follows:
| · | senior to the Common Stock with respect to dividends and with respect to distributions
upon a deemed dissolution, liquidation or winding-up of the Company; |
| · | senior to any class or series of our capital stock after the Preferred Stock is created specifically ranking by its terms junior to
the Preferred Stock; and |
| · | junior to any class or series of our capital stock after the Preferred Stock is created specifically ranking by its terms senior to
the Preferred Stock. |
Voting Rights
The holders of shares of Preferred
Stock generally will have no voting rights, except as required by law, and except that the consent of the majority of holders of the outstanding
Preferred Stock will be required to: (i) create, authorize or issue any equity securities of the Company other than in connection with
issuances under its equity incentive plans; (ii) generally declare or pay dividends or distributions (other than distributions on the
Preferred Stock); (iii) redeem, acquire or make a Company tender offer for any equity securities of the Company (other than in connection
repurchases by the Company in connection with its equity incentive plans); (iv) alter or change adversely the powers, preferences or rights
given to the Preferred Stock or alter or amend the Certificate of Designation; (v) amend the Certificate of Incorporation or bylaws of
the Company in any manner that adversely affects any rights of the holders of Preferred Stock; (vi) authorize or enter into any agreement
related to a material transaction (material acquisitions, mergers, tender offers, business combinations and similar transactions) or change
of control of the Company; and (vii) generally increase or decrease the size of the board of directors of Ring (the “Board”)
except as set forth in the Purchase Agreement or any ancillary document thereto.
Distributions
When and if declared by the
Board, the Preferred Stock will be entitled to preferred distributions at a rate of 8.0% per annum of the Liquidation Preference per share,
which is initially $1,000 per share plus any accrued and unpaid distributions through the date of conversion, payable each calendar quarter.
To the extent distributions are not declared and paid, then on each distribution date the unpaid distribution per share is added to the
per share Liquidation Preference described below. Notwithstanding the foregoing, no distribution will be paid on the Preferred Stock if
it converts into Common Stock on or before January 31, 2023.
In addition, the holders of Preferred Stock will
be entitled to receive, and the Company will be required to pay, dividends on shares of the Preferred Stock equal (on an as if converted
to Common Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends
are paid on shares of the Common Stock.
Conversion and Limitations
The Preferred Stock may not be converted into Ring
Common Stock until such time as Stockholder Approval is received, which is defined as the date requisite approval from holders of capital
stock of the Company is received as required at law or under the applicable securities exchange rules (currently the NYSE American
stock exchange). Upon receiving Stockholder Approval, each share of issued Preferred Stock will be automatically converted into such number
of shares of Ring Common Stock determined by dividing (i) the Liquidation Preference (described below) as of the conversion date
by (ii) the conversion price, which is initially $3.60 per share (subject to adjustment for stock splits and distributions, recapitalizations,
exchanges and similar actions) (such calculation, as so adjusted from time to time, the “Conversion Rate”). The initial
Conversion Rate is 277.7778 shares of Ring Common Stock for each share of Preferred Stock.
Liquidation Preference
Upon a Liquidation Event, the holders of the Preferred
Stock will be entitled to a “Liquidation Preference” of $1,000 per share plus any unpaid distributions noted above. A “Liquidation
Event” means (i) any voluntary or involuntary liquidation, dissolution or winding-up of the Company or (ii) the consummation
of a change of control (which generally means the acquisition by a person of more than 50% of the combined voting power of the Company).
If, on a fully converted basis, the amount that the holders of the Preferred Stock would receive is greater than their Liquidation Preference,
then instead they are to receive the “as-converted” amount, meaning the amount such holders would have received if the Preferred
Stock had been converted to the number of shares of Common Stock to which they would be entitled as of the Liquidation Event.
The Certificate of Designation provides that when
there is a Liquidation Event where the proceeds include both cash and property, the holders of Preferred Stock are to be favored in that
to the extent possible, they will receive the cash proceeds rather than the other property.
Redemption
If the Preferred Stock has not been converted prior
to the date that is 61 months following the closing the Stronghold Acquisition, all outstanding shares of Preferred Stock must be redeemed
in cash at the greater of the Liquidation Preference or the market price of Common Stock that each holder would receive if such holder
had fully converted into shares of Common Stock on the redemption date.
Financing Considerations
Pursuant to a commitment letter dated July 1,
2022 with Truist Bank and the other participating bank parties thereto, it is anticipated that the cash portion of the Purchase Price
will be funded by amending Ring’s existing credit facility to increase the total borrowing capacity under its credit facility to
$1,000,000,000 with an initial borrowing base of approximately $600,000,000 (up from its existing $350,000,000 borrowing base). The Commitment
Letter and related increases to the credit facility and borrowing base are subject to a number of conditions, including the preparation,
execution and delivery of loan documentations amending and restating the existing credit facility to the satisfaction of the bank parties
and the Company.
The Purchase Agreement is
filed as Exhibit 2.1 to this Current Report on Form 8-K, and includes four of the Exhibits thereto that are discussed above.
The foregoing summary description of the Purchase Agreement and the four Exhibits is qualified in its entirety by reference to such Exhibit 2.1,
which is incorporated herein by reference. The Purchase Agreement is filed herewith to provide readers with information regarding its
terms. It is not intended to provide any other factual information about the parties. In particular, the assertions embodied in the representations
and warranties contained in the Purchase Agreement were made as of the date of such agreements only and are in certain instances qualified
by information in confidential disclosure schedules provided by the parties to each other in connection with the signing of the Purchase
Agreement. These disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties
set forth in the Purchase Agreement. Moreover, certain representations and warranties in the Purchase Agreement may have been used for
the purpose of allocating risk between the parties rather than establishing matters of fact. Accordingly, readers should not rely on the
representations and warranties in the Purchase Agreement as characterizations of the actual statements of fact about the parties.
Director Nomination Agreement
At closing, Stronghold
will have the right to designate two directors to the Board (the “Stronghold Directors”) and one or more Special
Committees that the Board may from time to time resolve to establish, subject to compliance with any rule or regulation of the SEC,
the principal U.S. national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not
then listed on a U.S. national or regional securities exchange, on the principal other market on which the Common Stock is then
traded, and any other applicable law. In connection with these two appointments, the Board will appoint (i) one director that
Stronghold designates in their sole discretion and (ii) a second director that Stronghold designates, subject to approval of the
qualifications of such second director by Ring’s Nominating, Environmental, Social and Governance Committee, acting in good
faith. The size of the Board shall be automatically increased or decreased, if necessary, to allow for the election, resignation or
removal of the Stronghold Directors, as the case may be. Under the Director Nomination Agreement, the term “Special
Committee” means any committee of the Board established for the purpose of considering, reviewing, evaluating or negotiating
proposals for a change of control, merger, business combination, restructuring or other strategic transaction or any transaction
involving an actual or potential conflict of interest with any affiliate or employee of the Company, other than Stronghold and its
affiliates.
After the Stronghold directors
are initially appointed, Stronghold will continue to have the right to appoint the Stronghold Directors as long as it beneficially owns
at least 15% of the outstanding Common Stock of the Company (with any outstanding shares of Preferred Stock beneficially owned being deemed
converted into shares of Common Stock.) If Stronghold’s beneficial ownership is below 15%, but is at least 10% of the outstanding
shares of Common Stock of the Company, then they will retain the right to appoint one director to the Board. Should Stronghold’s
beneficial ownership fall below 10%, then Stronghold will have no right to appoint any director to the Board.
Each Stronghold Director:
(i) must meet in all material respects all of the requirements of a director of the Company and (ii) must not be prohibited from or disqualified
from serving as a director of the Company pursuant to any rule or regulation of the SEC, the principal U.S. national or regional securities
exchange on which the Common Stock is then listed or, if the Common Stock is not then listed on a U.S. national or regional securities
exchange, on the principal other market on which the Common Stock is then traded or any other applicable law. In connection therewith,
the Board retains the right to object to the nomination, election or appointment of any Stronghold Director for service on the Board or
any committee of the Board if the Board determines in good faith, after consultation with its outside legal counsel, that such Stronghold
Director fails to meet the criteria set forth above. In such a case, Stronghold will have the right to designate a new candidate. In connection
with any acceptable Stronghold Director, the Board as agreed to take all actions necessary to include and recommend the Stronghold Director
in the election of directors by the Ring stockholders.
The form of Director Nomination
Agreement is included in Exhibit 2.1 to this Current Report on Form 8-K.