RING ENERGY, INC. quarterly report, Q3 FY2011

Business Context and Reporting Period

Ring Energy, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company described itself as a development-stage entity, with minimal oil and gas operations and no significant revenue. Its existing asset was a 25% working interest in a 440-acre Howard County, Texas lease; management said further development was unlikely and future production from its well was doubtful.

Financial Highlights

• Third-quarter 2011 loss included a $250,000 non-refundable transaction fee. Nine-month general and administrative expense was $61,429, compared with $41,869 in 2010.
• At September 30, 2011, the balance sheet reported cash and cash equivalents of $620,907, total current assets of $623,007, total assets of $627,902, and total liabilities of $2,161. No debt was reported.
• Cash declined $310,196 from year-end 2010. The company reported stockholders’ equity of $625,741 and an accumulated development-stage deficit of $1,049,548.
• Oil and gas operating results were a $2,024 profit for the first nine months of 2011, versus $135 in 2010, reflecting lower production costs and no 2011 depletion expense after prior impairment. No oil or gas was produced in the third quarter.
• Profitability and margins were not meaningful given the company’s minimal revenue and continuing losses. Interest income was $1,978 for the first nine months, versus $2,334 in 2010.

Material Changes, Outlook, and Risks

• On September 28, 2011, Ring signed a non-binding letter of intent to acquire all of Stanford Energy, Inc. for $8 million and 2 million Ring shares. The proposed company holds interests in Andrews County, Texas; closing was tentatively targeted for on or before January 15, 2012, subject to a definitive agreement, due diligence, and valuation verification.
• Ring paid Stanford a non-refundable $250,000 fee and agreed to a 180-day restriction on pursuing certain competing transactions. The filing states the acquisition financing is not assured; Ring anticipated potentially issuing debt or equity and incurring fundraising costs. The filing provides no formal earnings or production guidance.
• If the proposed deal did not close, management intended to seek other oil and gas acquisitions, which could require substantially more capital. Management did not expect revenue from existing properties and said any future revenue from Stanford would depend on completing the transaction.
• Management cited oil-price volatility, economic and political conditions, production and drilling costs, operating interruptions, and increasingly stringent environmental and safety regulation as risks. Cash deposits were held at one institution, with balances above $250,000 not federally insured.
• The company reported no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.

Important Facts for Investors to Verify

• Confirm the status, final terms, financing, and closing outcome of the Stanford Energy transaction, including the consideration and share issuance.
• Reconcile liquidity disclosures: the balance sheet reports cash of $620,907 and current assets of $623,007, while MD&A cites cash of $620,007 and current assets of $627,902. The filing text does not provide a clear reconciliation.
• Assess the company’s ability to fund acquisitions and ongoing costs given its cash balance, operating cash use, limited trading liquidity, and dependence on external financing.
• Evaluate the value and prospects of the existing Howard County property, which management said was fully impaired and unlikely to generate future production.
• Review the related-party aspects of the proposed acquisition: the Stanford sellers were Ring shareholders, each holding less than 5% of Ring’s outstanding common stock.