Summary of RING ENERGY, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income. This section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, and our interim unaudited financial statements and accompanying notes to these financial statements.

Stanford Energy, Inc., a Texas Corporation, was formed in 2007. There were no operations prior to acquisitions during 2011. During 2011 Stanford completed three acquisitions of properties with existing production, all with additional potential for development, as well as additional acquisition and leasing of undeveloped acreage. During the nine months ended September 30, 2012 Stanford continued leasing additional mineral interest in acreage in which it already owned an interest. On June 28, 2012, Stanford consummated a stock-for-stock exchange with Ring Energy, Inc. Stanford was determined to be the accounting acquirer in this transaction and therefore the historical financial statements presented are those of Stanford. During the nine months ended September 30, 2012 but prior to the consummation of the stock-for-stock exchange, Ring completed two acquisitions of undeveloped acreage that are offsetting the assets held by Stanford and which is complimentary.

Results of Operations - For the Three Months Ended September 30, 2012 and 2011

Oil and natural gas sales. For the three months ended September 30, 2012, oil and natural gas sales revenue increased $212,212 to $374,739, compared to $162,527 for the same period during 2011. Oil sales increased $218,291 and natural gas sales decreased $6,079. The increases were the result of higher production, which occurred primarily as a result of acquisitions made in the latter part of 2011. For the three months ended September 30, 2012, oil sales volume increased 2,515 barrels to 4,386 barrels, compared to1,871 barrels for the same period in 2011. The average realized per barrel oil price increased 2% from $83.22 for the three months ended September 30, 2011 to $85.28 for the three months ended September 30, 2012. For the three months ended September 30, 2012, gas sales volume decreased 725 thousand cubic feet (MCF) to 169 MCF, compared to 894 MCF for the same period in 2011. The average realized natural gas price per MCF decreased 41% from $7.65 for the three months ended September 30, 2011 to $4.50 for the three months ended September 30, 2012.

Oil and gas production costs. Our lease operating expenses (LOE) increased from $51,632 or $25.56 per barrel of oil equivalent (BOE) for the three months ended September 30, 2011 to $216,908 or $49.14 per BOE for the three months ended September 30, 2012. The increases were the result of additional acquisitions made between periods and work to get properties into proper working condition.
This amount also includes $74,755 or $16.94 per BOE in salt water disposal charges that will be eliminated once our salt water disposal well is placed on line.

Production taxes. Production taxes as a percentage of oil and natural gas sales were 5% during the three months ended September 30, 2011 and remained steady at 5% for the three months ended September 30, 2012. These rates are expected to stay relatively steady unless we make acquisitions in other states with differing production tax rates or the state of Texas changes its production tax rate.

Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by $71,068 to $117,267 for the three months ended September 30, 2012, compared to $49,287 during the same period in 2011. The increase was the result of higher production volume partially offset by a decrease in the average depletion rate from $24.28 per BOE during the three months ended September 30, 2011 to $21.43 per BOE during the three months ended September 30, 2012. The decreased depletion rate was the result of additional acquisitions between periods.

General and administrative expenses. General and administrative expenses increased by $547,572 to $671,438 for the three months ended September 30, 2012, compared to $123,866 during the same period in 2011. The increase was primarily the result of an increase in stock-based compensation expense from $0 for the three months ended September 30, 2011 to $261,856 for the three months ended June 30, 2012 and contract staff compensation.

Interest income. Interest income increased by $2,248 to $2,248 for the three months ended September 30, 2012, compared to zero for the same period in 2011.
The increase was due to a higher cash balance between periods.

Interest expense. Interest expense increased by $3,083 to $33,992 for the three months ended September 30, 2012, compared to the same period in 2011. The increase was due to a higher average outstanding balance between periods.

Net income/loss. For the three months ended September 30, 2012 there was a net loss of $631,453, as compared to net income of $126,876 for the three months ended September 30, 2011. The primary reason for this change is compensation expense.

Results of Operations - For the Nine Months Ended September 30, 2012 and 2011

Oil and natural gas sales. For the nine months ended September 30, 2012, oil and natural gas sales revenue increased $773,304 to $1,045,264 compared to $271,960 for the same period during 2011. Oil sales increased $767,622 and natural gas sales increased $5,682. The increases were the result of higher production, which occurred primarily as a result of acquisitions made during the latter part of 2011. For the nine months ended September 30, 2012, oil sales volume increased 8,670 barrels to 11,653 barrels, compared to 2,983 barrels for the same period in 2011. The average realized per barrel oil price decreased slightly from $88.87 for the nine months ended September 30, 2011 to $88.62 for the nine months ended September 30, 2012. For the nine months ended September 30, 2012, gas sales volume increased 2,425 thousand cubic feet (MCF) to 3,319 MCF, compared to 894 MCF for the same period in 2011. The average realized natural gas price per MCF decreased 51% from $7.65 for the nine months ended September 30, 2011 to $3.77 for the nine months ended September 30, 2012.

Oil and gas production costs. Our lease operating expenses (LOE) increased from $131,837 or $42.09 per barrel of oil equivalent (BOE) for the nine months ended September 30, 2011 compared to $592,163 or $48.51 per BOE for the nine months ended September 30, 2012. The increases were the result of additional acquisitions made between periods and work to get properties into proper working condition. This amount also includes $183,448 or $15.03 per BOE in salt water disposal charges that will be eliminated once our salt water disposal well is placed on line.

Production taxes. Production taxes as a percentage of oil and natural gas sales were 5% during the nine months ended September 30, 2011 and remained steady at 5% for the nine months ended September 30, 2012. Production taxes vary from state to state. Therefore, these taxes may vary in the future depending on the mix of production we generate from various states, as well as the possibility that any state may raise its production tax rate.

Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by $247,479 to $293,102 for the nine months ended September 30, 2012, compared to $53,722 for the same period in 2011. The increase was the result of higher production volume partially offset by a decrease in the average depletion rate from $24.28 per BOE during the nine months ended September 30, 2011 to $21.43 per BOE during the nine months ended September 30, 2012. The decreased depletion rate was the result of additional acquisitions between periods.

General and administrative expenses. General and administrative expenses increased by $1,673,215 to $1,825,937 for the nine months ended September 30, 2012, compared to $152,722 for the same period in 2011. The increase was primarily the result of an increase in stock-based compensation expense from $0 for the nine months ended September 30, 2011 to $707,090 for the nine months ended September 30, 2012 and contract staff compensation.

Interest income. Interest income increased by $2,248 to $2,248 for the nine months ended September 30, 2012, compared to zero for the same period in 2011.
The increase was due to a higher cash balance between periods.

Interest expense. Interest expense increased by $182,175 to $221,838 for the nine months ended September 30, 2012, compared to $39,663 for the same period in 2011. The increase was due to a higher average outstanding balance between periods.

Net income/loss. For the nine months ended September 30, 2012 there was a net loss of $1,803,104, as compared to net income of $109,963 for the nine months ended September 30, 2011. The primary reason for this change is compensation expense.

Capital Resources and Liquidity

As shown in the financial statements for the nine months ended September 30, 2012, the Company had cash on hand of $9,846,250, compared to $11,372 as of December 31, 2011. The Company had net cash provided by operating activities for the nine months ended September 30, 2012 of $515,038, compared to $301,561 for the same period 2011. Other significant sources of cash inflow for the nine months ended September 30, 2012 include proceeds from issuance of common stock for cash of $11,545,983, proceeds from issuance of common stock to Ring Energy, Inc. shareholders in the stock-for-stock exchange transaction of $10,887,561 and borrowings from Ring Energy, Inc. prior to the closing of the stock-for-stock exchange transaction of $1,150,000. The only significant source of cash inflow for the nine months ended September 30, 2011 was proceeds from borrowings under the revolving line of credit for $4,053,428. The most significant cash outflows during the nine months ended September 30, 2012 and 2011 were capital expenditures of $5,019,276 and $4,152,930, respectively, and $9,244,428 payment on notes payable in 2012.

In May 2011, the Company entered into a credit agreement with a bank that provides for a revolving line of credit of up to $10 million for borrowings and letters of credit. As of September 30, 2012, $9,950,000 was available to be drawn on the line of credit. The agreement includes a non-usage commitment fee of 0.20% per annum and covenants limiting other indebtedness, liens, transfer or sale of assets, distributions or dividends and merger or consolidation activity.
The facility has an interest rate of the bank's prime rate plus 0.75% with the total interest rate to be charged being no less than 4.00%. As of September 30, 2012 the interest rate being charged was 4.00%. The note matured on May 10, 2012 and was extended to May 10, 2013. Two of the Company's stockholders are jointly and severally obligated for outstanding borrowings under the credit facility.

To the extent possible, we intend to acquire producing properties and/or developed undrilled properties rather than exploratory properties. We do not intend to limit our evaluation to any one state. We presently have no intention to evaluate off-shore properties or properties located outside of the United States of America.

The pursuit of and acquisition of additional oil and gas properties may again require substantially greater capital than we currently have available and obtaining additional capital would require that we enter into the sale of either short-term or long-term notes payable or the sale of our common stock.
Furthermore, it may be necessary for us to retain outside consultants and others in our endeavors to locate desirable oil and gas properties. The cost to retain one or more consultants or a firm specializing in the purchase/sale of oil and gas properties will have an impact on our financial position and will impact our future cash flows.

The process of acquiring one or more additional oil and gas properties will impact our financial position and reduce our cash position. The types of costs that we may incur include travel cost relating to meeting with individuals instrumental in our acquisition of one or more oil and gas properties, obtaining petroleum engineer reports relative to the oil and gas properties that we are investigating, legal fees associated with such acquisition including title reports, and accounting fees relative to obtaining historical information regarding such oil and gas properties. Even though we may incur such costs, there is no assurance that we will ultimately be able to consummate a transaction resulting in our acquisition of an oil and/or gas property.

Off-balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements and it is not anticipated that the Company will enter into any off-balance sheet arrangements.

Disclosures About Market Risks

Like other natural resource producers, Ring faces certain unique market risks.
The two most salient risk factors are the volatile prices of oil and gas and certain environmental concerns and obligations.

Oil and Gas Prices

Current competitive factors in the domestic oil and gas industry are unique.
The actual price range of crude oil is largely established by major international producers. Pricing for natural gas is more regional. Because domestic demand for oil and gas exceeds supply, there is little risk that all current production will not be sold at relatively fixed prices. To this extent Ring does not see itself as directly competitive with other producers, nor is there any significant risk that the Company could not sell all production at current prices with a reasonable profit margin. The risk of domestic overproduction at current prices is not deemed significant. The primary competitive risks would come from falling international prices which could render current production uneconomical.

Secondarily, Ring is presently committed to use the services of the existing gatherers in its present areas of production. This gives to such gatherers certain short term relative monopolistic powers to set gathering and transportation costs, because obtaining the services of an alternative gathering company would require substantial additional costs since an alternative gatherer would be required to lay new pipeline and/or obtain new rights-of-way in the lease.

It is also significant that more favorable prices can usually be negotiated for larger quantities of oil and/or gas product, such that Ring views itself as having a price disadvantage to larger producers. Large producers also have a competitive advantage to the extent they can devote substantially more resources to acquiring prime leases and resources to better find and develop prospects.

Environmental

Oil and gas production is a highly regulated activity which is subject to significant environmental and conservation regulations both on a federal and state level. Historically, most of the environmental regulation of oil and gas production has been left to state regulatory boards or agencies in those jurisdictions where there is significant gas and oil production, with limited direct regulation by such federal agencies as the Environmental Protection Agency. However, while the Company believes this generally to be the case for its production activities in Texas it should be noted that there are various Environmental Protection Agency regulations which would govern significant spills, blow-outs, or uncontrolled emissions.

In Texas, specific oil and gas regulations exist related to the drilling, completion and operations of wells, as well as disposal of waste oil. There are also procedures incident to the plugging and abandonment of dry holes or other non-operational wells, all as governed by the Texas Railroad Commission, Oil and Gas Division

Compliance with these regulations may constitute a significant cost and effort for Ring. No specific accounting for environmental compliance has been maintained or projected by Ring to date. Ring does not presently know of any environmental demands, claims, or adverse actions, litigation or administrative proceedings in which it or the acquired properties are involved or subject to or arising out of its predecessor operations.

In the event of a breach of environmental regulations, these environmental regulatory agencies have a broad range of alternative or cumulative remedies to include: ordering a cleanup of any spills or waste material and restoration of the soil or water to conditions existing prior to the environmental violation; fines; or enjoining further drilling, completion or production activities. In certain egregious situations, the agencies may also pursue criminal remedies against the Company or its principals.