Sable Natural Resources Corp - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Sable Natural Resources Corp	Financial_Report.xls
EX-31.1 - EX-31.1 - Sable Natural Resources Corp	d85082exv31w1.htm
EX-31.2 - EX-31.2 - Sable Natural Resources Corp	d85082exv31w2.htm
EX-32.1 - EX-32.1 - Sable Natural Resources Corp	d85082exv32w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

Commission File Number: 53915

NYTEX ENERGY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		84-1080045 (I.R.S. Employer Identification No.)

12222 Merit Drive, Suite 1850 Dallas, Texas (Address of principal executive offices)		75251 (Zip Code)

972-770-4700
(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:
None

Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value per share
(Title of class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 31, 2011, the registrant had 27,367,936 shares of common stock outstanding.

TABLE OF CONTENTS


	Page
PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited):

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		4

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010		5

Consolidated Statements of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2011 and 2010		6

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010		7

Notes to Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

PART II OTHER INFORMATION

Item 1. Legal Proceedings		33

Item 1A. Risk Factors		33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults Upon Senior Securities		42

Item 4. (Removed and Reserved)		42

Item 5. Other Information		42

Item 6. Exhibits		42

Signatures		43
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING STATEMENTS

The statements contained in all parts of this document relate to future events, including, but not limited to, any and all statements regarding future operations, financial results, business plans and cash needs and other statements that are not historical facts are forward looking statements. When used in this document, the words “anticipate,” “budgeted,” “planned,” “targeted,” “potential,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions are intended to be among the statements that identify forward looking statements. Such statements involve known and unknown risks and uncertainties, including, but not limited to, those relating to the current economic downturn and credit crisis, the volatility of natural gas and oil prices, our dependence on our key personnel, factors that affect our ability to manage our growth and achieve our business strategy, technological changes, our significant capital requirements, the potential impact of government regulations, adverse regulatory determinations, litigation, competition, business and equipment acquisition risks, availability of equipment, weather, availability of financing, financial condition of our industry partners, ability of industry partners/customers to obtain permits and other factors detailed herein. Some of the factors that could cause actual results to differ from those expressed or implied in forward-looking statements are described under “Risk Factors” and in our Form 10-K for the year ended December 31, 2010 filed with the U.S. Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement and we undertake no obligation to update or revise any forward-looking statement.

PART I

Item 1. Financial Statements

NYTEX ENERGY HOLDINGS, INC.

Consolidated Balance Sheets


	September 30,
	2011			December 31,
	(Unaudited)			2010
Assets
Current assets:
Cash and cash equivalents	$	63,207		$	209,498
Accounts receivable, net		15,868,440			12,230,782
Inventories		1,348,636			1,237,149
Prepaid expenses and other		3,664,066			2,028,968
Deferred tax asset, net		—			13,487

Total current assets		20,944,349			15,719,884

Property, plant, and equipment, net		42,429,393			45,156,873
Other assets:
Deferred financing costs		1,717,197			2,014,561
Intangible assets, net		13,203,036			14,322,604
Goodwill		4,748,653			4,558,394
Deposits and other		122,164			169,752


Total assets	$	83,164,792		$	81,942,068


Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	11,520,750		$	7,907,001
Accrued expenses		3,441,804			3,327,030
Revenues payable		5,835			36,345
Wells in progress		502,106			403,415
Deferred revenue		46,665			46,665
Derivative liabilities — current portion		33,890,000			32,554,826
Debt — current portion		23,671,190			22,516,398

Total current liabilities		73,078,350			66,791,680

Other liabilities:
Debt		2,613,347			1,127,980
Senior Series A redeemable preferred stock		3,227,778			398,232
Derivative liabilities		702			1,573,560
Asset retirement obligations		—			50,078
Deferred tax liabilities		12,646,702			14,215,838


Total liabilities		91,566,879			84,157,368

Commitments and contingencies (Note 9)

Stockholders’ deficit:
Preferred stock, Series A convertible, $0.001 par value; 10,000,000 shares authorized; 5,761,028 and 5,580,000 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		5,761			5,580
Preferred stock, Series B, $0.001 par value; 1 share authorized; 1 share issued and outstanding at September 30, 2011 and December 31, 2010, respectively		—			—
Common stock, $0.001 par value; 200,000,000 shares authorized; 27,314,368 and 26,219,665 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		27,314			26,219
Additional paid-in capital		25,828,866			24,750,200
Accumulated deficit		(34,264,028	)		(26,997,299	)

Total stockholders’ deficit		(8,402,087	)		(2,215,300	)


Total liabilities and stockholders’ deficit	$	83,164,792		$	81,942,068

See accompanying Notes to Consolidated Financial Statements

NYTEX ENERGY HOLDINGS, INC.

Consolidated Statements of Operations

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
Revenues:
Oilfield services	$	20,718,655		$	—		$	56,121,485		$	—
Drilling fluids		2,707,156			—			7,333,898			—
Oil and gas		40,796			439,210			332,022			679,457
Other		140,674			1,299			271,164			2,922

Total revenues		23,607,281			440,509			64,058,569			682,379

Operating expenses:
Cost of goods sold — drilling fluids		679,728			—			2,148,044			—
Oil & gas lease operating expenses		9,313			18,618			66,157			84,732
Depreciation, depletion, and amortization		2,236,113			22,050			6,597,544			42,927
Selling, general, and administrative expenses		20,539,809			1,300,696			56,415,964			2,272,054
Loss on litigation settlement		—			—			965,065			—
(Gain) loss on sale of assets, net		5,772			111,971			(16,878	)		(466,902	)

Total operating expenses		23,470,735			1,453,335			66,175,896			1,932,811


Income (loss) from operations		136,546			(1,012,826	)		(2,117,327	)		(1,250,432	)

Other income (expense):
Interest income		843			24			1,229			234
Interest expense		(1,375,513	)		(83,043	)		(3,722,126	)		(176,504	)
Change in fair value of derivative liabilities		(8,699	)		—			355,387			—
Accretion of preferred stock liability		(943,181	)		—			(2,829,545	)		—
Equity in loss of unconsolidated subsidiaries		—			(76,305	)		—			(316,908	)
Loss on sale of unconsolidated subsidiary		—			(870,750	)		—			(870,750	)
Other		35,983			—			18,283			—

Total other income (expense)		(2,290,567	)		(1,030,074	)		(6,176,772	)		(1,363,928	)


Loss before income taxes		(2,154,021	)		(2,042,900	)		(8,294,099	)		(2,614,360	)

Income tax benefit		693,321			—			1,426,806			—


Net loss		(1,460,700	)		(2,042,900	)		(6,867,293	)		(2,614,360	)
Preferred stock dividends		(131,906	)		—			(399,436	)		—


Net loss to common stockholders	$	(1,592,606	)	$	(2,042,900	)	$	(7,266,729	)	$	(2,614,360	)


Net loss per share, basic and diluted	$	(0.06	)	$	(0.10	)	$	(0.27	)	$	(0.13	)


Weighted average shares outstanding, basic and diluted		26,940,633			19,728,928			26,481,719			19,394,022

See accompanying Notes to Consolidated Financial Statements

NYTEX ENERGY HOLDINGS, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)


	Series A Convertible						Series B								Additional
	Preferred Stock						Preferred Stock				Common Stock				Paid-In			Accumulated
	Shares			Amounts			Shares		Amounts		Shares		Amounts		Capital			Deficit			Total
Balance at December 31, 2009		—		$	—			—	$	—		19,129,123	$	19,129	$	7,911,434		$	(7,293,154	)	$	637,409
Issuance of common stock and warrants												614,201		615		851,212						851,827

Shares to be issued at maturity of loan												59,375		59		(59	)					—
Net loss																			(2,614,360	)		(2,614,360	)


Balance at September 30, 2010		—		$	—			—	$	—		19,802,699	$	19,803	$	8,762,587		$	(9,907,514	)	$	(1,125,124	)


Balance at December 31, 2010		5,580,000		$	5,580			1	$	—		26,219,665	$	26,219	$	24,750,200		$	(26,997,299	)	$	(2,215,300	)
Issuance of Series A Convertible Preferred Stock		420,000			420											369,050						369,470
Shares issued for share-based compensation and services												177,417		178		700,498						700,676
Shares issued for debt converted												76,667		77		114,922						114,999
Shares issued for warrants exercised												504,124		504		12,733						13,237
Issuance of warrant derivative																(118,440	)					(118,440	)
Shares of Preferred Stock issued for warrants exercised		97,523			97											(97	)					—
Preferred Stock converted to common shares		(336,495	)		(336	)						336,495		336		—						—
Dividend declared																			(399,436	)		(399,436	)
Net loss																			(6,867,293	)		(6,867,293	)


Balance at September 30, 2011		5,761,028		$	5,761			1	$	—		27,314,368	$	27,314	$	25,828,866		$	(34,264,028	)	$	(8,402,087	)

See accompanying Notes to Consolidated Financial Statements

NYTEX ENERGY HOLDINGS, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	For the Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(6,867,293	)	$	(2,614,360	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization		6,597,544			42,927
Equity in loss of unconsolidated subsidiaries		—			316,908
Bad debt expense		159,213			—
Share-based compensation		700,676			507,520
Deferred income taxes		(1,555,649	)		—
Accretion of discount on asset retirement obligations		(50,078	)		3,125
Amortization of debt discount		134,121			—
Amortization of deferred financing fees		297,364			38,892
Accretion of Senior Series A redeemable preferred stock liability		2,829,545			—
Change in fair value of derivative liabilities		(355,387	)		—
Loss on litigation settlement		965,065			—
(Gain) loss on sale of assets, net		(16,878	)		403,848
Change in working capital:
Accounts receivable		(3,796,871	)		(196,925	)
Inventories		(111,487	)		—
Prepaid expenses and other		(1,587,510	)		(151	)
Accounts payable and accrued expenses		3,138,829			(92,753	)
Other liabilities		68,181			138,896


Net cash provided by (used in) operating activities		549,385			(1,452,073	)


Cash flows from investing activities:
Investments in oil and gas properties		—			(2,160	)
Investments in unconsolidated subsidiaries		—			(108,500	)
Additions to property, plant, and equipment		(4,997,362	)		—
Proceeds from sale of property, plant, and equipment		1,298,679			859,408
Proceeds from sale of unconsolidated subsidiaries		—			400,000


Net cash provided by (used in) investing activities		(3,698,683	)		1,148,748


Cash flows from financing activities:
Proceeds from the issuance of common stock and warrants		12,500			181,100
Proceeds from the issuance of Series A convertible preferred stock		369,470			—
Proceeds from the issuance of 9% convertible debentures		936,000			—
Borrowings under revolving credit facility		63,120,440			—
Payments under revolving credit facility		(63,401,026	)		—
Borrowings under notes payable		3,883,773			1,509,791
Payments on notes payable		(1,918,150	)		(629,895	)


Net cash provided by financing activities		3,003,007			1,060,996


Net increase (decrease) in cash and cash equivalents		(146,291	)		757,671
Cash and cash equivalents at beginning of year		209,498			18,136


Cash and cash equivalents at end of year	$	63,207		$	775,807

See accompanying Notes to Consolidated Financial Statements

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1. NATURE OF BUSINESS

NYTEX Energy Holdings, Inc. (“NYTEX Energy”) is an energy holding company with operations centralized in two subsidiaries, NYTEX Petroleum, Inc. (“NYTEX Petroleum”), an exploration and production company concentrating on the acquisition and development of crude oil and natural gas reserves, and Francis Drilling Fluids, Ltd., (“Francis Drilling Fluids,” or “FDF”), a full-service provider of drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services, transportation, storage and handling of liquid and dry drilling products, and equipment rental for the oil and gas industry. On November 23, 2010, through our newly-formed subsidiary, NYTEX FDF Acquisition, Inc. (“Acquisition Inc.”), we acquired 100% of the membership interests of New Francis Oaks, LLC, formerly Francis Oaks, LLC (“Oaks”) and its wholly-owned operating subsidiary, FDF (together with Oaks, the “Francis Group”). The Francis Group has no other assets or operations other than FDF (See Note 4). NYTEX Energy and subsidiaries are collectively referred to herein as the “Company,” “we,” “us,” and “our.”

Liquidity, Events of Default, and Waiver

Our loan agreements generally stipulate that we comply with certain reporting and financial covenants. These covenants include among other things, providing the lender, within set time periods, with financial information, notifying the lender of any change in management, limitations on the amount of capital expenditures, and maintaining certain financial ratios. As a result of the challenges incurred in integrating the FDF operations and due to higher than anticipated capital expenditures at FDF, we were unable to meet several reporting and financial covenants under our senior revolving credit and term loan facility (“Senior Facility”) with PNC Bank measured as of November 30, 2010 and February 28, 2011. Failure to meet the loan covenants under the loan agreement constituted a default and on April 13, 2011, PNC Bank, as lender, provided us with a formal written notice of default. PNC Bank did not commence the exercise of any of its other rights and remedies.

On November 3, 2011, we entered into a First Amendment to Revolving Credit, Term Loan and Security Agreement and Limited Waiver (“First Amendment”) with PNC Bank. The effective date of the Amendment and Waiver is November 1, 2011 (“First Amendment Effective Date”). The First Amendment amends the existing Senior Facility with PNC Bank. Pursuant to the First Amendment, PNC Bank waived each of the existing events of default under the Senior Facility, including the breach of the fixed charge coverage ratio and the breach of the reporting requirement covenant. The First Amendment also amended the Senior Facility, to, among other things:

	•		Require the Company to obtain third-party financing for certain unencumbered real property of FDF no later than 180 days following the First Amendment Effective Date;

	•		Modify the calculation of the fixed charge coverage ratio covenant;

	•		Set monthly limitations on capital expenditures;

	•		Modify the limitations on distributions;

	•		Modify the limitations on certain indebtedness;

	•		Modify the limitations on certain transactions with affiliates and

	•		Modify the timing and amount of any early termination fee.

Due to cross-default provisions and other covenant requirements, we remained, as of September 30, 2011, in default under the Preferred Stock and Warrant Purchase Agreement (“WayPoint Purchase Agreement”) with WayPoint Nytex, LLC (“WayPoint”). The amounts reported on our consolidated balance sheet as of September 30, 2011 and December 31, 2010 related to the WayPoint Purchase Agreement include a derivative liability totaling $33,890,000 and $32,554,826, respectively, which are reported as current liabilities on our consolidated balance sheets. In addition, accrued expenses at September 30, 2011 include $2,371,264 of accrued and unpaid dividends on the Senior Series A Redeemable Preferred Stock. As a result, WayPoint became entitled to seek certain remedies afforded to them under the WayPoint Purchase Agreement including the right to (i) exercise their Control Warrant, or (ii) exercise their put right.

On May 4, 2011, WayPoint provided formal written notice (“Put Notice”) to us of its election to cause us to repurchase (i) warrants issued to WayPoint that, in the aggregate, allow WayPoint to purchase that number of shares of our common stock to equal 51% of our fully diluted capital stock then outstanding, (ii) the 20,750 shares of Senior Series A Redeemable Preferred Stock of Acquisition Inc. owned by WayPoint, and (iii) one share of our Series B Preferred Stock owned by WayPoint (the “WayPoint Securities”), for an aggregate purchase price of $30,000,000 within five business days

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

following the date of the Put Notice. We did not have the funds available to satisfy this Put Notice in a timely manner.

On September 30, 2011, we entered into a Forbearance Agreement (the “Forbearance Agreement”) with WayPoint relating to WayPoint’s mezzanine debt financing to the NYTEX Parties made pursuant to the WayPoint Purchase Agreement. Pursuant to the Forbearance Agreement, WayPoint agreed to forbear from exercising its rights and remedies resulting from (i) events of default under the WayPoint Purchase Agreement and (ii) our failure to repurchase the WayPoint Securities for an aggregate purchase price of $30,000,000, as demanded by WayPoint in its May 4, 2011 Put Notice, which failure resulted in an additional event of default under the WayPoint Purchase Agreement.

To induce WayPoint to enter into the Forbearance Agreement, we have agreed to, among other things, within 60 days after the effective date of the Forbearance Agreement, September 29, 2011 (the “Forbearance Effective Date”), recapitalize the Company (the “Recapitalization”) by effecting a repurchase of the WayPoint Securities for the aggregate purchase price equal to the sum of $32,371,264 as of September 30, 2011 (which sum reflects the $30,000,000 amount set forth in the Put Notice plus accrued interest on other WayPoint Securities), plus interest accruing at the default rate set forth in the WayPoint Purchase Agreement through the closing date of the Recapitalization (the “Closing”), plus payment of reasonable legal fees and disbursements incurred by WayPoint.

WayPoint’s agreement to forbear ends on the earlier of 60 days after the Forbearance Effective Date, (the “Forbearance Period”) or the occurrence of a “Forbearance Default,” defined in the Forbearance Agreement. The term “Forbearance Default” includes nine categories of events, which are listed in Section 1(f) of the Forbearance Agreement and which list includes, among other events, the occurrence of any Default or Event of Default (without taking into account any grace or cure periods) under the WayPoint Purchase Agreement other than the Current Events of Default, and failure to comply with any term, condition or covenant in the Forbearance Agreement.

To induce the Company to enter into the Forbearance Agreement, WayPoint agreed to, among other things, until the earlier to occur of the Closing or the termination of the Forbearance Period, forbear from exercising rights and remedies under the WayPoint Purchase Agreement, including but not limited to (1) exercising warrant rights to acquire a majority of our outstanding common stock, (2) effecting any change in our officers or directors, (3) taking any further action to enforce any of its rights under the WayPoint Purchase Agreement with respect to events of default, and (4) having its financial advisor actively and publicly market Acquisition Inc., Oaks, and FDF for sale to a third party.

On November 14, 2011, WayPoint provided a formal written notice (“Forbearance Default”) that the Company was in default of Section 1(f)(iii) the Forbearance Agreement, which required the Company to (i) either identify a lead investor in connection with the Recapitalization that would, among other things, fund the purchase of the WayPoint Securities, or (ii) provide WayPoint with evidence of progress toward such a proposed recapitalization that is satisfactory to WayPoint at its sole discretion. As a result, WayPoint may seek certain remedies afforded to them under the Forbearance Agreement and the WayPoint Purchase Agreement including the marketing for sale of FDF to a third party. We continue to negotiate with WayPoint to waive the default or amend the Forbearance Agreement. On November 18, 2011, WayPoint provided a written formal notice that allows us to continue the ability to repurchase the WayPoint Securities at the amount stated in the Forbearance Agreement through December 8, 2011. Accordingly, we continue with our efforts to effect the Recapitalization and continue to evaluate financing alternatives. However, there are no assurances that the Company will be successful with the Recapitalization or in its negotiations with WayPoint, and WayPoint has reserved all other rights, remedies, actions and powers to which it may be entitled. Due to cross-default provisions, the default under the Forbearance Agreement constitutes a default under the First Amendment with PNC Bank.

Accordingly, at September 30, 2011, and December 31, 2010, the outstanding principal balance of the amounts owed under the Senior Facility was $17,472,137 and $17,752,723, respectively, and was, because of the default, reported within current liabilities on the consolidated balance sheet at September 30, 2011 and December 31, 2010.

We cannot be certain that our existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under either the Senior Facility or the WayPoint Purchase Agreement. We are currently evaluating long-term financing alternatives that would allow us to comply with the terms of the Forbearance Agreement and enhance our working capital position. Additionally, management has implemented plans to improve liquidity through slowing or stopping certain planned capital expenditures, through the sale of selected assets deemed unnecessary to our business, and improvements to results from operations. There can be no assurance that we will be successful with our plans or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.

A fundamental principle of the preparation of financial statements in accordance with generally accepted accounting principles is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. Our consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might specifically result from the outcome of this uncertainty.

NOTE 2. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These financial statements include the accounts of NYTEX Energy and entities in which it holds a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in non-controlled entities over which we have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost, and subsequently adjusted for our proportionate share of earnings and losses and distributions.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

The interim financial data as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 is unaudited; in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to a fair statement of the results for the interim periods. The consolidated results of operations for the three and nine months ended September 30, 2011 and 2010 are not necessarily indicative of the results to be expected for the full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto as filed in our Annual Report on Form 10-K for the year ended December 31, 2010. Certain prior-period amounts have been reclassified to conform to the current-year presentation.

All references to the Company’s outstanding common shares and per share information have been adjusted to give effect to the one-for-two reverse stock split effective November 1, 2010.

NOTE 3. INVENTORY

Inventory consists of dry materials used in mixing oilfield drilling fluids and liquid drilling fluids mixed and ready for delivery to the drilling rig location. The dry materials are carried at the lower of cost or market, principally on the first-in, first-out basis. The liquid drilling materials are valued at standard cost which approximates actual cost on a first-in, first-out basis, not to exceed market value. Inventories amounted to $1,348,636 and $1,237,149 at September 30, 2011 and December 31, 2010, respectively, and are attributable to our Oilfield Services business.

NOTE 4. BUSINESS COMBINATION

On November 23, 2010, through our newly-formed subsidiary, Acquisition Inc., we acquired 100% of the membership interests of Oaks and its wholly-owned operating subsidiary, FDF. Total consideration transferred was $51.8 million and consisted of cash of $41.3 million, 5.4 million shares of NYTEX Energy common stock at an estimated fair value of $1.86 per share, or $10 million, and a non-interest bearing promissory note payable to the seller in the principal amount of $0.7 million with a fair value of $0.5 million.

FDF is a full-service provider of drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services, and equipment rental for the oil and gas industry. Headquartered in Crowley, Louisiana, FDF operates out of 22 locations in five U.S. states. Our acquisition of FDF makes us a more diversified energy company by providing a broader range of products and services to the oil and gas industry. FDF contributed revenues totaling $23,425,811 and $63,455,383 and loss before income taxes of $1,329,142 and $5,232,041 to our consolidated statement of operations for the three and nine months ended September 30, 2011, respectively.

The following unaudited pro forma summary presents consolidated information as if the business combination had occurred on January 1, 2010 for the nine months ended September 30, 2010:


	Nine Months Ended
	September 30, 2010
Revenue	$	56,985,934
Net loss	$	(2,289,366	)
Net loss per share, basic and diluted	$	(0.11	)

NOTE 5. GOODWILL AND ACQUIRED INTANGIBLE ASSETS

At September 30, 2011 and December 31, 2010, we had $4,748,653 and $4,558,394, respectively, of goodwill allocated to our oilfield services segment as a result of the acquisition of FDF in November 2010. Prior to the acquisition of FDF, we did not have any goodwill.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Intangible assets subject to amortization at September 30, 2011 and associated amortization expense for the nine months then ended is as follows:


	Gross					Net
	Carrying		Accumulated			Carrying		Amortization
	Amount		Amortization			Amount		Expense
Non-compete agreements	$	6,033,000	$	(1,091,714	)	$	4,941,286	$	982,543
Customer relationships		3,654,000		(152,250	)		3,501,750		137,025


	$	9,687,000	$	(1,243,964	)	$	8,443,036	$	1,119,568

The non-compete agreement and customer relationship intangible assets have been allocated to our oilfield services segment and have estimated useful lives of 2.5 to 7 years for non-compete agreements and 20 years for the customer relationships. We also have trade name intangible assets associated with FDF that are not subject to amortization, which have a carrying balance of $4,760,000 as of September 30, 2011 and December 31, 2010. We did not have any such intangible assets prior to our acquisition of FDF.

The estimated amortization for the remainder of 2011 and each of the next five fiscal years is as follows:


October 1 — December 31, 2011	$	373,189
2012		1,492,757
2013		1,086,057
2014		795,557
2015		795,557
2016 and thereafter		3,899,919

NOTE 6. WAYPOINT TRANSACTION

In connection with the FDF acquisition, on November 23, 2010, we, through our wholly-owned subsidiary, Acquisition Inc., entered into the WayPoint Purchase Agreement with WayPoint, an unaffiliated third party, whereby, in exchange for $20,000,001 cash, we issued to WayPoint (collectively, the “WayPoint Transaction”) (i) 20,750 shares of Acquisition Inc. 14% Senior Series A Redeemable Preferred Stock, par value of $0.001 and an original stated amount of $1,000 per share (“Senior Series A Redeemable Preferred Stock”), (ii) one share of NYTEX Energy Series B Preferred Stock, par value of $0.001 per share, (iii) a warrant to purchase at $0.01 per share up to 35% of the then outstanding shares of the Company’s common stock (“Purchaser Warrant”), and (iv) a warrant to purchase at $0.01 per share an additional number of shares of the Company’s common stock so that, measured at the time of exercise, the number of shares of common stock issued to WayPoint represents 51% of the Company’s outstanding common stock on a fully-diluted basis (“Control Warrant”). The Control Warrant is exercisable upon meeting certain conditions, as defined in the WayPoint Purchase Agreement.

In addition, under the WayPoint Purchase Agreement, WayPoint was granted a put right that could require us to repurchase the Purchaser Warrant and Control Warrant from WayPoint at any time on or after the earlier of (i) the date on which a change of control occurs, as defined, (ii) the date on which an event of default occurs, as defined, (iii) the date on which we elect to redeem the Senior Series A Redeemable Preferred Stock, and (iv) the maturity date of the Senior Series A Redeemable Preferred Stock. The repurchase price is equal to the greater of (a) WayPoint’s aggregate equity ownership percentage in the Company as of the date the put right is exercised, multiplied by the fair value of the Company’s common stock and (b)(1) in the event that the put right is exercised before November 23, 2013, $30,000,000, or (2) in the event that the put right is exercised on or after November 23, 2013, $40,000,000.

Initial Accounting

Under the initial accounting, we separated the instruments issued under the WayPoint Purchase Agreement into component parts of the Senior Series A Redeemable Preferred Stock, the Series B Preferred Stock, the Purchaser Warrant, and the Control Warrant. We considered the put right to be inseparable from the Purchaser Warrant and Control Warrant and deemed them to be a derivative (each, a “WayPoint Warrant Derivative”). We estimated the fair value of each component as of the date of issuance. We initially assigned no value to the Control Warrant as it was contingently exercisable and the conditions for exercising had not been met. Since the WayPoint Warrant Derivative related to the Purchaser Warrant had a fair value in excess of the net proceeds we received in the WayPoint Transaction at the date of issuance, no amounts were assigned to Senior Series A Redeemable Preferred Stock in the allocation of proceeds.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Due to the default under the WayPoint Agreement discussed below, the conditions to exercise the Control Warrant are deemed to have been met. Accordingly, we estimated the fair value of the Control Warrant at September 30, 2011 to be a liability of $8,650,000. The WayPoint Warrant Derivatives are included in derivative liabilities on the accompanying consolidated balance sheets as of September 30, 2011 and December 31, 2010.

Changes in fair value of the WayPoint Warrant Derivatives are included in other income (expense) in the consolidated statements of operations and are not taxable or deductible for income tax purposes.

Although no amounts were initially assigned to the Senior Series A Redeemable Preferred Stock, we accrete the total face amount, or $20,750,000, over the term of the instrument of 5.5 years as a liability on the consolidated balance sheet and a corresponding charge to accretion expense on the consolidated statement of operations. For the three and nine months ended September 30, 2011, we recognized $943,181 and $2,829,545 of accretion expense respectively related to the Senior Series A Redeemable Preferred Stock.

Default Under WayPoint Purchase Agreement and Forbearance Agreement

Due to cross-default provisions with our Senior Facility and other covenant requirements, we are currently in default under the WayPoint Purchase Agreement. On April 14, 2011, WayPoint provided us with a formal written notice of default under the WayPoint Purchase Agreement. The amount reported on our consolidated balance sheets as of September 30, 2011 and December 31, 2010 related to the WayPoint Purchase Agreement includes derivative liabilities totaling $33,890,000 and $32,554,826, which are reported within current liabilities on our consolidated balance sheets. In addition, accrued expenses at September 30, 2011 include $2,371,264 of accrued and unpaid dividends on the Senior Series A Redeemable Preferred Stock.

On May 4, 2011, WayPoint provided formal written notice (“Put Notice”) to the Company of its election to cause the Company to (i) repurchase warrants issued to WayPoint that, in the aggregate, allow WayPoint to purchase that number of shares of the Company’s common stock to equal 51% of the Company’s fully diluted capital stock then outstanding, (ii) the 20,750 shares of Senior Series A Redeemable Preferred Stock of Acquisition Inc. owned by WayPoint, and (iii) one share of Series B Preferred Stock of the Company owned by WayPoint, for an aggregate purchase price of $30,000,000 within five business days following the date of the Put Notice. The Company did not have the funds available to satisfy this Put Notice in a timely manner.

On September 30, 2011, we entered into a Forbearance Agreement with WayPoint relating to WayPoint’s mezzanine debt financing to the NYTEX Parties made pursuant to the WayPoint Purchase Agreement. Pursuant to the Forbearance Agreement, WayPoint agreed to forbear from exercising its rights and remedies resulting from (i) events of default under the WayPoint Purchase Agreement and (ii) our failure to repurchase the WayPoint Securities for an aggregate purchase price of $30,000,000, as demanded by WayPoint in its May 4, 2011 Put Notice, which failure resulted in an additional event of default under the WayPoint Purchase Agreement.

To induce WayPoint to enter into the Forbearance Agreement, we have agreed to, among other things, within 60 days after the effective date of the Forbearance Agreement, September 29, 2011, recapitalize the Company by effecting a repurchase of the WayPoint Securities for the aggregate purchase price equal to the sum of $32,371,264 as of September 30, 2011 (which sum reflects the $30,000,000 amount set forth in the Put Notice plus accrued interest on other WayPoint Securities), plus interest accruing at the default rate set forth in the WayPoint Purchase Agreement through the closing date of the Recapitalization, plus payment of reasonable legal fees and disbursements incurred by WayPoint.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 7. DERIVATIVE LIABILITIES

The following summarizes our derivative liabilities at September 30, 2011 and December 31, 2010.


	September 30,		December 31,
	2011		2010
WayPoint Warrant Derivative — Purchaser Warrant	$	25,240,000	$	32,554,826
WayPoint Warrant Derivative — Control Warrant		8,650,000		—
Warrants — Series A Convertible Preferred Stock		702		1,573,560


Balance at end of period	$	33,890,702	$	34,128,386

The WayPoint Warrant Derivative — Purchaser Warrant and Control Warrant were initially recorded at their fair value of $19,253,071 and $0, respectively, on the date of issuance, November 23, 2010. At September 30, 2011, the carrying amount of the WayPoint Warrant Derivative — Purchaser Warrant had not changed from its adjusted value of $25,240,000 as of June 30, 2011. The WayPoint Warrant Derivative — Control Warrant was adjusted to its respective fair value $8,650,000 with a corresponding adjustment to operations. The WayPoint Warrant Derivatives are reported as a derivative liability — current portion on the accompanying consolidated balance sheets as of September 30, 2011 and December 31, 2010.

The agreement setting forth the terms of the warrants issued to the holders of the Company’s Series A Convertible Preferred Stock include an anti-dilution provision that requires a reduction in the instrument’s exercise price should subsequent at-market issuances of the Company’s common stock be issued below the instrument’s original exercise price of $2.00 per share. Accordingly, we consider the warrants to be a derivative; and, as a result, the fair value of the derivative is included as a derivative liability on the accompanying consolidated balance sheets as of September 30, 2011 and December 31, 2010.

Changes in fair value of the derivative liabilities are included as a separate line item within other income (expense) in the accompanying consolidated statement of operations for the three and nine months ended September 30, 2011, and are not taxable or deductible for income tax purposes.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 8. DEBT

A summary of our outstanding debt obligations as of September 30, 2011 and December 31, 2010 is presented as follows:


	September 30,			December 31,
	2011			2010
18% Bridge Loan due July 2011	$	—		$	234,919
9% Demand Notes due February 2011		—			237,458
0% Secured Equipment Loan due March 2011		—			2,098
3.75% Secured Equipment Loan due June 2011		—			1,388,807
18% Promisory Note due November 2011		214,667			—
5.5% Mortgage Note due July 2012		331,995			343,696
3.75% Secured Equipment Loan due August 2012		3,004,280			—
6% Related Party Loan due September 2012		141,000			168,000
12% Convertible Debentures due October 2012		2,026,487			2,064,867
7.41% Secured Equipment Loan due November 2013		—			10,149
5.75% Secured Equipment Loan due November 2013		32,686			43,086
9% Convertible Debentures due February 2014		1,173,013			—
7.41% Secured Equipment Loan due July 2015		—			19,765
Francis Promissory Note (non-interest bearing) due October 2015		409,045			478,710
Senior Facility — Term Loan due November 2015		10,301,102			11,857,144
Senior Facility — Revolver due November 2015		7,171,035			5,895,579
6% Secured Equipment Loan due December 2015		843,972			900,100
7.5% Secured Equipment Loan due February 2016		28,725			—
7.5% Secured Equipment Loan due March 2016		23,900			—
6.34% Secured Equipment Loan due April 2016		276,883			—
6.34% Secured Equipment Loan due June 2016		305,747			—


Total debt		26,284,537			23,644,378
Less: current maturities		(23,671,190	)		(22,516,398	)


Total long-term debt	$	2,613,347		$	1,127,980

Carrying values in the table above include net unamortized debt discount of $266,301 and $356,423 as of September 30, 2011 and December 31, 2010, respectively, which is amortized to interest expense over the terms of the related debt.

Senior Revolving Credit and Term Loan Facility

In connection with the FDF acquisition, on November 23, 2010, we entered into the Senior Facility with PNC Bank providing for loans up to $24,000,000. The Senior Facility consists of a term loan in the amount of $12,000,000 and a revolving credit facility in an amount up to $12,000,000. The term loan bears an annual interest rate based on the higher of (i) the 30 day LIBOR plus 1%, or (ii) the Fed Funds rate plus 0.5%, plus a margin of 2.5% (3.74% at September 30, 2011). The term loan requires monthly payments of principal and interest based on a seven-year amortization of $142,857 with the remaining principal and any unpaid interest due in full at maturity on November 23, 2015. The revolving credit facility bears an annual interest rate based on the higher of (i) the 30 day LIBOR plus 1%, or (ii) the Fed Funds rate plus 0.5%, plus a margin of 1.75% (2.99% at September 30, 2011) and payments of interest only due monthly with the then outstanding principal and any unpaid interest due in full at maturity on November 23, 2015. Advances under the revolving credit facility may not exceed 85% of FDF’s eligible accounts receivable as defined in the Senior Facility.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

ratios. As a result of the challenges incurred in integrating the FDF operations and due to higher than anticipated capital expenditures at FDF, we were unable to meet several reporting and financial covenants under our Senior Facility with PNC Bank measured as of November 30, 2010 and February 28, 2011. Failure to meet the loan covenants under the loan agreement constituted a default and on April 13, 2011, PNC Bank, as lender, provided us with a formal written notice of default. PNC Bank did not commence the exercise of any of its other rights and remedies.

On November 3, 2011, we entered into the First Amendment with PNC Bank. The First Amendment amends the existing Senior Facility with PNC Bank. Pursuant to the First Amendment, PNC Bank waived each of the existing events of default under the Senior Facility, including the breach of the fixed charge coverage ratio and the breach of the reporting requirement covenant. The First Amendment also amended the Senior Facility, to, among other things:

	•		Require the Company to obtain third-party financing for certain unencumbered real property of FDF no later than 180 days following the First Amendment Effective Date;

	•		Modify the calculation of the fixed charge coverage ratio covenant;

	•		Set monthly limitations on capital expenditures;

	•		Modify the limitations on distributions;

	•		Modify the limitations on certain indebtedness;

	•		Modify the limitations on certain transactions with affiliates; and

	•		Modify the timing and amount of any early termination fee.

Other

In December 2010, we issued two demand notes totaling $237,000 related to our acquisition of certain oil and gas interests. The demand notes were due and payable on February 14, 2011 or upon demand by the holder and bear interest at a fixed rate of 9%. On February 14, 2011, we issued $973,013 of 9% Convertible Debentures (“9% Convertible Debenture”) due January 2014, of which $237,000 was issued in exchange for the demand notes due February 14, 2011. In April 2011, we issued an additional $200,000 of the 9% Convertible Debenture and closed the debenture offering. Interest only is payable monthly at the annual rate of 9% with any accrued and unpaid interest along with the unpaid principal due at maturity. The 9% Convertible Debenture is convertible into the Company’s common stock at any time at the fixed conversion price of $2.00 per share, subject to certain adjustments including stock dividends and stock splits. We have the option, at any time, to redeem the outstanding 9% Convertible Debentures in cash equal to 100% of the original principal amount plus accrued and unpaid interest. In August 2011, we entered into a $200,000 promissory note payable with a third party. The promissory note is due in full along with accrued, unpaid interest at the fixed rate of 18% at maturity, November 24, 2011. As an inducement to enter into the promissory note, we agreed to pay the holder of the promissory note a one-time fee of $11,000 and 20,000 shares of our common stock payable upon maturity, both of which are accounted for as a premium to the promissory note. As of September 30, 2011, the balance on the promissory note payable was $214,667.

For the nine months ended September 30, 2011, we issued 76,667 shares of common stock related to conversions of the Company’s 12% Convertible Debentures.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 9. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain trucks, automobiles, equipment, and office space under non-cancelable operating leases which provide for minimum annual rentals. Future minimum obligations under these lease agreements at September 30, 2011 are as follows:


October 1, 2011 — December 31, 2011	$	627,742
2012		2,229,981
2013		1,857,784
2014		1,580,306
2015		1,125,376
Thereafter		1,165,445


	$	8,586,634

Total lease rental expense for the nine months ended September 30, 2011 and 2010 was $1,709,706 and $30,781, respectively.

Litigation

We may become involved from time to time in litigation on various matters, which are routine to the conduct of our business. We believe that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or operations, although any adverse decision in these cases, or the costs of defending or settling such claims, could have a material adverse effect on our financial position, operations, and cash flows.

On August 26, 2010, two suits were filed by Kevin Audrain and Lori Audrain d/b/a Drain Oil Company (“Plaintiffs”) against NYTEX Energy, one as Cause No. 39360 in the 84th District Court in Hutchinson County, Texas, and the other as Cause No. 10-122 in the 69th District Court in Moore County, Texas. Both suits were filed by Plaintiffs and both relate to 75.0% of certain producing oil and gas leaseholds in those counties of the Texas panhandle (the “Panhandle Field Producing Property”). On August 1, 2009, NYTEX Petroleum acquired and assumed operations of the Panhandle Field Producing Property from Plaintiffs. The Plaintiffs allege that NYTEX Petroleum did not engage in a well re-completion (refrac) operation as required by the purchase document between Plaintiffs and NYTEX Petroleum (the “Purchase Document”). As a result of this alleged lack of performance, Plaintiffs believe that they were entitled to pursue repurchase of the Panhandle Field Producing Property in accordance with a buyback provision set forth in the Purchase Document. The Company had filed answers to both suits. On May 9, 2011, effective May 1, 2011, the Company entered into a Compromise Settlement Agreement and Release of All Claims agreement (the “Settlement”) with the Plaintiffs whereby both parties reached a full and final settlement of all claims to both suits. In exchange for the release of all claims to both suits, concurrent with the Settlement, the Company entered into a Purchase and Sale Agreement whereby the Company sold its entire interest in the Panhandle Field Producing Property to the Plaintiffs for the purchase price of $782,000, resulting in a loss on litigation settlement totaling $965,065 for the three months ended March 31, 2011.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 10. STOCKHOLDERS’ EQUITY

The authorized capital of NYTEX Energy consists of 200 million shares of common stock, par value $0.001 per share; 10 million shares of Series A Convertible Preferred Stock, par value $0.001 per share; and one share of Series B Preferred Stock, par value $0.001 per share. The holders of the Series A Convertible Preferred Stock are entitled to receive cumulative quarterly dividends equal to 9% of $1.00 per share, with such dividends in preference to the declaration or payment of any dividends to the holders of common stock. Further, dividends on the Series A Convertible Preferred Stock are cumulative so that if any previous or current dividend shall not have been paid, the deficiency shall first be fully paid before any dividend is to be paid on or declared on common stock. The holders of Series A Convertible Preferred Stock have the same voting rights and powers as the holders of common stock.

The holder of the Series B Preferred Stock is not entitled to receive dividends and is not entitled to any voting rights. However, the holder of the Series B Preferred Stock is entitled to elect two members of the Company’s board of directors.

For the nine months ended September 30, 2011, we issued 76,667 shares of common stock related to conversions of the Company’s 12% Convertible Debentures.

Private Placement — Series A Convertible Preferred Stock

In contemplation of the acquisition of FDF, in October 2010, we initiated a private placement of units each consisting of (i) 100,000 shares of our Series A Convertible Preferred Stock, and (ii) a warrant to purchase 30,000 shares of our common stock at an exercise price of $2.00 per share. Each unit was priced at $100,000. During the three months ended March 31, 2011, we issued 4.2 units for gross proceeds of $420,000 consisting of 420,000 shares of Series A Convertible Preferred Stock and warrants to purchase up to 126,000 shares of common stock. For the year ended December 31, 2010, we issued 55.8 units for gross proceeds of $5,580,000 consisting of 5,580,000 shares of Series A Convertible Preferred Stock and warrants to purchase up to 1,674,000 shares of common stock. At the conclusion of the private placement offering in January 2011, we had issued a total of 60 units for aggregate gross proceeds of $6,000,000.

The holders of the Series A Convertible Preferred Stock are entitled to payment of dividends at 9% of the purchase price per share of $1.00, with such dividends payable quarterly. Dividends are payable out of any assets legally available, are cumulative, and in preference to any declaration or payment of dividends to the holders of common stock. Each holder of Series A Convertible Preferred Stock may, at any time, convert their shares of Series A Convertible Preferred Stock into shares of common stock at an initial conversion ratio of one-to-one. Dividends payable related to the Series A Convertible Preferred Stock totaled $399,436 at September 30, 2011, and are reported in accounts payable on the consolidated balance sheet at September 30, 2011.

For the nine months ended September 30, 2011, we issued 336,495 shares of common stock related to conversions of the Company’s Series A Convertible Preferred Stock.

Warrants

In connection with the private placement offering of Series A Convertible Preferred Stock, during the three months ended March 31, 2011, we issued warrants to the holders to purchase up to 126,000 shares of common stock at an exercise price of $2.00 per share. The warrants may be exercised for a period of three years from the date of grant. The aggregate fair value of the warrants issued during the nine months ended September 30, 2011 was $118,440, was determined using a Monte Carlo simulation, and was accounted for as a derivative liability on the accompanying consolidated balance sheets.

In addition, during the three months ended March 31, 2011, we issued warrants to purchase up to 16,800 shares of Series A Convertible Preferred Stock to the placement agent of the private placement offering of Series A Convertible Preferred Stock. The warrants may be exercised for a period of three years from date of grant at an exercise price of $1.00 per share. The aggregate fair value of the warrants on the date of grant was approximately $15,792 using the Monte Carlo simulation.

For the nine months ended September 30, 2011, we issued 504,124 shares of common stock related to the exercise of warrants granted in connection with the issuance of Series A Convertible Preferred Stock.

The fair value of warrants was determined using the Black-Scholes option pricing model and the Monte Carlo simulation. The expected term of the warrant is estimated based on the contractual term or an expected time-to-liquidity event. The volatility assumption is estimated based on expectations of volatility over the term of the warrant as indicated by implied volatility. The risk-free interest rate is based on the U.S. Treasury rate for a term commensurate with the expected term of the warrant. The aggregate fair value of the warrants issued during the nine months ended September 30, 2011 totaled approximately $134,200 and was determined using the following weighted average attributes and assumptions: risk-free interest rate of 1.62%, expected dividend yield of 0%, expected term of 5.5 years, and expected volatility of 55%. A summary of warrant activity for the nine months ended September 30, 2011 and 2010 is as follows:

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)


	Nine Months Ended September 30,
	2011					2010
				Weighted Average				Weighted Average
	Warrants			Exercise Price		Warrants		Exercise Price
Outstanding at beginning of period		44,061,330		$	0.18		5,798,502	$	0.50
Issued		142,800			1.88		87,400		0.50
Adjustment for WayPoint Warrant ⁽¹⁾		3,175,363			0.01		—		—
Exercised		(1,072,968	)		1.87		—		—
Forfeited or expired		—			—		—		—

Outstanding at end of period		46,306,525		$	0.13		5,885,902	$	0.50


⁽¹⁾		The WayPoint Purchase Agreement allows WayPoint to purchase shares of the Company’s common stock equal to 51% of the Company’s fully diluted common stock then outstanding.

NOTE 11. FAIR VALUE MEASURMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We utilize a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

•

Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

•

Level 2 — Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.

•

Level 3 — Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

As discussed in Notes 6, 7, and 10, we consider certain of our warrants to be derivatives, and, as a result, the fair value of the derivative liabilities are reported on the accompanying consolidated balance sheets. We value the derivative liabilities using a Monte Carlo simulation which contains significant unobservable, or Level 3, inputs. The use of valuation techniques requires us to make various key assumptions for inputs into the model, including assumptions about the expected behavior of the instruments’ holders and expected future volatility of the price of our common stock. At certain common stock price points within the Monte Carlo simulation, we assume holders of the instruments will convert into shares of our common stock. In estimating the fair value, we estimated future volatility by considering the historic volatility of the stock of a selected peer group over a five year period.

For the three months ended September 30, 2011, the fair value of the derivative liabilities increased by an aggregate of $8,699. For the nine months ended September 30, 2011, the fair value of the derivative liabilities decreased by an aggregate $355,387. These amounts were recorded within other income (expense) in the accompanying consolidated statements of operations.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Financial assets and liabilities measured at fair value on a recurring basis are summarized below:


	Carrying Amount		Level 1		Level 2		Level 3
Derivative liabilities	$	33,890,702	$	—	$	—	$	33,890,702

Included below is a summary of the changes in our Level 3 fair value measurements:


Balance, December 31, 2010	$	34,128,386
Change in derivative liabilities		(355,387	)
Issuance of warrant derivative		118,440
Exercise of warrants		(737	)

Balance, September 30, 2011	$	33,890,702

The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, and accrued expenses reported on the accompanying consolidated balance sheets approximates fair value due to their short-term nature. The fair value of debt is the estimated amount we would have to pay to repurchase our debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at each balance sheet date. Debt fair values are based on quoted market prices for identical instruments, if available, or based on valuations of similar debt instruments. As of September 30, 2011 and December 31, 2010, we estimate the fair value of our debt to be $26,296,974 and $23,738,511, respectively. We estimate the fair value of our Senior Series A Redeemable Preferred Stock to be $23,000,000 and $20,750,000, respectively, as of September 30, 2011 and December 31, 2010.

NOTE 12. INCOME TAXES

Income tax benefit was $693,321 and $1,426,806 for the three and nine months ended September 30, 2011 respectively, as compared to no income tax benefit or provision for the three and nine months ended September 30, 2010. The change in income tax benefit in the third quarter of 2011, compared to the third quarter of 2010, was primarily the result of our acquisition of FDF and related differences in the mix of our pre-tax earnings and losses. At September 30, 2011, we had deferred income tax assets of $11,761,800 and a valuation allowance of $9,137,867 resulting in an estimated recoverable amount of deferred income tax assets of $2,623,933. This reflects a net increase of the valuation allowance of $13,842 from the December 31, 2010 balance of $9,124,025.

The balances of the valuation allowance as of September 30, 2011 and December 31, 2010 were $9,137,867 and $9,124,025, respectively. The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 34% primarily due to the effect of state income taxes, permanent differences between book and taxable income, changes to the valuation allowance, and certain discrete items.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 13. EARNINGS PER SHARE

Net loss per common share is calculated by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding. The following table reconciles net loss and common shares outstanding used in the calculations of basic and diluted net loss per share.


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010
Numerator:
Net loss	$	(1,460,700	)	$	(2,042,900	)	$	(6,867,293	)	$	(2,614,360	)
Attributable to preferred stockholders		(131,906	)		—			(399,436	)		—


Net loss attributable to common stockholders	$	(1,592,606	)	$	(2,042,900	)	$	(7,266,729	)	$	(2,614,360	)


Denominator:
Weighted average common shares outstanding, basic		26,940,633			19,728,928			26,481,719			19,394,022
Attributable to participating securities		—			—			—			—


Shares used in calcuating basic and diluted loss per share		26,940,633			19,728,928			26,481,719			19,394,022


Basic and diluted loss per share	$	(0.06	)	$	(0.10	)	$	(0.27	)	$	(0.13	)

Basic earnings per share amounts are computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share amounts are computed by dividing net income or loss by the weighted average number of common shares and dilutive common share equivalents outstanding during the period. Diluted earnings per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments unless the effect is anti-dilutive, thereby reducing the loss or increasing the income per common share.

Because a net loss was incurred during the three and nine months ended September 30, 2011 and 2010, dilutive instruments including the warrants produce an antidilutive net loss per share result. These excluded shares totaled 48,440,448 for the three and nine months ended September 30, 2011, and 3,325,451 for the three and nine months ended September 30, 2010. Therefore, the diluted loss per share reported in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010 are the same as the basic loss per share amounts.

NOTE 14. SEGMENT INFORMATION

Our primary business segments are vertically integrated within the oil and gas industry. These segments are separately managed due to distinct operational differences and unique technology, distribution, and marketing requirements. Our two reportable operating segments are oil and gas exploration and production and oilfield services. The oil and gas exploration and production segment explores for and produces natural gas, crude oil, condensate, and NGLs. The oilfield services segment, which consists solely of the operations of FDF, provides drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services, transportation, storage and handling of liquid and dry drilling products, and equipment rental for the oil and gas industry.

The following tables present selected financial information of our operating segments for the three months ended September 30, 2011. Information presented below as “Corporate and Intersegment Eliminations” includes results from operating activities that are not considered operating segments, as well as corporate and certain financing activities. Prior to the acquisition of FDF, we operated as a single segment enterprise. Accordingly, we do not present segment information for the three months ended September 30, 2010.

For the three months ended September 30, 2011, we had two customers that accounted for more than 10% of our total consolidated revenues: Baker Hughes — 26% and Halliburton Energy Services — 11%. For the nine months ended September 30, 2011, we had two customers that accounted for more than 10% of our total consolidated revenues: Baker Hughes — 23% and Halliburton Energy Services — 11%.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)


							Corporate and
	Oil Field						Intersegment
	Services			Oil & Gas			Eliminations			Total
As of September 30, 2011:
Current Assets	$	20,669,936		$	96,275		$	178,138		$	20,944,349
Property, plant, and equipment, net		42,362,054			67,339			—			42,429,393
Goodwill / intangible assets		17,951,689			—			—			17,951,689
Deferred financing cost		633,758			—			1,083,439			1,717,197
Other assets		112,868			9,296			—			122,164

Total assets	$	81,730,305		$	172,910		$	1,261,577		$	83,164,792


Current liabilities	$	68,641,305		$	757,537		$	3,679,508		$	73,078,350
Long-term debt		1,176,931			1,215,217			221,199			2,613,347
Senior Series A redeemable preferred stock		3,227,778			—			—			3,227,778
Warrant derivative		—			—			702			702
Deferred income taxes		12,066,513			97,398			482,791			12,646,702
Stockholder’s deficit		(3,382,222	)		(1,897,242	)		(3,122,623	)		(8,402,087	)

Total liabilities and stockholder’s deficit	$	81,730,305		$	172,910		$	1,261,577		$	83,164,792


Additions to long-lived assets	$	4,977,441		$	19,921		$	—		$	4,997,362


							Corporate and
	Oil Field						Intersegment
	Services			Oil and Gas			Eliminations			Total
Three Months Ended September 30, 2011:
Revenues:
Oil field services	$	20,718,655		$	—		$	—		$	20,718,655
Drilling fluids		2,707,156			—			—			2,707,156
Oil & gas		—			40,796			—			40,796
Other		—			140,674			—			140,674

Total Revenues		23,425,811			181,470			—			23,607,281

Expenses and other, net:
Cost of goods sold — drilling fluids		679,728			—			—			679,728
Lease operating expenses		—			9,313			—			9,313
Depreciation, depletion, and amortization		2,229,991			6,122			—			2,236,113
Selling, general and administrative expenses		19,760,009			78,505	⁽¹⁾		701,295	⁽¹⁾		20,539,809
Loss on sale of assets		5,772			—			—			5,772
Interest income		—			(836	)		(7	)		(843	)
Interest expense		1,162,254			30,197			183,062			1,375,513
Accretion of preferred stock		943,181			—			—			943,181
Change in fair value of derivative liabilities		10,000			—			(1,301	)		8,699
Other		(35,983	)		—			—			(35,983	)

Total expenses and other, net		24,754,952			123,301			883,049			25,761,302


Income (loss) before income taxes		(1,329,141	)		58,169			(883,049	)		(2,154,021	)
Income tax benefit		693,321			—			—			693,321

Net income (loss)	$	(635,820	)	$	58,169		$	(883,049	)	$	(1,460,700	)


⁽¹⁾		During the quarter ended September 30, 2011, certain expenses, primarily payroll and payroll-related costs, were reclassified from the Oil and Gas segment to the Corporate segment.

NYTEX ENERGY HOLDINGS, INC.

Notes to Consolidated Financial Statements

(Unaudited)


							Corporate and
	Oil Field						Intersegment
	Services			Oil and Gas			Eliminations			Total
Nine Months Ended September 30, 2011:
Revenues:
Oil field services	$	56,121,485		$	—		$	—		$	56,121,485
Drilling fluids		7,333,898			—			—			7,333,898
Oil & gas		—			332,022			—			332,022
Other		—			271,164			—			271,164

Total Revenues		63,455,383			603,186			—			64,058,569

Expenses and other, net:
Cost of goods sold — drilling fluids		2,148,044			—			—			2,148,044
Lease operating expenses		—			66,157			—			66,157
Depreciation, depletion, and amortization		6,549,744			47,800			—			6,597,544
Selling, general and administrative expenses		52,744,242			621,462			3,050,260			56,415,964
Loss on litigation settlement		—			965,065			—			965,065
(Gain) loss on sale of assets		(21,882	)		5,004			—			(16,878	)
Interest income		—			(836	)		(393	)		(1,229	)
Interest expense		3,120,840			76,823			524,463			3,722,126
Accretion of preferred stock		2,829,545			—			—			2,829,545
Change in fair value of derivative liabilities		1,335,174			—			(1,690,561	)		(355,387	)
Other		(18,283	)		—			—			(18,283	)

Total expenses and other, net		68,687,424			1,781,475			1,883,769			72,352,668


Loss before income taxes		(5,232,041	)		(1,178,289	)		(1,883,769	)		(8,294,099	)
Income tax benefit		1,426,806			—			—			1,426,806

Net loss	$	(3,805,235	)	$	(1,178,289	)	$	(1,883,769	)	$	(6,867,293	)

NOTE 15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Additional cash flow information was as follows for the nine months ended September 30, 2011 and 2010:


	2011		2010
Supplemental disclosures of cash flow information:
Total cash paid for interest	$	979,329	$	124,609

Total cash paid for taxes	$	1,825,988	$	—

Cash paid for interest — related party	$	4,815	$	14,310


Supplemental disclosure of non-cash information:
Exchange of working interest in oil and gas properties to retire debt	$	—	$	62,388

Exchange of working interest in oil and gas properties to satisfy payables	$	—	$	161,706

Exchange of wells in progress funds to retire debt	$	—	$	37,612

Exchange of wells in progress funds to satisfy accrued interest	$	—	$	12,500

Acquisition of equipment under financing arrangements	$	—	$	21,583

Issuance of common stock and warrrants in connection with debt transactions	$	—	$	154,273

Exchange of 12% debentures for common stock	$	114,999	$	—

Issuance of derivative liability	$	118,440	$	—

Dividend declared	$	399,436	$	—

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

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

Overview

Our strategy is to enhance value for our shareholders through the acquisition of oilfield fluid service companies at below-market acquisition prices and development of a well-balanced portfolio of natural resource-based assets at discounted acquisition and development costs.

We are an energy holding company consisting of two operating segments:

	Oilfield Services —		consisting of our subsidiary, Francis Drilling Fluids, Ltd. (“FDF”), a full-service provider of drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services, transportation, storage and handling of liquid and dry drilling products, and equipment rental for the oil and gas industry; and

	Oil and Gas —		consisting of our subsidiary, NYTEX Petroleum, Inc. (“NYTEX Petroleum”), an exploration and production company concentrating on the acquisition and development of oil and natural gas reserves.

NYTEX Energy and subsidiaries are collectively referred to herein as “we,” “us,” “our,” “its,” and the “Company”.

General information about us, including our corporate governance policies can be found on our website at www.nytexenergyholdings.com. On our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after we electronically file or furnish them to the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and our other filings. The address of that site is www.sec.gov.

General Industry Overview

Demand for services offered by our industry is a function of our customers’ willingness to make operating and capital expenditures to explore for, develop and produce hydrocarbons in the United States, which in turn is affected by current and expected levels of oil and gas prices. As oil and gas prices increased from 2006 through most of 2008, oil and gas companies increased their drilling activities. In the last part of 2008, oil and gas prices declined rapidly, resulting in decreased drilling activities. During the second half of 2009, oil prices began to increase and remained relatively stable through the latter half of 2010, which resulted in increases in drilling activities. However, natural gas prices continued to decline significantly through most of 2009 and remained depressed throughout 2010, which resulted in decreased activity in the natural gas-driven markets. Despite natural gas prices remaining below the levels seen in recent years, several markets that produce significant natural gas liquids, such as the Eagle Ford shale and those that have other advantages like proximity to key consuming markets, such as the Marcellus shale, have continued to see increased activity. The U.S. Energy Information Administration’s (“EIA”) report on U.S. shale gas and shale oil plays released in July 2011 indicates that 86% of the total 750 trillion cubic feet of technically recoverable shale gas resources are located in the Northeast, Gulf Coast, and Southwest regions of the United States, which account for 63%, 13%, and 10% of the total, respectively. In the three regions, the largest shale gas play is the Marcellus (410.3 trillion cubic feet, 55% of the total), a shale play in which we do business. The Bakken Shale area in North Dakota and Montana has become a major oil producing resource play with an increasing number of drilling rigs and service companies operating in the area since 2007. By combining horizontal wells and hydraulic fracturing (the same technologies used to significantly boost U.S. shale gas production), operators increased Bakken oil production from less than 3,000 barrels per day in 2005 to over 230,000 barrels per day in 2010. Further, because of technological advances associated with horizontal drilling and hydraulic fracturing, the time required to drill and complete a horizontal well has significantly been reduced (25 days in 2010 compared to 65 days in 2008, according to the North Dakota’s Department of Mineral Resources).

The EIA’s report also summarizes the assessment of technically recoverable shale oil resources, which amount to 23.9 billion barrels in the onshore lower 48 U.S. states. The second and third largest shale oil plays are the Bakken and Eagle Ford, which are assessed to hold approximately 3.6 billion barrels and 3.4 billion barrels of oil, respectively, and are shale oil plays in which we do business.

Sustained high oil prices along with strong demand for natural gas continues to positively impact the number of

active rigs drilling in North America. According to Baker-Hughes, active domestic rigs averaged 1,949 in the third quarter of 2011 compared to 1,835 rigs in the second quarter of 2011 and 1,721 rigs in the first quarter of 2011, and compared to an average of 1,626 rigs in the third quarter of 2010. The average number of active domestic rigs in the third quarter of 2011 represents a 19.9% increase over the third quarter of 2010 and a 6.2% increase over the second quarter of 2011. The active domestic rig count ended the third quarter of 2011 at 1,990 rigs, the highest rig count since the third week of November 2008. As a result of these industry developments, we believe that the current high level of drilling will continue and near-term demand for our oilfield products and services will remain favorable.

Source: Baker Hughes Incorporated

Hydraulic Fracturing

Hydraulic fracturing, a technique in use for over 60 years, is commonly applied to wells drilled in low permeability reservoir rock. A hydraulic fracture is formed by pumping fracturing fluid into the wellbore at a rate sufficient to cause the formation to crack, allowing the fracturing fluid to enter and extend the crack farther into the formation. To keep this fracture open after the injection stops, a solid proppant, primarily sand, is added to the fracture fluid. The propped hydraulic fracture then becomes a high permeability conduit through which the oil and/or gas can flow to the well.

The fluid injected into the rock is mostly water. Various types of proppant are added, such as silica sand, resin-coated sand, and fired bauxite clay (man-made ceramics), depending on the type of permeability or grain strength needed. Chemical additives are sometimes applied by the driller/well operator to tailor the injected material to the specific geological situation, protect the well, and improve its operation, though chemical additives typically make up less than 1% of the total composition of the injected fluid, varying slightly based on the type of well.

None of our businesses directly provide nor perform hydraulic fracturing services. In addition, we do not take title to customers’ frac sand or proppants as our Oilfield Services business limits its involvement with hydraulic fracturing to distributing, warehousing, and transloading these products for our customers.

Our Oilfield Services

Acquisition of FDF

On November 23, 2010, through our newly-formed subsidiary, NYTEX FDF Acquisition Inc. (Acquisition Inc.), we acquired 100% of the membership interests of Oaks and its wholly-owned operating subsidiary, FDF (together with Oaks, the “Francis Group”). The Francis Group has no other assets or operations other than FDF. Total consideration transferred was $51.8 million and consisted of cash of $41.3 million, 5.4 million shares of NYTEX Energy common stock at an estimated fair value of $1.86 per share, or $10 million, and a non-interest bearing promissory note payable to the seller in the principal amount of $0.7 million with a fair value of $0.5 million.

FDF is a full-service provider of drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services, transportation, storage and handling of liquid and dry drilling products, and equipment rental for the oil & gas industry. Headquartered in Crowley, Louisiana, FDF operates out of 22 locations in Texas,

Oklahoma, Wyoming, North Dakota, and Louisiana including three coastal Louisiana facilities which provide services on land within the Marcellus, Bakken, and Eagle Ford shales, and off-shore within the Gulf of Mexico. FDF’s suite of fluid products includes water based, oil based and synthetic liquid drilling mud, oil based and hematite products, viscosifiers, fluid conditioners, as well as lubricants, detergents, defoamers and completion fluids. FDF’s completion fluids include calcium, sodium, zinc bromide, salt water, calcium chloride and potassium chloride. FDF’s dry products include frac sand, proppants, cement and fly ash, and sack drilling mud. As part of its total solution, FDF offers transportation, technical and support services, environmental support services and industrial cleaning of drilling rigs, tanks, vessels and barges and offers rental equipment in the form of tanks, liquid mud barges, mud pumps, etc. FDF is a distributor, warehouser and transloader of frac sand, proppants and liquid drilling mud authorized to distribute in 39 states. The customers include exploration and production companies, oilfield and drilling service companies, frac sand and proppant manufacturers, and international brokerage companies of proppants.

Our Oil and Gas

NYTEX Petroleum engages in the acquisition, promotion of, and participation in the drilling of crude oil and natural gas wells and also provides fee-based administration and management services related to oil and gas properties.

In August 2009, we acquired a 75% ownership in the Panhandle Field Producing Property, a 320 acre producing oil and gas property in the Texas panhandle consisting of 18 wells. As the new operator, we agreed to perform technically proven fracture stimulations known as “refracs” on approximately ten of the existing wells. We successfully completed the refrac on one well in the third quarter of 2009 and put it into commercial oil production. The property lies within the vast Panhandle Field that extends into Oklahoma and Kansas. Beginning in the first quarter 2010 and through the third quarter of 2010, we sold or transferred a portion of our 75% working interest in the Panhandle Field Producing Property for $859,408 in cash, recognized a gain on sale of $578,872, and retained a 28.16% working interest.

In December 2010, we re-acquired all but a 2.0% share of the 45.33% share sold earlier in the year for total consideration transferred of approximately $1,451,858. The total consideration transferred consisted of approximately $26,063 cash, 616,291 shares of NYTEX Energy common stock at an estimated fair value of $1.86 per share, or approximately $1,146,301, 9% demand notes totaling approximately $237,458, and interests in existing NYTEX Petroleum properties with an estimated fair value of $42,036. On May 9, 2011, effective May 1, 2011, the Company entered into a Compromise Settlement Agreement and Release of All Claims (the “Settlement”) with the plaintiffs of two lawsuits filed against the Company in August 2010, whereby all parties reached a full and final settlement of all claims to such lawsuits. In exchange for the release of all claims to both suits, concurrent with the Settlement, the Company entered into a Purchase and Sale Agreement whereby the Company sold its entire interest in the Panhandle Field Producing Property to the plaintiffs for the purchase price of $782,000, resulting in a loss on litigation settlement totaling $965,065 for the three months ended March 31, 2011. See Part II, Item 1. Legal Proceedings for further discussion.

Since the refrac completed in the third quarter of 2009 and as of the date of this report, we have not performed any hydraulic fracturing on wells that we own or operate.

Results of Operations

On November 23, 2010, we acquired FDF for total consideration of $51.8 million. The results of FDF are included in our consolidated statement of operations for the current quarter. Accordingly, nearly all of the line items reported in our consolidated statement of operations for the three and nine months ended September 30, 2011 have increased significantly as a result of acquiring FDF compared to the amounts reported in our consolidated statement of operations for the three months ended September 30, 2010.

Selected Data


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Financial Results
Revenues — Oilfield Services	$	23,425,811		$	—		$	63,455,383		$	—
Revenues — Oil and Gas		181,470			440,509			603,186			682,379

Total revenues		23,607,281			440,509			64,058,569			682,379

Total operating expenses		23,470,735			1,453,335			66,175,896			1,932,811
Total other expense		2,290,567			1,030,074			6,176,772			1,363,928

Loss before income taxes	$	(2,154,021	)	$	(2,042,900	)	$	(8,294,099	)	$	(2,614,360	)
Income tax benefit		693,321			—			1,426,806			—

Net loss	$	(1,460,700	)	$	(2,042,900	)	$	(6,867,293	)	$	(2,614,360	)

Loss per share — basic and diluted	$	(0.06	)	$	(0.10	)	$	(0.27	)	$	(0.13	)

Weighted average shares outstanding — basic and diluted		26,940,633			19,728,928			26,481,719			19,394,022


Operating Results
Adjusted EBITDA — Oilfield Services	$	3,022,057				⁽²⁾	$	8,581,380				⁽²⁾
Adjusted EBITDA — Oil and Gas		94,488				⁽²⁾		(83,597	)			⁽²⁾
Adjusted EBITDA — Corporate and Intersegment Eliminations		(701,288	)			⁽²⁾		(3,049,867	)			⁽²⁾


Consolidated Adjusted EBITDA⁽¹⁾	$	2,415,257		$	(1,825,836	)	$	5,447,916		$	(2,861,831	)


⁽¹⁾		See Results of Operations—Adjusted EBITDA for a description of Adjusted EBITDA, which is not a U.S. Generally Accepted Accounting Principles (“GAAP”) measure, and a reconciliation of Adjusted EBITDA to net loss, which is presented in accordance with GAAP.

⁽²⁾		The Company operated as a single segment for the three and nine months ended September 30, 2010.

Three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010

Revenues. Revenues increased over the prior year periods primarily as a result of our acquisition of FDF in November 2010. In the event domestic rig counts increase and we acquire additional operating companies, we expect a corresponding and continued increase in our future revenues.

Oil & gas lease operating expenses. Lease operating expenses decreased $9,305, or 50%, in the three months ended September 30, 2011 compared to the prior three months ended September 30, 2010 and $18,575 or 22% for the nine months ended September 30, 2011 compared to the prior nine months ended September 30, 2010. The decrease is due principally to general reduction in drilling activities during 2010, which has carried over to 2011.

Depreciation, depletion, and amortization. Depreciation, depletion, and amortization (“DD&A”) increased over the prior period primarily as a result of our acquisition of FDF in November 2010 and resultant significant increase in depreciable long-lived assets. We expect DD&A to increase in the future as we acquire additional plant and equipment in our oilfield services business and we acquire additional operating companies.

Selling, general, and administrative expenses. Selling, general, and administrative (“SG&A”) expenses increased for the three and nine months ended September 30, 2011 compared to the prior three and nine months ended September 30, 2010 due principally to our acquisition of FDF in November 2010. SG&A consists primarily of salary and wages, contract labor, professional fees, lease rental costs, fuel, and insurance costs. We expect SG&A to increase in the future relative to increased demand for our oilfield services business and we acquire additional operating companies.

Litigation loss on settlement. The litigation loss on settlement for the nine months ended September 30, 2011 is a result of the settlement of two lawsuits related to the Panhandle Field Producing Property. In exchange for the release of all claims to these two suits by the plaintiffs, concurrent with entering into a Compromise Settlement Agreement and Release of All Claims, the Company entered into a Purchase and Sale Agreement whereby the Company sold its entire interest in the

Panhandle Field Producing Property to the plaintiffs for the purchase price of $782,000, resulting in a loss on litigation settlement totaling $965,065 for the nine months ended September 30, 2011. The impact of the settlement of activity for the three months ended September 30, 2011 was less than $1,000 due to the finalization and execution of the agreement. See Part II, Item 1. Legal Proceedings for further discussion.

(Gain) loss on sale of assets, net. Loss on sale of assets, net decreased $106,199 for the three months ended September 30, 2011 and gain on sale of assets decreased $450,024 for the nine months ended September 30, 2011 compared to the three months and nine months ended September 30, 2010 respectively. The decrease from the three months ended September 30, 2010 is a result of the loss on sale related to the Company’s disposition of interest in the Lakeview Shallow Project. The decrease from the nine months ending September 30, 2010 was due to the aggregate gain recognized on the sale of the Panhandle Field Producing Property.

Interest expense. Interest expense increased during the three and nine months ended September 30, 2011 over the prior year period due primarily to the acquisition of FDF in November 23, 2010 and the increase in outstanding debt during the three and nine months ended September 30, 2011, as compared to the amount of debt outstanding during the three and nine months ended September 30, 2010. We expect interest expense to increase in the near term as we include interest expense associated with the increased outstanding debt for a full period.

Change in fair value of derivative liabilities. The increase in the current period as compared to the prior period ended September 30, 2010, is due to the re-valuation of the Purchaser and Control Warrants held by a third party, both deemed to be derivatives, and the change in value of the warrants issued to the holders of the Company’s Series A Convertible Preferred Stock, also deemed to be derivative. For the three months ended September 30, 2011, the fair value of the derivative liabilities increased by an aggregate $8,699 due to an increase in the valuation of the Control Warrant coupled with a decrease in the liability due to warrants exercised. In addition, for the year ended December 31, 2010, the Control Warrant derivative was initially valued at $0; however, for the nine months ended September 30, 2011, the Control Warrant derivative was valued at $8,650,000 as the conditions for exercise of the Control Warrant had been met in connection with the defaults under the WayPoint Purchase Agreement. We recognize changes in the respective fair values in the consolidated statements of operations.

Accretion of preferred stock liability. Amount reflects the accretion of the face amount of $20,750,000 related to the Senior Series A Redeemable Preferred Stock issued in connection with the WayPoint Transaction in November 2010 over the term of the instruments of approximately 5.5 years. This preferred stock is more fully described below under, “Defaults Under Financing Arrangements.”

Equity in loss of unconsolidated subsidiaries. There was no loss of unconsolidated subsidiaries for the three or nine months ended September 30, 2011. We recognized a loss totaling $76,305 for the three months ended September 30, 2010 and $316,908 for the nine months ended September 30, 2010. These losses related to our noncontrolling interests in Supreme Vacuum and Waterworks. We disposed of our noncontrolling interests in Supreme Vacuum in September 2010.

Income tax benefit. Income tax benefit for the three and nine months ended September 30, 2011 of $693,321 and $1,426,806 respectively, is the result of utilizing existing and current net operating losses to offset taxable income generated by our oilfield services business.

Adjusted EBITDA

To assess the operating results of our segments, our chief operating decision maker analyzes net income (loss) before income taxes, interest expense, DD&A, impairments, gains or losses resulting from the sale of assets or resolution of commercial disputes, changes in fair value attributable to derivative liabilities, and accretion of preferred stock liability (“Adjusted EBITDA”). Our definition of Adjusted EBITDA, which is not a GAAP measure, excludes interest expense to allow for assessment of segment operating results without regard to our financing methods or capital structure. Similarly, DD&A and impairments are excluded from Adjusted EBITDA as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. In addition, changes in fair value attributable to derivative liabilities and the accretion of preferred stock liability are excluded from Adjusted EBITDA since these unrealized (gains) losses are not considered to be a measure of asset-operating performance. Management believes that the presentation of Adjusted EBITDA provides information useful in assessing the Company’s financial condition and results of operations and that Adjusted EBITDA is a widely accepted financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make distributions to stockholders.

Adjusted EBITDA, as we define it, may not be comparable to similarly titled measures used by other companies. Therefore, our consolidated Adjusted EBITDA should be considered in conjunction with net income (loss) and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDA has important limitations as an analytical tool because it excludes certain items that affect net income (loss) and net cash provided by operating activities. Adjusted EBITDA should not be considered in isolation or as a

substitute for an analysis of our results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDA to consolidated net loss to common stockholders as reported on our consolidated statements of operations.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Reconciliation of Adjusted EBITDA to GAAP Net Income (Loss):
Net income (loss)	$	(1,460,700	)	$	(2,042,900	)	$	(6,867,293	)	$	(2,614,360	)
Income tax benefit		(693,321	)		—			(1,426,806	)		—
Interest expense		1,375,513			83,043			3,722,126			176,504
DD&A		2,236,113			22,050			6,597,544			42,927
Change in fair value of derivative liabilities		8,699			—			(355,387	)		—
Accretion of preferred stock liability		943,181			—			2,829,545			—
Loss on litigation		—			—			965,065			—
(Gain) loss on sale of asset		5,772			111,971			(16,878	)		(466,902	)


Consolidated Adjusted EBITDA	$	2,415,257		$	(1,825,836	)	$	5,447,916		$	(2,861,831	)

Liquidity and Capital Resources

Our working capital needs have historically been satisfied through operations, equity and debt investments from private investors, loans with financial institutions, and through the sale of assets. Historically, our primary use of cash has been to pay for acquisitions and investments such as FDF, Supreme Vacuum, the Lakeview Shallow Prospect, and the Panhandle Field Producing Property, service our debt, and for general working capital requirements.

As of September 30, 2011, we had cash and cash equivalents of $63,207, and a net working capital deficit of $52,134,001 (measured by current assets less current liabilities) principally due to (i) reporting the outstanding principal balance of amounts owed under the Senior Facility of $17,472,137 within current liabilities, and (ii) reporting the WayPoint derivative liability totaling $33,890,000 within current liabilities. See Defaults Under Financing Arrangements below for further discussion.

Defaults Under Financing Arrangements, Forbearance Agreement, and Waiver

Our loan agreements and the agreements relating to our other financing arrangements generally require that we comply with certain reporting and financial covenants. These covenants include among other things, providing the lender, within set time periods, with financial information, notifying the lender of any change in management, limitations on the amount of capital expenditures, and maintaining certain financial ratios. As a result of the challenges incurred in integrating the FDF operations and due to higher than anticipated capital expenditures at FDF, we were unable to meet several reporting and financial covenants under our Senior Facility with PNC Bank measured as of November 30, 2010 and February 28, 2011. Failure to meet the loan covenants under the Senior Facility loan agreement constituted a default and on April 13, 2011, PNC, as lender, provided us with a formal written notice of default. PNC Bank did not commence the exercise of any of its other rights and remedies.

	•		Require the Company to obtain third-party financing for certain unencumbered real property of FDF no later than 180 days following the First Amendment Effective Date;

	•		Modify the calculation of the fixed charge coverage ratio covenant;

	•		Set monthly limitations on capital expenditures;

	•		Modify the limitations on distributions;

	•		Modify the limitations on certain indebtedness;

	•		Modify the limitations on certain transactions with affiliates and

	•		Modify the timing and amount of any early termination fee.

Due to cross-default provisions and other covenant requirements, we remained, as of September 30, 2011, in default under the WayPoint Purchase Agreement. The amounts reported on our consolidated balance sheet as of September 30, 2011 and December 31, 2010 related to the WayPoint Purchase Agreement include a derivative liability totaling $33,890,000 and $32,554,826, respectively, which are reported as current liabilities on our consolidated balance sheets. Additionally, we have not paid dividends on Senior Series A Preferred Stock of Acquisition Inc. held by WayPoint. As of September 30, 2011, we owed dividends of $2,371,264 to WayPoint. As a result, WayPoint became entitled to seek certain remedies afforded to them under the WayPoint Purchase Agreement including the right to (i) exercise their Control Warrant, or (ii) exercise their put right and receive a waiver of defaults, or (iii) initiate collection efforts regarding any unpaid dividends and repurchase securities.

On May 4, 2011, WayPoint provided formal written notice (“Put Notice”) to us of its election to cause us to repurchase (i) warrants issued to WayPoint (“Warrants”) that, in the aggregate, allow WayPoint to purchase that number of shares of our common stock to equal 51% of our fully diluted capital stock then outstanding, (ii) the 20,750 shares of Senior Series A Redeemable Preferred Stock of Acquisition Inc. owned by WayPoint, and (iii) one share of our Series B Preferred Stock owned by WayPoint, for an aggregate purchase price of $30,000,000 within five business days following the date of the Put Notice. We did not have the funds available to satisfy this Put Notice in a timely manner.

On September 30, 2011, we entered into the Forbearance Agreement with WayPoint relating to WayPoint’s mezzanine debt financing to the NYTEX Parties made pursuant to the WayPoint Purchase Agreement. Pursuant to the Forbearance Agreement, WayPoint agreed to forbear from exercising its rights and remedies resulting from (i) events of default under the WayPoint Purchase Agreement and (ii) our failure to repurchase the WayPoint Securities for an aggregate purchase price of $30,000,000, as demanded by WayPoint in its May 4, 2011 Put Notice, which failure resulted in an additional event of default under the WayPoint Purchase Agreement.

To induce WayPoint to enter into the Forbearance Agreement, we have agreed to, among other things, within 60 days after the effective date of the Forbearance Agreement, September 29, 2011, recapitalize the Company by effecting a repurchase of the WayPoint Securities for the aggregate purchase price equal to the sum of $32,371,264 as of September 30, 2011 (which sum reflects the $30,000,000 amount set forth in the Put Notice plus accrued interest on other WayPoint Securities), plus interest accruing at the default rate set forth in the WayPoint Purchase Agreement through the closing date of the Recapitalization, plus payment of reasonable legal fees and disbursements incurred by WayPoint.

We cannot be certain that our existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under either the Senior Facility or the WayPoint Purchase Agreement. We are currently evaluating long-term financing alternatives that would allow us to comply with the terms of the Forbearance Agreement and enhance our working capital position. Additionally, management has implemented plans to improve liquidity through slowing or stopping certain planned capital expenditures, through the sale of selected assets deemed unnecessary to our business, and improvements to results from operations. Although these constraints have caused us to significantly scale back the rate at which we implement our business strategy, we believe that these actions should preserve our viability, provide additional time to execute our business priorities, and allow us to satisfy our financial defaults and to resolve our working capital deficit. However, there can be no assurance that we will be successful with our plans or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.

Our future capital requirements will depend on many factors and we may require additional capital beyond our currently anticipated amounts. Any such required additional capital may not be available on reasonable terms, if at all, given our prospects, the current economic environment and restricted access to capital markets. Additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; and strategic partnerships may result in terms which reduce our economic

potential from any adjustments to our existing long-term strategy. Our continuation as a going concern is dependent upon attaining and maintaining profitable operations, resolving the defaults under certain of our loan agreements discussed above, and raising significant additional capital. The financial statements for the three months ended September 30, 2011 and 2010 do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should we discontinue operations.

Cash Flows

The following table summarizes our cash flows and has been derived from our unaudited financial statements for the nine months ended September 30, 2011 and 2010.


	Nine Months Ended September 30,
	2011			2010
Cash flow provided by (used in) operating activities	$	549,385		$	(1,452,073	)
Cash flow provided by (used in) investing activities		(3,698,683	)		1,148,748
Cash flow provided by financing activities		3,003,007			1,060,996


Net increase (decrease) in cash and cash equivalents		(146,291	)		757,671
Beginning cash and cash equivalents		209,498			18,136


Ending cash and cash equivalents	$	63,207		$	775,807

Cash flows from operating activities improved from a cash outflow of $1,452,073 for the nine months ended September 30, 2010 to a cash inflow of $549,385 for the nine months ended September 30, 2011 due to non-cash adjustments affecting earnings including $6,554,617 increase in DD&A, $193,156 increase in share-based compensation, $2,829,545 of accretion of the Senior Series A Redeemable Preferred Stock related to the FDF acquisition, and a loss on litigation settlement of $965,065. These increases were offset by decreases of $355,387 related to the decrease in fair value of the derivative liabilities and a change of $1,555,649 in deferred income taxes. In addition, we had a net cash outflow related to working capital totaling $2,288,858 for the nine months ended September 30, 2011 as compared to a net cash outflow of $150,933 for the nine months ended September 30, 2010.

Cash flows used in investing activities for the nine months ended September 30, 2011 were $3,698,683 compared to cash provided of $1,148,748 for the nine months ended September 30, 2010, and consisted primarily of cash used to acquire property, plant, and equipment totaling $4,997,362, offset by proceeds from the sale of property, plant, and equipment totaling $1,298,679, both within our Oilfield Services segment. For the nine months ended September 30, 2010, cash provided by investing activities consisted primarily of proceeds from the sale of oil and gas properties totaling $859,408 and proceeds from the sale of unconsolidated subsidiaries of $400,000 offset by cash used to invest in unconsolidated subsidiaries of $108,500.

Cash flows provided by financing activities were $3,003,007 for the nine months ended September 30, 2011 consisted primarily of borrowings on notes payable, which was offset by repayment of financing arrangements and the issuance of warrants related to the PPM. In addition, during the nine months ended September 30, 2011, we received proceeds totaling $369,470 from the sale of additional shares of the Series A Convertible Preferred Stock. We also received proceeds totaling $936,000 from the issuance of 9% convertible debentures.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2010, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the first nine months of 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information is not required under Regulation S-K for “smaller reporting companies.”

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Our management, with the participation of the chief executive officer and chief financial officer, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2011. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of that date, our disclosure controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 were not effective at a reasonable assurance level because of the identification of material weaknesses in our internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures. The effect of such weaknesses on our disclosure controls and procedures, as well as the initial remediation actions taken and planned, are described in Item 9A, Controls and Procedures, of our Annual Report on Form 10-K for the year ended December 31, 2010.

Remediation and Changes in Internal Controls

We developed and are in the process of implementing remediation plans to address our material weaknesses. In the nine months ended September 30, 2011, the following specific remedial actions have been put in place:

•

Established and filled the position of Vice President — Finance with experience in complex financial, accounting, and reporting matters and responsibilities over accounting operations, treasury, internal controls, and external SEC reporting;

•

Established and filled the position of Senior Controller of Accounting Operations and Consolidations with experience in complex financial and accounting matters with responsibilities over accounting operations, certain treasury functions, and internal controls;

•

Implemented additional period-end accounting close procedures and developed a project plan utilizing internal resources to support the re-design of our consolidation process; and

•

Engaged an outside consultant to assist us in tax accounting and reporting and to support and assist in the execution of our remediation plans.

As a result, we believe that there are no material inaccuracies or omissions of material fact and, to the best of our knowledge, believe that the consolidated financial statements as of and for the three and nine months ended September 30, 2011, fairly present in all material respects the financial condition and results of operations in conformity with accounting principles generally accepted in the United States of America.

Other than as described above, there have not been any other changes in our internal control over financial reporting in the nine months ended September 30, 2011, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. A control system also can be circumvented by collusion or improper management override. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of such limitations, disclosure controls and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process, therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

PART II

Item 1. Legal Proceedings

Other than ordinary routine litigation incidental to our business, certain additional material litigation follows:

On August 26, 2010, two suits were filed by Kevin Audrain and Lori Audrain d/b/a Drain Oil Company (“Plaintiffs”) against NYTEX Energy, one as Cause No. 39360 in the 84th District Court in Hutchinson County, Texas, and the other as Cause No. 10-122 in the 69th District Court in Moore County, Texas. Both suits were filed by Plaintiffs and both relate to 75.0% of certain producing oil and gas leaseholds in those counties of the Texas panhandle (the “Panhandle Field Producing Property”). On August 1, 2009, NYTEX Petroleum acquired and assumed operations of the Panhandle Field Producing Property from Plaintiffs. The Plaintiffs allege that NYTEX Petroleum did not engage in a well re-completion (refrac) operation as required by the purchase document between Plaintiffs and NYTEX Petroleum (the “Purchase Document”). As a result of this alleged lack of performance, Plaintiffs believe they are entitled to pursue repurchase of the Panhandle Field Producing Property in accordance with a buyback provision set forth in the Purchase Document. The Company believed that NYTEX Petroleum had performed as required. The Company had filed answers to both suits. On May 9, 2011, effective May 1, 2011, the Company entered into a Compromise Settlement Agreement and Release of All Claims agreement (the “Settlement”) with the Plaintiffs whereby all parties reached a full and final settlement of all claims to both lawsuits. In exchange for the release of all claims to both suits, concurrent with the Settlement, the Company entered into a Purchase and Sale Agreement whereby the Company sold its entire interest in the Panhandle Field Producing Property to the Plaintiffs for the purchase price of $782,000, resulting in a loss on litigation settlement totaling $965,065 for the three months ended March 31, 2011.

Item 1A. Risk Factors

Risk factors relating to our operations

We are in default under our mezzanine debt agreement and our senior facility. We recently entered into a forbearance agreement with our mezzanine debt lender, but, if we are unable to comply with the terms of the forbearance agreement or if we are otherwise unable to reach an agreement to resolve our default, this lender can exercise remedies which ultimately could require us to curtail or cease our operations.

On April 13, 2011, we received a letter from PNC Bank, National Association (“PNC”), as lender, notifying us of the occurrence and continued existence of certain events of default under our senior debt facility, in particular, breach of a fixed charge coverage ratio and breach of our reporting requirements. We are currently in negotiations with PNC to obtain a waiver of the defaults. However, there are no assurances that we will be successful in our negotiations with PNC. Because we are in default under the senior debt facility, PNC may at any time exercise any of its remedies under the facility, which include acceleration of the amounts owed, which we may not have the ability to pay. If the debt is accelerated and we are unable to pay, we could experience materially higher interest expenses, and PNC could seek to satisfy the debt by foreclosing on its liens on some or all of our assets, which are security under the facility, or could pursue other legal action. Substantially all of FDF’s personal property is security under the facility, as is our administrative offices in Crowley, LA. Any such action may require us to curtail or cease our operations.

On November 3, 2011, we entered into a First Amendment to Revolving Credit, Term Loan and Security Agreement and Limited Waiver (“First Amendment”) with PNC. The effective date of the Amendment and Waiver is November 1, 2011 (“First Amendment Effective Date”). The First Amendment amends the existing Senior Facility with PNC. Pursuant to the First Amendment, PNC waived each of the existing events of default under the Senior Facility, including the breach of the fixed charge coverage ratio and the breach of the reporting requirement covenant.

On April 14, 2011 we received a letter from WayPoint, as mezzanine lender, stating we are in default of the WayPoint Purchase Agreement, for defaults similar to the PNC defaults plus our failure to pay dividends when due and, therefore, that WayPoint now has the right to exercise the Control Warrant. If WayPoint exercises the Control Warrant, it would own 51% of our outstanding Common Stock. In addition to being in default under the WayPoint Purchase Agreement, on May 4, 2011, WayPoint provided us with the Put Notice regarding its election to cause us to repurchase all securities that WayPoint acquired in connection with the WayPoint Purchase Agreement for an aggregate purchase price of $30,000,000 within five business days following the date of the Put Notice. These securities are enumerated more fully described under (i) the Risk Factor entitled “Exercise of the WayPoint Control Warrant would result in a change in control,” and (ii) the Risk Factor entitled “The WayPoint Warrants possess full anti-dilution provisions, and may result in a duplication of dilution.” We did not and do not have the funds available to repurchase these securities.

On September 30, 2011, pursuant to the terms of the Forbearance Agreement, WayPoint agreed to forbear for a period of 60 days from exercising its rights and remedies resulting from (i) events of default under the WayPoint Purchase Agreement and (ii) the NYTEX Parties’ failure to repurchase the WayPoint Securities for an aggregate purchase price of $30,000,000, as demanded by WayPoint in the Put Notice, which failure resulted in an additional event of default under the WayPoint Purchase Agreement. We are currently evaluating financing alternatives that would allow us to comply with the terms of the Forbearance Agreement. However, there are no assurances that we will be successful in obtaining the necessary financing, and WayPoint has reserved all other rights, remedies, actions and powers to which it may be entitled should we fail to comply with the terms of the Forbearance Agreement. As a result, WayPoint may seek certain remedies afforded to it under the WayPoint Purchase Agreement including the exercise of its Purchaser and Control Warrants, which would provide WayPoint with ownership of a majority of our outstanding Common Stock, and thereby give WayPoint significant control over our board of directors and operations. Alternatively, WayPoint could initiate collection efforts regarding our failure to pay dividends and repurchase the securities.

By virtue of having the right, and having exercised the right, to designate a majority of the board of directors of our subsidiary, Acquisition Inc., WayPoint may be deemed to have control over Acquisition Inc. and its subsidiaries, including FDF, our significant operating subsidiary. WayPoint also holds the sole outstanding share of our Series B Preferred Stock, entitling it to increase the size of our board of directors and to designate a majority of our board. While members of a board of directors owe fiduciary duties to all stockholders, WayPoint has interests that are in addition to, or different from the interests of our stockholders generally and that create potential conflicts of interest.

In exchange for WayPoint’s $20 million investment that was used to finance our acquisition of FDF, our newly created subsidiary Acquisition Inc. issued WayPoint 20,750 shares of Senior Series A Redeemable Preferred Stock. Acquisition Inc. is the sole owner of Francis Oaks, LLC, which in turn wholly owns FDF. As long as any such shares are outstanding, the holders of such shares, voting as a single class, are entitled to elect two members to the board of Acquisition Inc. Upon the occurrence of a default, as defined in the WayPoint Purchase Agreement, and as more fully described under the Risk Factor entitled “Exercise of the WayPoint Control Warrant would result in a change of control,” that remains uncured for 75 days, the holders of a majority of shares of Senior Series A Redeemable Preferred Stock may increase the number of directors constituting the board of directors of Acquisition Inc. up to that number that would give such holders control of a majority of the board, and to designate such additional directors. On May 9, 2011, WayPoint notified Acquisition Inc. that, because of the continuing occurrences of default, it elected to increase the board from four members to five, and designated Mr. J.J. Schickel, Jr. to fill this newly created vacancy. Mr. Schickel served in this capacity until May 20, 2011, when WayPoint replaced Mr. Schickel with Mr. Lee Buchwald. As of September 30, 2011, the board of Acquisition Inc. included Michael Galvis, Kenneth K. Conte, John Henry Moulton (a WayPoint designee), Thomas Drechsler (a WayPoint designee) and Mr. Buchwald (a WayPoint designee). While members of a board of directors owe fiduciary duties to all stockholders, WayPoint has interests that are in addition to, or different from the interests of our stockholders generally and that create potential conflicts of interest.

The newly-constituted board of Acquisition, Inc. has taken action to change the officers and directors of some of our subsidiaries. On May 10, 2011, the board of Acquisition Inc. voted to remove Michael Galvis as president and Kenneth Conte as chief financial officer, treasurer and secretary of both Oaks and FDF and replace them with Mike Francis as president and Jude Gregory as chief financial officer, treasurer and secretary. Also on May 10, 2011, the board of Acquisition Inc. voted to remove all directors and managers, as applicable, of Oaks and FDF, and replace them with Messrs. Moulton, Drechsler, Galvis, Schickel and Conte as the sole directors and managers, as applicable. Mr. Schickel served in this capacity until May 20, 2011, when WayPoint replaced Mr. Schickel with Mr. Lee Buchwald. Mr. Conte resigned from his role as a director and manager of Acquisition Inc. on November 14, 2011.

As holder of our one outstanding shares of Series B Preferred Stock, and because of the continued breaches under the WayPoint Purchase Agreement, WayPoint, subject to the terms of the Forbearance Agreement, has the right to increase size of our board of directors up to that number that would give WayPoint the right to appoint a majority of our board, and to designate such additional directors. While initially WayPoint appointed two directors to our board, they subsequently resigned. As of the date of this report, WayPoint has no designees serving on our board of directors.

Our independent auditors have expressed doubt about our ability to continue our activities as a going concern, which may hinder our ability to obtain future financing.

The continuation of our business is dependent upon us resolving the defaults under our loan agreements, raising additional financial support, and maintaining profitable operations. The issuance of additional equity securities by us could result in a substantial dilution in the equity interests of our current stockholders. If we should fail to continue as a going concern, you may lose all or a part of the value of your entire investment in us.

Due to the uncertainty of our ability to meet our current operating expenses and the defaults under our loan agreements noted above, in their report on the annual financial statements for the years ended December 31, 2010 and 2009, our independent auditors included an explanatory paragraph regarding the doubt about our ability to continue as a going concern.

Our continuation as a going concern is dependent upon our attaining and maintaining profitable operations, resolving the defaults under certain of our loan agreements, and raising additional capital. The financial statements do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should our company discontinue operations.

Our indebtedness and other payment obligations could restrict our operations and make us more vulnerable to adverse economic conditions.

We now have, and expect to continue to have, a significant amount of indebtedness. Our outstanding indebtedness consists of a senior credit facility, the Debentures, and dividends payable on our Series A Preferred Stock and on the Senior Series A Redeemable Preferred Stock of Acquisition Inc. As of September 30, 2011, we owed $17,472,137 under our senior credit facility, $2,035,000 under the Debentures and dividends of $2,371,264 on the Senior Series A Redeemable Preferred Stock of Acquisition Inc. and $399,436 on our Series A Preferred Stock. Additionally, pursuant to the terms of the Forbearance Agreement, we are required to repurchase the WayPoint Securities for the sum of $32,371,264, plus interest accruing at the default rate set forth in the WayPoint Purchase Agreement through the closing date of the Recapitalization. We currently do not have the funds available to satisfy these obligations. Our current and future indebtedness could have important consequences. For example, those levels of indebtedness and obligations could:

•

impair our ability to make investments and obtain additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes;

•

limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make payments on our indebtedness and obligations; and

•

make us more vulnerable to a downturn in our business, our industry or the economy in general as a substantial portion of our operating cash flow will be required to make payments.

We also have other put or redemption obligations that may restrict the funds that we can devote to operations. The holder of the Senior Series A Redeemable Preferred Stock has the right to have Acquisition Inc. redeem such shares after the third anniversary of issuance thereof at a redemption price equal to 104% of the Stated Amount, and at a redemption price equal to 103% of the Stated Amount 48 months after the date of issuance thereof to May 23, 2016, together, in either case, with all dividends, declared and unpaid thereon through the redemption date.

After the earliest to occur of (a) a Change of Control, (b) an occurrence of a Default that remains uncured for seventy-five days; provided, however, that payment to the holders of the Senior Series A Redeemable Preferred Stock of all amounts owing to them as a result of a Default shall be considered a cure of a Default, and (c) May 23, 2016, Acquisition Inc. is required to redeem the Senior Series A Redeemable Preferred Stock at 100% of the Stated Amount, together with all accrued and unpaid dividends thereon as of the redemption date. If Acquisition Inc. is required to redeem these shares, and we or it does not have available funds, we may have to curtail or cease operations.

We need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our stockholders.

We cannot be certain that our existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under the Senior Facility, our Preferred Stock, the WayPoint Purchase Agreement, or the Forbearance Agreement. However, management has implemented plans to improve liquidity through slowing or stopping certain planned capital expenditures, through the sale of selected assets deemed unnecessary to our business, and improvements to results from operations. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain an additional credit facility. We cannot assure you that any additional equity sales or financing will be available in amounts or on terms acceptable to us, if at all. The sale of additional equity securities could result in additional dilution to our stockholders and result in a significant reduction of your percentage interest in us. The incurrence of additional indebtedness would result in increased debt service obligations and could result in additional operating and financing covenants that would further restrict our operations. There can be no assurance that we will be successful with our plans or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.

Our business depends on domestic spending by the oil and gas industry, and this spending and our business have been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control.

We depend on our customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and gas in the United States. Customers’ expectations of lower market prices for oil and gas, as well as the availability of capital for operating and capital expenditures, may cause them to curtail spending, thereby reducing demand for our services and equipment.

Industry conditions are influenced by numerous factors over which we have no control, such as the supply of and demand for oil and gas, domestic and worldwide economic conditions, political instability in oil and gas producing countries and merger and divestiture activity among oil and gas producers. The volatility of the oil and gas industry and the consequent impact on exploration and production activity could adversely impact the level of drilling and workover activity by some of our customers. This reduction may cause a decline in the demand for our services or adversely affect the price of our services. Reduced discovery rates of new oil and gas reserves in our market areas also may have a negative long-term impact on our business, even in an environment of stronger oil and gas prices, to the extent existing production is not replaced and the number of producing wells for us to service declines. In addition, recent market conditions and the existence of excess equipment have resulted in lower utilization rates.

The deterioration in the global economic environment since 2008 has caused the oilfield services industry to cycle into a downturn, and the rate at which it may continue to improve, or return to former levels, is uncertain. Those adverse changes in capital markets and declines in prices for oil and gas caused many oil and gas producers to announce reductions in capital budgets for future periods. In the last part of 2008, oil and gas prices declined rapidly, resulting in decreased drilling activities. During the second half of 2009, oil prices began to increase and remained relatively stable through the latter half of 2010 and into 2011, which has resulted in increases in drilling activities, and have been increasingly expanding in the oil-driven markets. However, natural gas prices continued to decline significantly through most of 2009 and remained depressed

throughout 2010 and into 2011, which resulted in decreased activity in the natural gas-driven markets. Limitations on the availability of capital, or higher costs of capital, for financing expenditures have caused and may continue to cause these and other oil and gas producers to make additional reductions to capital budgets in the future even if commodity prices increase from current levels. These cuts in spending may curtail drilling programs as well as discretionary spending on well services, which could result in a reduction in the demand for our services, the rates we can charge and our utilization. In addition, certain of our customers could become unable to pay their suppliers, including us. As a result of these conditions, our customers’ spending patterns have become increasingly unpredictable, making it difficult for us to predict our future operating results. Additionally, any of these conditions or events could adversely affect our operating results.

If oil and gas prices remain volatile, or decline, the demand for our services could be adversely affected.

The demand for our services is primarily determined by current and anticipated oil and gas prices and the related general production spending and level of drilling activity in the areas in which we have operations. Volatility or weakness in oil and gas prices (or the perception that oil and gas prices will decrease) affects the spending patterns of our customers and may result in the drilling of fewer new wells or lower production spending on existing wells. This, in turn, could result in lower demand for our services and may cause lower rates and lower utilization of our well service equipment. Continued volatility in oil and gas prices or a reduction in drilling activities could materially and adversely affect the demand for our services and our results of operations.

Competition within the well services industry may adversely affect our ability to market our services.

The well services industry is highly competitive and fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can. The amount of equipment available currently exceeds demand, which has resulted in active price competition. Many contracts are awarded on a bid basis, which may further increase competition based primarily on price.

We depend on several significant customers, and a loss of one or more significant customers could adversely affect our results of operations.

Our customers consist primarily of major and independent oil and gas companies. During 2010, our top five customers accounted for 41% of our revenues. The loss of any one of our largest customers or a sustained decrease in demand by any of such customers could result in a substantial loss of revenues and could have a material adverse effect on our results of operations.

We may not be able to grow successfully through future acquisitions or successfully manage future growth, and we may not be able to effectively integrate the businesses we do acquire.

Our business strategy includes growth through the acquisitions of other businesses. We may not be able to continue to identify attractive acquisition opportunities or successfully acquire identified targets. Furthermore, competition for acquisition opportunities may escalate, increasing our cost of making further acquisitions or causing us to refrain from making additional acquisitions. This strategy may require external financing, which we may not be able to secure at all, or on favorable conditions, and which are governed by and subject to restrictive covenants under our existing financial obligations including with WayPoint and PNC.

In addition, we may not be successful in integrating our current or future acquisitions into our existing operations, which may result in unforeseen operational difficulties or diminished financial performance or require a disproportionate amount of our management’s attention. Even if we are successful in integrating our current or future acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies, that we expected from such acquisitions, which may result in the commitment of our capital resources without the expected returns on such capital.

Our industry has experienced a high rate of employee turnover. Any difficulty we experience replacing or adding personnel could adversely affect our business.

We may not be able to find enough skilled labor to meet our needs, which could limit our growth. Our business activity historically decreases or increases with the price of oil and gas. We may have problems finding enough skilled and unskilled laborers in the future if the demand for our services increases. If we are not able to increase our service rates sufficiently to compensate for wage rate increases, we may not be able to hire and retain the necessary skilled labor to perform our services.

Other factors may also inhibit our ability to find enough workers to meet our employment needs. Our services require skilled workers who can perform physically demanding work. As a result of our industry volatility and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment at

wage rates that are competitive with ours. We believe that our success is dependent upon our ability to continue to employ and retain skilled technical personnel. Our inability to employ or retain skilled technical personnel may adversely affect our ability to complete our ongoing projects or engage new business in the future, which generally could have a material adverse effect on our operations.

Our success depends on key members of our management, the loss of any of whom could disrupt our business operations.

We depend to a large extent on the services of some of our executive officers. The loss of the services of Michael K. Galvis, our President and Chief Executive Officer, Michael G. Francis, President and Chief Executive Officer of FDF, Jude Gregory, Chief Financial Officer of FDF, or other key personnel could disrupt our operations. Although we have entered into employment agreements with the executives mentioned above, and certain other executive officers that contain, among other provisions, non-compete agreements, we may not be able to retain the executives past the terms of their employment agreements or enforce the non-compete provisions in the employment agreements.

Our operations are subject to inherent risks, some of which are beyond our control. These risks may be self-insured, or may not be fully covered under our insurance policies.

Our operations are subject to hazards inherent in the oil and gas industry, such as, but not limited to, accidents, blowouts, explosions, craterings, fires and oil spills. These conditions can cause:

•

personal injury or loss of life;

•

damage to or destruction of property and equipment (including the collateral securing our indebtedness) and the environment;

•

suspension of our operations; and

•

lost profits.

The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our financial condition and results of operations. In addition, claims for loss of oil and gas production and damage to formations can occur in the well services industry. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.

We maintain insurance coverage that we believe to be customary in the industry against these hazards including marine and non-marine property and casualty, workers’ compensation, water pollution/environmental, and liability insurance. Our policy limits for these policies range up to $10,000,000 per occurrence with deductibles ranging up to $25,000. Regarding our water pollution/environmental insurance coverage, our policy limits range up to $5,000,000 with a $2,500 deductible. However, we do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. As such, not all of our property is insured. We maintain accruals in our consolidated balance sheets related to self-insurance retentions by using third-party data and historical claims history. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive. It is likely that, in the future our insurance renewals, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive than it has been in the recent past. In addition, our insurance is subject to coverage limits, and some policies exclude coverage for damages resulting from environmental contamination. Our insurance program is administered by an officer of the Company, is reviewed not less than annually with our insurance brokers and underwriters, and is reviewed by our Board of Directors on an annual basis.

We are subject to federal, state and local regulations regarding issues of health, safety and protection of the environment. Under these regulations, we may become liable for penalties, damages or costs of remediation. Any changes in these laws and government regulations could increase our costs of doing business.

Our operations are subject to federal, state and local laws and regulations relating to protection of natural resources and the environment, health and safety, waste management, and transportation of waste and other materials. Our fluid services segment includes disposal operations into injection wells that pose some risks of environmental liability, including leakage from the wells to surface or subsurface soils, surface water or groundwater. Liability under these laws and regulations could result in cancellation of well operations, fines and penalties, expenditures for remediation, and liability for property damage and personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations also

may include assessment of administrative, civil and criminal penalties, revocation of permits and issuance of corrective action orders.

Risk factors relating to an investment in our securities

The WayPoint Warrants possess full anti-dilution provisions, and may result in a duplication of dilution.

The warrant we issued to WayPoint in connection with the financing of the FDF Acquisition to purchase up to 35% of the outstanding shares of our Common Stock (“Purchaser Warrant”) provides anti-dilution protection so that the number of shares that may be purchased pursuant to the Purchaser Warrant, each at $0.01 per share, shall be equal to 35% of the then outstanding shares of our Common Stock on a fully-diluted basis, as measured at the time of full exercise of the Purchaser Warrant. WayPoint also holds an additional warrant (“Control Warrant” and collectively with the Purchaser Warrant, the “WayPoint Warrants”) to purchase a sufficient number of shares of our Common Stock so that, measured at the time of exercise, the number of shares of Common Stock issued or issuable pursuant to the WayPoint Warrants represents 51% of our outstanding Common Stock on a fully-diluted basis. The exercise price of both WayPoint Warrants is $0.01 per share. The Control Warrant is exercisable only if certain default conditions exist. Because of these anti-dilution provisions, each time we issue additional shares of its Common Stock, for whatever reason, the number of shares of Common Stock issuable upon exercise of the WayPoint Warrants automatically increases. In the event one or both of the WayPoint Warrants is exercised, it will substantially dilute the ownership interests of all other holders of our Common Stock, from both a voting and economic perspective. As discussed above, the Control Warrant is exercisable, but exercise thereof is subject to the Forbearance Agreement.

The Control Warrant may also become exercisable after the Purchaser Warrant has been fully exercised and WayPoint has disposed of all shares of Common Stock acquired pursuant to that warrant. Based on the current number of shares outstanding, the Purchaser Warrant could be exercised for approximately 13,000,000 shares of Common Stock. Assuming that the Control Warrant becomes exercisable and all of the shares acquired upon exercise of the Purchaser Warrant are disposed of by the holder before the Control Warrant is exercised, the Control Warrant would be exercisable for 51% of our Common Stock, which currently would result in the issuance of approximately an additional 28,500,000 shares of Common Stock to WayPoint and result in the total number of shares of Common Stock outstanding exceeding 75,000,000 shares. Thus, the Purchaser Warrant and the Control Warrant could result in duplicative dilution.

Exercise of the WayPoint Control Warrant would result in a change in control.

The Control Warrant becomes exercisable at an exercise price of $0.01 per share, upon the earliest to occur of (i) the occurrence of a Default (defined below) that remains uncured for seventy-five days; provided, that payment to the holders of Senior Series A Redeemable Preferred Stock of our subsidiary Acquisition Inc. of all amounts owing to them as a result of a Default shall be considered a cure of a Default; (ii) the date on which a Change of Control (defined below) occurs, if Acquisition Inc. is not able to redeem all of the Senior Series A Redeemable Preferred Stock in accordance with its terms; (iii) seventy-five days after the date on which the third Default has occurred within a consecutive twelve-month period; and (iv) May 23, 2016, if Acquisition Inc. is not able to redeem all of the Senior Series A Redeemable Preferred Stock in accordance with its terms (the “Default Conditions”). The term “Default” includes 14 categories of events, which are listed in Section 11.1 of the WayPoint Purchase Agreement and which list includes, among other events, (i) the failure of Acquisition Inc. to timely make a redemption payment to holders of the Senior Series A Redeemable Preferred Stock, (ii) the failure of Acquisition Inc. to timely make a dividend payment to holders of the Senior Series A Redeemable Preferred Stock, (iii) our failure or the failure of Acquisition Inc. to perform covenants in the WayPoint Purchase Agreement, (iv) our failure to meet a fixed-charge coverage ratio, leverage ratio or minimum EBITDA test in the WayPoint Purchase Agreement; (v) we or any of our subsidiaries becomes in default on other indebtedness, individually or in the aggregate, in excess of $250,000; (vi) we, Acquisition Inc., Francis Oaks, LLC, FDF or any FDF subsidiary (the “Francis Group”) becomes subject to bankruptcy or receivership proceedings, (vii) a judgment or judgments is entered against is entered against us, Acquisition Inc. or Francis Group in excess of $1,000,000, and such judgment is not satisfied; (viii) we, Acquisition Inc. or Francis Group breaches a representation or warranty in the WayPoint Purchase Agreement or the documents related thereto; (ix) a Change of Control occurs; and (x) certain liabilities in excess of $250,000 arise under ERISA. “Change of Control” means (i) a sale of shares of our stock, Acquisition Inc. or Francis Group, or a merger involving any of them, as a result of which holders of the voting capital stock of the applicable entity immediately prior to such transaction do not hold at least 50% of the voting power of the applicable entity or the resulting or surviving entity or the acquiring entity; (ii) a disposition of all or substantially all of our assets, Acquisition Inc. or Francis Group; (iii) a voluntary or involuntary liquidation, dissolution or winding up by us, Acquisition Inc. or Francis Group; (iv) either Michael K. Galvis or Michael G. Francis shall sell at least five percent (5%) of our equity held by them immediately prior to such sale; (v) Michael K. Galvis ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days; or (vi) Michael G. Francis ceases to be the Chief Executive Officer of FDF and is not replaced by a candidate

suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be the Chief Executive Officer of the FDF and is not replaced by a candidate suitable to WayPoint within 30 days. As stated in more detail above, certain of the Default Conditions have occurred, and the Control Warrant is, as of the date of this report, exercisable, but only subject to the Forbearance Agreement.

The issuance of shares of Common Stock upon conversion of the Debentures and Series A Preferred Stock, as well as upon exercise of outstanding warrants may cause immediate and substantial dilution to our existing stockholders.

If the market price per share of our Common Stock at the time of conversion of our Convertible Debentures or Series A Preferred Stock and exercise of any warrants, options, or any other convertible securities is in excess of the various conversion or exercise prices of these derivative securities, conversion or exercise of these derivative securities would have a dilutive effect on our Common Stock. As of September 30, 2011, we had (i) outstanding Convertible Debentures which are convertible into an aggregate of 1,356,667 shares of our Common Stock at a conversion price of $1.50 per share, (ii) 5,761,028 shares of Series A Preferred Stock which are convertible into an aggregate of 5,761,028 shares of our Common Stock at $1.00 per share, (iii) warrants to purchase 1,291,000 shares of our Common Stock at an exercise price of $2.00 per share of our Common Stock and (iv) outstanding 9% convertible debentures issued by NYTEX Petroleum which are convertible into an aggregate 586,507 shares of Common Stock at a conversion price of $2.00 per share (the “NYTEX Petroleum Convertible Debentures”). Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our Common Stock, which may result in additional dilution of the existing ownership interests of our Common Stockholders.

The terms of our indebtedness to PNC Bank and our transaction with WayPoint restrict our operations.

We need consent from PNC Bank and WayPoint to engage in certain activities, including, but not limited to, incurring further indebtedness, granting any liens on our assets, disposing of our assets, entering into mergers, or conducting acquisitions. If appropriate consents cannot be obtained from PNC Bank and WayPoint, we may not be able to pursue capital-raising transactions or acquisitions that we believe are in our best interests and those of our stockholders.

We are required to register various securities with the SEC under agreements with certain of our security holders and may be subject to certain monetary penalties if we do not do so.

We filed a registration statement with the SEC registering for sale 9,663,333 shares of Common Stock issuable upon conversion of (i) the Debentures and (ii) Series A Preferred Stock, and upon exercise of both the Debenture Warrants and Series A Warrants. Pursuant to a registration rights agreement with the holders of the securities, we were required to file the registration statement on or before 60 days of the final closing of the Series A Preferred Stock offering, which was April 11, 2011. The holders of Series A Preferred Stock may demand a penalty equal to two percent of the amount of their investment, or $120,000, for each month after that date that the registration statement was not filed. We filed a Form S-1 registration statement on April 15, 2011, which was subsequently declared effective by the SEC on September 19, 2011.

We may be required to file a registration statement with the SEC registering for sale those shares of Common Stock held by Diana Francis that were issued to her in the FDF Acquisition. If such shares held by Diana Francis are eligible to be resold in reliance on Rule 144 of the Act, our registration requirements with respect to her shares will lapse.

After November 23, 2011, but only upon request, we are obligated to file a registration statement with the SEC registering for sale the shares of Common Stock that may be issued upon exercise of the WayPoint Warrants. After such time, WayPoint is also entitled to piggyback registration rights, if we register other securities with the SEC. If we are required to file a registration statement registering securities for resale by WayPoint and the registration statement is not timely filed, does not become effective within a certain time period, or ceases to be available for sales thereunder for certain time periods, then we must pay WayPoint an amount in cash equal to one percent (1%) of the value of WayPoint’s securities on the date of such event and each monthly anniversary thereof until cured, subject to a cap of ten percent (10%) of the value of WayPoint’s registrable securities.

We are subject to the reporting requirements of federal securities laws, compliance with which is expensive.

We are a public reporting company in the U.S. and, accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if we were a privately held company.

Our compliance with the Sarbanes Oxley Act and SEC rules concerning internal controls will be time consuming, difficult, and costly.

As a reporting company, it will be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We will need to hire additional financial reporting, internal control, and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the Sarbanes-Oxley Act’s requirements regarding internal controls, we may not be able to obtain the independent accountant certifications that Sarbanes-Oxley Act requires publicly traded companies to obtain.

If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act could be impaired, which could cause the market price of our Common Stock to decrease substantially.

We have committed limited personnel and resources to the development of the external reporting and compliance obligations that are required of a public company. We have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy our obligations in connection with being a public company, when and as such requirements become applicable to us. We plan to obtain additional financial and accounting resources to support and enhance our ability to meet the requirements of being a public company. We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If our financial and managerial controls, reporting systems, or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our Common Stock to decline substantially.

Our stock price may be volatile, which may result in losses to our stockholders.

Domestic and international stock markets often experience significant price and volume fluctuations especially in

times of economic uncertainty. In particular, the market prices of companies quoted on the Over-The-Counter Bulletin Board, where our shares of Common Stock are quoted, generally have been very volatile and have experienced sharp share-price and trading-volume changes. The public trading price of our Common Stock is likely to be volatile and could fluctuate widely in response to the following factors, some of which are beyond our control:

	•		variations in our operating results;

	•		changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;

	•		changes in operating and stock price performance of other companies in our industry;

	•		WayPoint’s exercise of the Purchase Warrant or the Control Warrant;

	•		additions or departures of key personnel;

	•		future sales of our Common Stock; and

	•		general economic and political conditions.

The market price for our Common Stock may be particularly volatile given our status as a smaller reporting company with a presumably small and thinly-traded “float.” You may be unable to sell your Common Stock at or above your purchase price if at all, which may result in substantial losses to you.

The market for our Common Stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is attributable to a number of factors. As noted above, our Common Stock may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price.

Our Common Stock has only recently begun trading. We expect our Common Stock to be thinly-traded. You may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate such shares.

We cannot predict the extent to which an active public trading market for our Common Stock will develop or be sustained due to a number of factors, including the fact that we are a smaller reporting company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume. Even if we come to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company as currently constituted such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our Common Stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained.

Our Common Stock may be subject to penny stock rules, which may make it more difficult for our stockholders to sell their Common Stock.

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 per share. The penny stock rules require a broker-dealer, prior to a purchase or sale of a penny stock not otherwise exempt from the rules, to deliver to the customer a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.

We do not anticipate paying any dividends.

We presently do not anticipate that we will pay any dividends on any of our Common Stock in the foreseeable future. The payment of dividends on our Common Stock, if any, would be contingent upon our revenues, earnings, capital requirements, and our general financial condition. We will pay dividends on our Common Stock only if and when declared by our board of directors. The ability of our board of directors to declare a dividend is subject to restrictions imposed by Delaware law and under our financing arrangements, including our Series A and Series B Preferred Stock. Additionally, we may not pay a dividend on our Common Stock until we are current in dividends payable on our Series A Preferred Stock, as discussed more fully above under the Risk Factor, “Our indebtedness and other payment obligations could restrict our operations and make us more vulnerable to adverse economic conditions.” In determining whether to declare dividends, our board of directors will consider these restrictions as well as our financial condition, results of operations, working capital requirements, future prospects and other factors it considers relevant.

We have a substantial number of authorized common shares available for future issuance that could cause dilution of our stockholders’ interest and adversely impact the rights of holders of our Common Stock.

We have a total of 200,000,000 shares of Common Stock authorized for issuance. As of September 30, 2011, we had 172,685,632 shares of Common Stock available for issuance. We have reserved 1,356,667 shares for conversion of our Debentures, 5,761,028 shares for conversion of our Series A Preferred Stock and 1,738,376 shares for issuance upon the exercise of outstanding warrants held by the Selling Security Holders. We have also reserved 400,000 shares of Common Stock in connection with stock grants to our employees and those of FDF. Additionally, our wholly-owned subsidiary NYTEX Petroleum, has issued debentures convertible into 586,507 shares of our Common Stock if fully converted. We may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. We may also make acquisitions that result in issuances of additional shares of our capital stock. Furthermore, the book value per share of our Common Stock may be reduced.

The addition of a substantial number of shares of our Common Stock into the market or by the registration of any of our other securities under the Securities Act may significantly and negatively affect the prevailing market price for our Common Stock. The future sales of shares of our Common Stock issuable upon the exercise of outstanding warrants and options may have a depressive effect on the market price of our Common Stock, as such warrants and options are likely to be exercised only at a time when the price of our Common Stock is greater than the exercise price.

Other risk factors

Reserve data of our oil and gas operations are estimates based on assumptions that may be inaccurate.

There are uncertainties inherent in estimating natural gas and oil reserves and their estimated value, including many factors beyond our control as producer. Reservoir engineering is a subjective and inexact process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner and is based on assumptions that may vary considerably from actual results.

Accordingly, reserve estimates and actual production, revenue and expenditures likely will vary, possibly materially, from estimates. Additionally, there recently has been increased debate and disagreement over the classification of reserves, with particular focus on proved undeveloped reserves. Changes in interpretations as to classification standards or disagreements with our interpretations could cause us to write down these reserves.

The extent to which we can benefit from successful acquisition and development activities or acquire profitable oil and natural gas producing properties with development potential is highly dependent on the level of success in finding or acquiring reserves.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

None.


Item 3.		Defaults Upon Senior Securities

None


Item 4.		(Removed and Reserved)


Item 5.		Other Information

On November 3, 2011, we entered into a First Amendment to Revolving Credit, Term Loan and Security Agreement and Limited Waiver (“First Amendment”) with PNC Bank. The effective date of the Amendment and Waiver is November1, 2011 (“First Amendment Effective Date”). The First Amendment amends the existing Senior Facility with PNC Bank. Pursuant to the First Amendment, PNC Bank waived each of the existing events of default under the Senior Facility, including the breach of the fixed charge coverage ratio and the breach of the reporting requirement covenant. The First Amendment also amended the Senior Facility, to, among other things:

	•		Require the Company to obtain third-party financing for certain unencumbered real property of FDF no later than 180 days following the First Amendment Effective Date;

	•		Modify the calculation of the fixed charge coverage ratio covenant;

	•		Set monthly limitations on capital expenditures;

	•		Modify the limitations on distributions;

	•		Modify the limitations on certain indebtedness;

	•		Modify the limitations on certain transactions with affiliates; and

	•		Modify the timing and amount of any early termination fee.


Item 6.		Exhibits

The exhibits set forth on the accompanying Exhibit Index have been filed as part of this Form 10-Q.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	NYTEX Energy Holdings, Inc.
	By:	/s/ Michael K. Galvis
		Michael K. Galvis
		President and Chief Executive Officer

November 21, 2011

EXHIBIT INDEX


Exhibit		Document
2		Membership Interests Purchase Agreement by and among Registrant, Francis Drilling Fluids, Ltd., Francis Oaks, L.L.C. and the Members of Francis Oaks, L.L.C. dated November 23, 2010 (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed November 30, 2010 and incorporated herein by reference)

3.1		Certificate of Incorporation of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Form 10-12G/A filed August 12, 2010 and incorporated herein by reference)

3.2		Bylaws of Registrant, as amended (filed as Exhibit 3.2 to the Registrant’s Form 10-12G/A filed August 12, 2010 and incorporated herein by reference)

4.1		Form of Purchaser Warrant (filed as Exhibit 10.7 to the Registrant’s Form 8-K filed November 30, 2010 and incorporated herein by reference)

4.2		Form of Control Warrant (filed as Exhibit 10.7 to the Registrant’s Form 8-K filed November 30, 2010 and incorporated herein by reference)

4.3		Form of Registration Rights Agreement between WayPoint Nytex, LLC and the Registrant dated November 23, 2010 (filed as Exhibit 10.8 to the Registrant’s Form 8-K filed November 30, 2010 and incorporated herein by reference)

4.4		Amended and Restated Certificate of Designation in respect of Senior Series A Redeemable Preferred Stock (filed as Exhibit 10.9 to the Registrant’s Form 8-K filed November 30, 2010 and incorporated herein by reference)

4.5		Amended and Restated Certificate of Designation in respect of Senior Series B Redeemable Preferred Stock (filed as Exhibit 10.10 to the Registrant’s Form 8-K filed November 30, 2010 and incorporated herein by reference)

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002***


Exhibit		Document
101.INS **		XBRL Instance Document.

101.SCH **		XBRL Taxonomy Extension Schema.

101.CAL **		XBRL Taxonomy Extension Calculation Linkbase.

101.DEF **		XBRL Taxonomy Extension Definition Linkbase.

101.LAB **		XBRL Taxonomy Extension Label Linkbase.

101.PRE **		XBRL Taxonomy Extension Presentation Linkbase.


*		Filed herewith

**		Furnished herewith

***		In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

Sable Natural Resources Corp - FORM 10-Q - November 21, 2011

Attached files

Sable Natural Resources Corp Reports