Exhibit 99.1

Consolidated Financial Statements of

NYTIS EXPLORATION (USA) INC.

December 31, 2010 and 2009

NYTIS EXPLORATION (USA) INC.

TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Nytis Exploration (USA) Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Nytis Exploration (USA) Inc. and subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nytis Exploration (USA) Inc. and subsidiaries as of December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

NYTIS EXPLORATION (USA) INC.

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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NYTIS EXPLORATION (USA) INC.

Consolidated Statements of Operations

See accompanying notes to consolidated financial statements.

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NYTIS EXPLORATION (USA) INC.

Consolidated Statements of Stockholders’ Equity

See accompanying notes to consolidated financial statements.

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NYTIS EXPLORATION (USA) INC.

Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 1 — Nature of Operations and Significant Accounting Policies

Nytis Exploration (USA) Inc. (Nytis or the Company) is an independent oil and gas company engaged in the exploration, development and production of natural gas in the United States.  The Company’s business is comprised of the assets and properties of Nytis Exploration Company LLC (Nytis LLC) and Nytis Exploration of Pennsylvania LLC (Nytis Pennsylvania) which conduct the Company’s operations in the Appalachian and Illinois Basins.  Collectively Nytis, Nytis LLC and Nytis Pennsylvania are referred to as the Company.

Accounting policies used by the Company reflect industry practices and conform to accounting principles generally accepted in the United States of America.  The more significant of such accounting policies are briefly discussed below.

Principles of Consolidation

The consolidated financial statements include the accounts of Nytis and its consolidated subsidiaries.  As of December 31, 2010, the Company owns 85% of Nytis Pennsylvania and approximately 98% of Nytis LLC.  Pursuant to the operating agreement and after the Company received a certain return on its investment in Nytis Pennsylvania, the Company’s interest in Nytis Pennsylvania was reduced from 90% to 85% effective March 2010. All significant intercompany accounts and transactions have been eliminated.

Reclassifications

As of December 31, 2010, due to the long-term nature of the utilization of the prepaid drilling costs, the Company reclassified these prepaid assets as of December 31, 2009 from current assets to long-term assets.  The Company evaluated the quantitative and qualitative aspects of the adjustment and determined the reclassification was not material.  There was no impact on the Company’s results of operations and a nominal change in cash flows from operating activities with a corresponding change in cash flows from investing activities for the year ended December 31, 2009.

As of December 31, 2010, the Company elected to reflect its derivative gains and losses on a separate line in its Consolidated Statements of Operations.  Prior to 2010, such gains and losses were included with oil and gas revenues.  For comparative purposes, the Company reclassified its 2009 derivative gains from oil and gas revenues to a separate line.  As a result of this reclassification, there was no impact on the Company’s results of operations or cash flow statements for the year ended December 31, 2009.

Cash and Cash Equivalents

Cash and cash equivalents in excess of daily requirements have been generally invested in money market accounts, certificates of deposits and other cash equivalents with maturities of three months or less.  Such investments are deemed to be cash equivalents for purposes of the consolidated financial statements.  The carrying amount of cash equivalents approximates fair value because of the short maturity and high credit quality of these investments.

Accounts Receivable

Revenue producing activities are conducted primarily in Illinois, Kentucky, Ohio, Pennsylvania and West Virginia.  The Company grants credit to all qualified customers, which potentially subjects the Company to credit risk resulting from, among other factors, adverse changes in the industries in which the Company operates and the financial condition of its customers.  The Company continuously monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon its historical experience and any specific customer collection issues that it has identified.  At December 31, 2010 and 2009, the Company had not identified any collection issues and as a consequence no allowance for doubtful accounts was provided for on those dates.  During 2010 and 2009, the Company’s primary purchaser of its natural gas accounted for 47% and 45%, respectively of the Company’s natural gas revenues and represented approximately 45% of the Company’s natural gas accounts receivable at December 31, 2010.  There are a number of purchasers in the areas that the Company sells its production and accordingly, management does not believe that changing its primary purchaser, as the Company elected to do in 2010, or a loss of any other single purchaser would materially impact the Company’s business.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 1 — Nature of Operations and Significant Accounting Policies (continued)

Accounting for Oil and Gas Operations

The Company uses the full cost method of accounting for oil and gas properties.  Accordingly, all costs incidental to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipments, are capitalized.  Overhead costs incurred that are directly identified with acquisition, exploration and development activities undertaken by the Company for its own account, and which are not related to production, general corporate overhead or similar activities, are also capitalized.

Unproved properties are excluded from amortized capitalized costs until it is determined whether or not proved reserves can be assigned to such properties.  Nytis assesses its unproved properties for impairment at least annually.  Significant unproved properties are assessed individually.  During 2010, approximately $846,000 of expiring acreage was reclassified into proved property.  This acreage represents leases that will expire during 2011 and will not be renewed.  During 2009, approximately $620,000 of expiring acreage was reclassified into proved property.  This acreage represents leases that expired during 2010 and were not renewed.  These costs were included in the ceiling test and depletion calculations.

The Company performs a ceiling test annually.  Under the full cost method of accounting, capitalized oil and gas property costs less accumulated depletion and deferred income taxes may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves less the future cash outflows associated with the asset retirement obligations that have been accrued in the balance sheet, plus the cost, or estimated fair value if lower, of unproved properties and the costs of any properties not being amortized, if any, net of income taxes (“ceiling limitation”).  Should the full cost pool exceed this ceiling limitation, impairment is recognized.  The present value of estimated future net revenues is computed by applying the average, first-day-of-the-month oil and gas price during the 12-month period ended December 31, 2010 to estimated future production of proved oil and gas reserves as of period-end, less estimated future expenditures to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions.

The December 31, 2009 ceiling test was based on average first-day-of-the-month prices during the twelve-month period prior to December 31, 2009 pursuant to the Securities and Exchange Commission’s (SEC) new “Modernization of Oil and Gas Reporting” rule (see Note 2).  As a result of applying the new pricing rules and the five year limitation rule for proved undeveloped reserves, the Company recognized a ceiling test impairment expense of $16.1 million as of December 31, 2009.  Based on the prior rules utilizing spot prices at the end of the year, the Company would have not exceeded its ceiling limitation.  No ceiling test impairment expense related to the Company’s oil and gas properties was recorded during 2010.

Capitalized costs are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six thousand cubic feet of natural gas to one barrel of oil.  Depletion is calculated using the capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves.  All costs related to production activities, including work-over costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.  During 2010, the Company recognized a gain on the disposition of its Pennsylvania oil and gas properties as the disposition significantly altered the relationship between capitalized costs and proved reserves.  See Note 4.

Other Property and Equipment

Other property and equipment are recorded at cost upon acquisition.  Depreciation of other property and equipment over their estimated useful lives is provided for using the straight-line method over three to seven years.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 1 — Nature of Operations and Significant Accounting Policies (continued)

Long-Lived Assets

The Company reviews its long-lived assets other than oil and gas properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered.  The Company looks primarily to the estimated undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired.

Equity Method Investments

Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting.  Under the equity method of accounting, an Investee company’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Statements of Operations; however, the Company’s share of the earnings or losses, net of intercompany earnings or losses, of the Investee company is reflected in earnings.

Proportional Consolidation

The Company accounts for its 17.5% ownership interest in Sullivan Energy Ventures LLC (Sullivan), using the proportionate consolidation method of accounting.  Therefore, the Company’s proportionate share of Sullivan’s assets, liabilities, revenues and expenses are reflected in the corresponding line items within the balance sheets and statements of operations.  The Company includes its proportionate share of reserves from the Sullivan assets in its reserves presented in Note 17 and for purposes of calculating its depletion and ceiling test limitation.

Asset Retirement Obligations

The Company’s asset retirement obligations (ARO) relate to future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition.  The fair value of a liability for an ARO is recorded in the period in which it is incurred and the cost of such liability is recorded as an increase in the carrying amount of the related long-lived asset by the same amount.  The liability is accreted each period and the capitalized cost is depleted on a units-of-production basis as part of the full cost pool.  Revisions to estimated AROs result in adjustments to the related capitalized asset and corresponding liability.

The estimated ARO liability is based on estimated economic lives, estimates as to the cost to plug and abandon the wells in the future, and federal and state regulatory requirements.  The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or increased as a result of a reassessment of expected cash flows and assumptions inherent in the estimation of the liability.  Upward revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells.  AROs are valued utilizing Level 3 fair value measurement inputs.

The following table is a reconciliation of the ARO for the years ended December 31, 2010 and 2009.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 1 — Nature of Operations and Significant Accounting Policies (continued)

Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivables, trade payables and accrued liabilities.  The carrying value of cash and cash equivalents, accounts receivables, payables and accrued liabilities are considered to be representative of their fair value, due to the short maturity of these instruments.  The Company’s derivative instruments are recorded at fair value, as discussed below and in Note 3.  The carrying amount of the Company’s credit facility approximated fair value since borrowings bear interest at variable rates.

Gas Derivative Instruments

The Company enters into commodity derivative contracts to manage its exposure to natural gas price volatility with an objective to achieve more predictable cash flows.  Commodity derivative contracts may take the form of futures contracts, swaps or options.  The Company has elected not to designate its derivatives as cash flow hedges.  All derivatives are initially and subsequently measured at estimated fair value and recorded as assets or liabilities on the consolidated balance sheets and the changes in fair value are recognized as gains or losses in revenues in the consolidated statements of operations.

Income Taxes

Nytis accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as the future tax consequences attributable to the future utilization of existing tax net operating losses and other types of carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Stock-Based Compensation

Compensation cost is measured at the grant date based on the fair value of the awards and is recognized on a straight-line basis over the requisite service period (usually the vesting period).

Revenue Recognition

The Company accounts for natural gas sales using the entitlements method.  The Company accounts for oil sales when title to the product is transferred. Under the entitlements method, revenue is recorded based upon the Company’s share of volumes sold, regardless of whether the Company has taken its proportionate share of volumes produced.  The Company records a receivable or payable to the extent it receives less or more than its proportionate share of the related revenue.  Gas imbalances at December 31, 2010 and 2009 were not significant.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and disclosure of contingent assets and liabilities.  Significant items subject to such estimates and assumptions include the carrying value of oil and gas properties, the estimate of proved oil and gas reserve volumes and the related depletion and present value of estimated future net cash flows and the ceiling test applied to capitalized oil and gas properties, determining the amounts recorded for deferred income taxes, stock-based compensation, fair value of derivative instruments and asset retirement obligations.  Actual results could differ from those estimates and assumptions used.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 1 — Nature of Operations and Significant Accounting Policies (continued)

Impact of Recently Issued Accounting Standards

Effective January 1, 2010, the Company adopted new authoritative guidance for fair value measurements and disclosures requiring additional disclosures related to transfers in and out of Levels 1 and 2 fair value measurements, inputs and valuation techniques used to value Level 2 and 3 measurements and fair value disclosures for each class of asset and liability for Levels 1, 2, and 3.  The adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows.  Effective January 1, 2011, the Company will adopt the new guidance requiring that purchases, sales, issuances, and settlements in the rollforward activity in Level 3 measurements be disclosed.  Refer to Note 3 for further details regarding the Company’s assets and liabilities measured at fair value.

Note 2 — Change in Method of Determining Oil and Gas Reserves

In December 2008, the SEC revised its requirements for oil and gas reserves estimation and disclosures and related definitions to align them with current practices and changes in technology.  In January 2010, the Financial Accounting Standards Board (FASB) aligned the current oil and gas reserve estimation and disclosure requirements with those of the SEC.  As discussed earlier, the Company follows the full cost method of accounting for which the SEC provides guidance.  Among other things, the SEC and FASB amendments replace the single-day, year-end pricing assumption with a twelve-month average pricing assumption, revise certain definitions and allow the use of certain technologies to establish reserves.

As of December 31, 2009, the Company changed its method of determining the quantities of oil and gas reserves which impacted the amount recorded for depreciation, depletion and amortization and the ceiling test calculation for oil and gas properties.  Under the new rules, the Company prepared its oil and gas reserve estimates as of December 31, 2009 using average, first-day-of-the-month prices during the twelve month period ending December 31, 2009.  In prior years, the Company used year-end spot prices.  For 2009, the Company calculated depletion for the year using year-end reserves, and as a result, the new rules impacted the amount of depletion recorded for oil and gas properties and the ceiling test calculation for the year ended December 31, 2009.  In addition, under the new guidance, subsequent price increases cannot be considered in the ceiling test calculation.  Another significant provision of the new rules is a general requirement that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years of the date of booking.

The adoption of the new rules was considered a change in accounting principle inseparable from a change in accounting estimate and due to the change in methodology for pricing utilized to prepare oil and gas reserves and the five year limitation rule for proved undeveloped reserves, had a significant impact on the ceiling test for the Company for the year ended December 31, 2009.  Under the new rules, the Company’s oil and gas properties exceeded the ceiling limitation by approximately $16.1 million.  Under the old rules, the Company would not have exceeded its ceiling limitations.  In addition, the Company’s depletion rate, calculated under the new rules, increased by approximately 56% compared to the depletion rate calculated using the previous guidelines.  Accordingly, the impact of the adoption of the new rules resulted in a reduction of net income of $16.2 million for the year ended December 31, 2009.

Note 3 — Fair Value Measurements

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 3 — Fair Value Measurements (continued)

Level 1:          Quoted prices are available in active markets for identical assets or liabilities;

Level 2:          Quoted prices in active markets for similar assets or liabilities that are observable for the asset or liability; or

Level 3:          Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s policy is to recognize transfers in/and or out of fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer.  The Company has consistently applied the valuation techniques discussed below for all periods presented.

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010 and 2009 by level within the fair value hierarchy:

As of December 31, 2010, the Company’s commodity derivative financial instruments are comprised of two natural gas swap agreements.  As of December 31, 2009, the Company’s commodity derivative financial instruments were comprised of four natural gas swap agreements that expired in 2010.  The fair values of the swap agreements are determined under the income valuation technique using a discounted cash flows model.  The valuation models require a variety of inputs, including contractual terms, published forward prices, volatilities for options, and discount rates, as appropriate.  The Company’s estimates of fair value of derivatives include consideration of the counterparty’s credit worthiness, the Company’s credit worthiness and the time value of money.  The consideration of these factors results in an estimated exit-price for each derivative asset or liability under a market place participant’s view.  All of the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy. The counterparty in all of the Company’s commodity derivative financial instruments is the lender in the Company’s bank credit facility.

Assets Measured and Recorded at Fair Value on a Non-recurring Basis

The Company uses the income valuation technique to estimate the fair value of asset retirement obligations using the amounts and timing of expected future dismantlement costs, credit-adjusted risk-free rate and time value of money.  Accordingly, the fair value is based on unobservable pricing inputs and therefore, is included within the Level 3 fair value hierarchy.  During the years ended December 31, 2010 and 2009, the Company recorded asset retirement obligations of approximately $98,000 and $36,000, respectively. See Note 1 for additional information.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 3 — Fair Value Measurements (continued)

The acquisition discussed in Note 4 for $1.3 million qualifies as a business combination and, as such, the Company estimated the fair value of each property as of the acquisition date (the date on which the Company obtained control of the properties).  The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements also utilize assumptions of market participants.  The Company used a discounted cash flow model and made market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates.  These assumptions represent Level 3 inputs.

Note 4 — Dispositions and Acquisitions

In March 2010, the Company sold all of its interests in the Pennsylvania assets owned by Nytis LLC and Nytis Pennsylvania to a third party for $30.2 million, net of normal adjustments and transaction fees, with an effective date of February 1, 2010.  Proceeds from this sale were used to reduce outstanding borrowings due under the Company’s credit facility (see Note 7) and accounts payable due Nytis Exploration Company (NEC) (see Note 14), to pay resultant taxes due to the sale of these assets and distribute funds to members of Nytis Pennsylvania.  Because the sale of these assets significantly altered the relationship between capitalized costs and proved reserves, the Company recorded a gain of approximately $10.1 million.

In September 2010, the Company sold all of its interest in undeveloped acreage located in Webster County, West Virginia for approximately $770,000.

During 2010, the Company purchased a 17.5% interest in Sullivan Energy Ventures, LLC (Sullivan) for approximately $415,000. As of December 31, 2010, Sullivan’s investment consists of a 50% interest in Sunrise Energy, LLC (Sunrise).  Sunrise’s assets are comprised principally of a gathering system which moves production from the Company’s producing gas wells in a specific area to a major delivery point to be transported to market, unevaluated properties and producing wells.  The Company includes its proportionate share of Sunrise’s net assets in its oil and gas properties in the consolidated balance sheet.  All intercompany transactions are eliminated.

In June 2010, the Company acquired an interest in 19 producing wells located Boyd and Greenup Counties, Kentucky for a cash purchase price of approximately $1.3 million which qualifies as a business combination.  The following table summarizes the consideration paid to the sellers and the amounts of the assets acquired and liabilities assumed in the $1.3 million acquisition.

During 2009, the Company received approximately $2.7 million relating to two separate farmout agreements with terms of 5 and 10 years, respectively.  Under the terms of the agreements, the co-parties earn an interest in specific undeveloped acreage in Kentucky and West Virginia by completing a defined drilling program.  The Company may participate up to a maximum of 50% working interest in the drilling of any well and retains an overriding royalty ranging between 2% and 5%.  If the drilling commitments are not completed by the co-parties, the unearned acreage is retained by the Company.  The proceeds from these farmout agreements were recorded as a reduction of the Company’s investment in its oil and gas properties.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 5 — Property and Equipment

Net property and equipment at December 31, 2010 and 2009 consists of the following:

At December 31, 2010 and 2009, the Company had approximately $2.2 million and $5.1 million, respectively, of unproved oil and gas properties not subject to depletion.  The costs not subject to depletion relate to unproved properties that are excluded from amortized capital costs until it is determined whether or not proved reserves can be assigned to such properties.  The excluded properties are assessed for impairment at least annually.  Subject to industry conditions, evaluation of most of these properties and the inclusion of their costs in amortized capital costs is expected to be completed within five years.

During the years ended December 31, 2010 and 2009, overhead applicable to acquisition, development and exploration activities in the amounts of approximately $436,000 and $670,000, respectively, was capitalized to oil and gas properties.

Depreciation, depletion, amortization and impairment expense related to oil and gas properties for the years ended December 31, 2010 and 2009 was approximately $1.5 million and $18.6 million, respectively.  Depreciation and amortization expense related to furniture and fixtures, computer hardware and software and other equipment for the years ended December 31, 2010 and 2009 was approximately $50,000 and $85,000, respectively.

Note 6 — Equity Method Investment

During 2010, the Company invested $560,000 for a 50% interest in Crawford County Gas Gathering Company, LLC (CCGGC).  CCGGC owns and operates pipelines and related gathering and treating facilities that it acquired in 2010.  The Company’s gas production located in Illinois is gathered and transported on CCGGC’s gathering facilities.  The Company’s investment in CCGGC is accounted for under the equity method of accounting, and its share of the income or loss is recognized.  During 2010, the Company recorded approximately $23,000 of equity method income related to this investment.

Note 7 — Bank Credit Facility

On May 31, 2010, the Company amended its credit facility with the Bank of Oklahoma.  The credit facility matures in May 2012.  No repayments of principal are required until maturity, except to the extent that outstanding balances exceed the borrowing base then in effect; however, the Company has the right both to repay principal at any time and to reborrow.  Subject to the agreement of the Company and the lender, the size of the credit facility may be increased up to $50.0 million.  As of December 31, 2010, the borrowing base was $8.0 million.  The borrowing base is redetermined semi-annually, and the available borrowing amount could be increased or decreased as a result of such redeterminations.  Under certain

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 7 — Bank Credit Facility (continued)

circumstances the lender may request an interim redetermination.  The facility has variable interest rates based upon the ratio of outstanding debt to the borrowing base.  Interest rates are based on either an Alternative Base Rate or LIBOR.  The portion of the loan based on an “Alternate Base Rate” is determined by the rate per annum equal to the greatest of the following: (a) the Federal Funds Rate for such day plus one-half of one percentage point, (b) the Prime Rate for such day or (c) LIBOR for a one-month LIBOR Interest Period plus 2.5%; plus 1.5%.  The portion based on LIBOR is determined by the rate per annum equal to LIBOR plus between 2.5% and 3.25% for each LIBOR tranche.

For all debt outstanding regardless of whether the loan is based on the Alternative Base Rate or LIBOR, there is a minimum floor of 4.5% per annum.  In addition, the credit facility includes a hedging component that provides a line of credit under commodity swap, exchange, collar, cap and fixed price agreements and agreements designated to protect the Company against changes in interest and currency exchange rates.  The maximum amount of credit on this line is $2.7 million.  The credit facility is collateralized by substantially all of the Company’s oil and gas assets.  The credit facility includes terms that place limitations on certain types of activities and the payment of dividends, and requires satisfaction of a minimum current ratio (the ratio of current assets to current liabilities) of 1.0 to 1.0 and a maximum Funded Debt Ratio (the ratio of the outstanding balance of all interest bearing indebtedness to the sum of EBITDAX (net income plus interest expense, income taxes, depreciation, depletion, amortization, exploration and impairment expenses and other non-cash charges) for the most recently completed four consecutive fiscal quarters) of 3.5 to 1.0 as of the end of any fiscal quarter.

As of December 31, 2010 and 2009, outstanding balances on the credit facility were approximately $3.1 million and $24.0 million, respectively. The Company’s effective borrowing rate at December 31, 2010 and 2009 was 4.8% and 4.5%, respectively.  The Company is in compliance with all covenants associated with the credit agreement as of December 31, 2010.   As of December 31, 2010, there were no outstanding borrowings under the hedging component of the line of credit.

Note 8 — Income Taxes

The provision for income taxes for the years ended December 31, 2010 and 2009 consists of the following:

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 8 — Income Taxes (continued)

The effective income tax rate for the years ended December 31, 2010 and 2009 differed from the statutory U.S. federal income tax rate as follows:

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2010 and 2009 are presented below:

The Company has net operating losses (NOL) of approximately $3.7 million available to reduce future years’ federal taxable income.  The federal net operating losses expire in 2029.  The Company has NOL of approximately $7.4 million available to reduce future years’ state taxable income.  These state NOL will expire in the future based upon each jurisdiction’s specific law surrounding NOL carryforwards.  Tax returns are subject to audit by various taxation authorities.  The results of any audits will be accounted for in the period in which they are determined.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 8 — Income Taxes (continued)

The Company believes that the tax positions taken in the Company’s tax returns satisfy the more-likely-than-not threshold for benefit recognition.  Furthermore, the Company believes it has appropriately addressed material book-tax differences.  Nytis is confident that the amounts claimed (or expected to be claimed) in the tax returns reflect the largest amount of such benefits that are greater than fifty percent likely of being realized upon ultimate settlement.  Accordingly, no liabilities have been recorded by the Company.  Any potential adjustments for uncertain tax positions would be a reclassification between the deferred tax asset related to the Company’s NOL and another deferred tax asset.  No penalty or interest would be recorded as the Company has not been in a taxable income position prior to 2010.

Note 9 — Stockholders’ Equity

Authorized and Issued Capital Stock

The authorized capital stock of Nytis is 101,000 shares, consisting of 100,000 shares of common stock with a par value of $0.01 per share and 1,000 shares of preferred stock with a par value of $0.01 per share.  On May 19, 2005, the Company issued 28,175 shares of common stock for proceeds, including the receipt of a share purchase promissory note, totaling approximately $28.1 million net of share issuance costs of approximately $89,000.  Subsequent to that date and through the year ending December 31, 2008, the Company issued 1,200 shares of restricted stock. During the year ended December 31, 2009, the Company issued 175 shares of restricted stock and 175 shares of restricted stock were forfeited.  During 2010, in a cashless transaction, 454 shares of stock valued at approximately $694,000 were surrendered to pay a promissory note receivable and held as treasury shares resulting in 28,921 shares of common stock outstanding (net of treasury shares)  at December 31, 2010.

Stock Option Plan

Under the Company’s stock option plan, the aggregate number of options which may be issued to directors, employees and consultants shall not exceed 300.  Any shares to be issued upon exercise of the options would be from newly issued shares.  The option price for incentive stock options granted under the plan shall not be less than 100% of the fair value of the shares subject to the option.  The option price for nonqualified stock options granted under the plan shall not be less than 85% of the fair market value.  The following table summarizes certain information with respect to the Company’s stock option activity for the years ended December 31, 2010 and 2009.  There were no option activities for the year ended December 31, 2010.

Each option has ten year duration from the date of each individual grant.

For the years ended December 31, 2010 and 2009, there was no compensation costs related to non-vested options.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 9 — Stockholders’ Equity (continued)

Warrants

Prior to January 1, 2006, the Company granted 1,500 warrants to an officer of the Company.  Any shares to be issued upon exercise of the warrants would be from newly issued shares.  Utilizing the minimum valuation method under the Black-Scholes option price model, the Company determined that the fair value of the warrants at the date of grant was nil.  Each warrant enables the holder to purchase one share of common stock of the Company, at an initial exercise price of $1,000 per share of common stock until expiry on June 1, 2015.  The initial warrant exercise price of $1,000 per share of common stock is to increase annually at 6% starting June 1, 2006 and the exercise price for each of the warrants at December 31, 2010 and 2009 was $1,386 and $1,307, respectively.  Of the 1,500 warrants outstanding at December 31, 2010 and 2009, all are currently exercisable.  There were no warrants granted in 2009 and 2010.

Restricted Stock Plan

Under the Company’s restricted stock plan, participants may be granted stock without cost to the participant.  The aggregate number of shares of restricted stock which may be granted under the plan shall not exceed 1,200.  Shares of restricted stock vest upon achieving certain performance targets, which are based on the fair value of the consideration received from the sale or other disposition of shares of the Company’s common stock as a result of a change of control.  The Company cannot reasonably estimate the grant date fair value of these units due to the complexity of the terms of the vesting.  The shares of restricted stock are held in escrow and upon vesting are released to the participants.

There were 1,200 shares of restricted stock outstanding at December 31, 2010 and 2009.   There was no activity with respect to the Company’s restricted stock plan during 2010.  For the year ended December 31, 2009, 175 shares of restricted stock were granted and forfeited.

The Company continues to account for grants made in 2005 using variable plan accounting.  The Company accounts for grants made after 2005 at their intrinsic value, remeasured at each reporting date through the date of vesting.  The final measurement will be the intrinsic value of the instrument at the vesting date.  The accounting for grants issued subsequent to 2005 is the same because the final measurement of compensation cost will be based on the number of shares of restricted stock that ultimately vest using the market price at the date of vesting (i.e. a date performance criterion is met).  At December 31, 2010 and 2009, the Company estimated that none of the shares of restricted stock issued would vest and accordingly, no compensation cost has been recorded.

Share Promissory Note

On May 19, 2005, the Company received a promissory note totaling approximately $500,000 due from a corporation controlled by an officer of the Company in exchange for the issuance of 500 shares of common stock issued to the corporation.  The promissory note bears interest at a rate of 6% per annum compounded annually and is secured under a stock pledge agreement by 500 shares of common stock of the Company and by a personal guarantee by the officer.  The promissory note, including accrued interest, is payable on the earlier of (i) June 1, 2012 or (ii) the date upon which the Company or any successor to the Company registers any class of its securities under Section 12 of the Securities Exchange Act of 1934 (the 1934 Act), is required to file periodic reports under Section 15(d) of the 1934 Act, or files a registration statement under the Securities Act of 1933, as amended.

On December 31, 2010, the corporation controlled by an officer of the Company surrendered 454 shares of the Company’s common stock in full settlement of the promissory note totaling approximately $694,000 including accrued interest. At December 31, 2009, the promissory note including accrued interest totaled approximately $655,000.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 9 — Stockholders’ Equity (continued)

Restricted Membership Plan

On March 16, 2006, a restricted membership interest plan (the Plan) was approved for Nytis LLC.  The objective of the Plan is to provide key employees equity ownership in Nytis LLC.  The Plan provides for vesting and forfeiture provisions based on (i) the Company achieving a target internal rate of return upon certain changes in control with regard to the Company, Nytis LLC, or substantially all of the assets of the Company and (ii) the employee’s continued employment.  In 2008 the Plan was amended so that the interests available for grant under the Plan would not exceed five percent of the membership interest in Nytis LLC.  The following table summarizes certain information with respect to the Plan for the years ended December 31, 2010 and 2009.

This plan is similar to the restricted stock plan discussed earlier.  The Company accounts for grants under the restricted membership plan at their intrinsic value, remeasured at each reporting date.   The final measure of compensation cost is based on the membership interests that ultimately vest and the market price at the date the performance criteria are met.  At December 31, 2010 and 2009, the Company estimated that none of the membership interests issued would vest and accordingly, no compensation cost has been recorded.

Note 10 — Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at December 31, 2010 and 2009 consist of the following:

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 11 — Physical Delivery Contracts and Gas Derivatives

The Company has historically used commodity-based derivative contracts to manage exposures to commodity price on certain of its gas production.  The Company does not hold or issue derivative financial instruments for speculative or trading purposes.  Nytis also enters into gas physical delivery contracts to effectively provide gas price hedges.  Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives.  Therefore, these contracts are not recorded at fair value in the consolidated financial statements.

The Company has fixed price contracts requiring physical deliveries for approximately 90 Mcf per day for an average sales price of $5.26 per Mcf, which are on a month to month basis.

At December 31, 2010, other than the above mentioned contracts, the Company’s other gas sales contracts approximate index prices.

The Company’s swap agreements as of December 31, 2010 are summarized in the table below:

(a)          NYMEX Henry Hub Natural Gas futures contract for the respective delivery month.

For its swap instruments, the Company receives a fixed price for the hedged commodity and pays a floating price to the counterparty.  The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

The following table summarizes the fair value of the derivatives recorded in the consolidated balance sheets.  These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

The table below summarizes the realized and unrealized gains and losses related to the Company’s derivative instruments for the years ended December 31, 2010 and 2009.  These realized and unrealized gains and losses are recorded and included in commodity derivative gain in the accompanying consolidated statements of operations.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 11 — Physical Delivery Contracts and Gas Derivatives (continued)

Realized gains are included in cash flows from operating activities in the Company’s consolidated statements of cash flows.

The counterparty in all of the Company’s derivative instruments is the lender in the Company’s bank credit facility; accordingly, the Company is not required to post collateral since the bank is secured by the Company’s oil and gas assets.

Due to the volatility of natural gas prices, the estimated fair values of the Company’s derivatives are subject to large fluctuations from period to period.

Note 12 — Commitments

The Company has entered into employment agreements with certain executives and officers of the Company.  The initial term of the agreements generally range from one to two years and provide for renewal provisions in one year increments thereafter.  The agreements provide for, among other items, severance and continuation of benefit payments upon termination of employment or certain change of control events.

Note 13 — Retirement Savings Plan

The Company outsources certain payroll and human resource functions to an administrative company.  In conjunction with this arrangement, the Company has a 401(k) plan available to eligible employees.  The plan provides for 6% matching which vests immediately.

Note 14 — Related Party Transactions

NEC is an independent oil and gas company whose nature of its business is the exploration, development, production, marketing and sale of oil, gas, coalbed methane and other hydrocarbons in locations other than the United States.  NEC has substantially the same shareholders as the Company.  The Company has engaged NEC to assist in the management, direction and supervision of the operations and business functions of the Company.  A service agreement between the Company and NEC provides for certain restrictions on NEC’s authority to perform acts in connection with the business of the Company and establishes provisions for the compensation of NEC in performing these duties.  General and administrative expenses charged by NEC to the Company for the years ended December 31, 2010 and 2009 were approximately $1.2 million and $964,000, respectively.  At December 31, 2010 and 2009, the Company owed NEC approximately $3.1 million and $5.5 million, respectively.  This payable consists primarily of charges incurred under the service agreement and advances made for capital expenditures and other miscellaneous general and administrative expenses.  As discussed in Note 4, proceeds from the sale of certain oil and gas assets were used to pay down the related party payable.

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NYTIS EXPLORATION (USA) INC.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009.

Note 15 — Supplemental Cash Flow Disclosure

Supplemental cash flow disclosures for the years ended December 31, 2010 and 2009 are presented below: