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As Filed with the Securities and Exchange Commission on August 12, 2011

Registration No.  333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

Registration Statement

Under

The Securities Act of 1933

CARBON NATURAL GAS COMPANY

1700 Broadway, Suite 2020, Denver, Colorado 80290; telephone 720.407.7043

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

Kevin D. Struzeski

Chief Financial Officer

Carbon Natural Gas Company

1700 Broadway, Suite 2020

Denver, Colorado 80290

T. 303.720.7030 F. 303.720.7031

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all communications, including communications sent to agent for service, should be sent to:

Theresa M. Mehringer

Burns Figa & Will P.C.

6400 S. Fiddler’s Green Circle, Suite 1000

Greenwood Village, Colorado 80111

T. 303.796.2626 F. 303.796.2777

Jeffrey J. Peterson

Welborn Sullivan Meck & Tooley, P.C.

1125 Seventeenth Street, Suite 2200

Denver, Colorado 80202

T. 303.830.2500 F. 303.832.2366

Approximate date of commencement of proposed sale to public: From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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. (Check one):

CALCULATION OF REGISTRATION FEE

We will amend this registration statement on such date or dates as may be necessary to delay our effective date until we will file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement will become effective on such date as the Securities and Exchange Commission, in accordance with Section 8(a) may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED AUGUST    , 2011

PRELIMINARY PROSPECTUS

CARBON NATURAL GAS COMPANY

44,444,444 Shares of Common Stock

This prospectus relates to the sale or other disposition from time to time by selling securityholders of some or all of 44,444,444  shares of our common stock, originally issued by us pursuant to the Common Stock Purchase Agreement, dated as of June 29, 2011, by and among us and the investors party thereto (the “Private Placement Purchase Agreement”) in connection with a private placement of our common stock which closed on June 29, 2011 (the “Private Placement”).

The selling securityholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of our common stock or interests in shares of our common stock received after the date of this prospectus from a selling securityholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of our common stock or interests in shares of our common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. If these shares are sold through underwriters, broker-dealers or agents, the selling securityholders will be responsible for underwriting discounts or commissions or agents’ commissions. We will pay the expenses of registering these securities.

Our Common Stock is not listed on an exchange, and we do not currently have plans to list them on any exchange.

Our common stock is quoted on the OTC Bulletin Board under the symbol “CRBO.” On August 8, 2011, the last reported closing bid price of our common stock was $0.80 per share. These over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. You are urged to obtain current market quotations of the common stock.

Investing in the securities involves a high degree of risk. See “Risk Factors” beginning on page 5 of this prospectus.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of the securities offered hereby or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                    , 2011

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ABOUT THIS PROSPECTUS

Upon the closing of the Merger (as defined and discussed below under “Prospectus Summary”), Carbon Natural Gas Company (f/k/a St. Lawrence Seaway Corporation), a Delaware corporation, succeeded to the business of Nytis Exploration (USA) Inc., a Delaware corporation (“Nytis USA”). In connection with the Merger, effective May 2, 2011, we changed our corporate name to Carbon Natural Gas Company. Unless the context otherwise requires, “we,” “our,” “us,” “our company” and similar expressions used in this prospectus refer to Nytis USA and its consolidated subsidiaries, collectively, prior to the closing of the Merger on February 14, 2011, and Carbon Natural Gas Company (f/k/a St. Lawrence Seaway Corporation), as successor to the business of Nytis USA, and its consolidated subsidiaries, collectively, following the closing of the Merger.

This prospectus is part of a registration statement that we filed with the SEC.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus is offering to sell, and is seeking offers to buy, the securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of our common stock.

We may provide a prospectus supplement containing specific information about the terms of a particular offering by the selling securityholders, or their transferees. The prospectus supplement may add, update or change information in this prospectus. If information in a prospectus supplement is inconsistent with the information in this prospectus, you should rely on the information in that prospectus supplement. You should read both this prospectus and, if applicable, any prospectus supplement hereto. See “Where You Can Find More Information” for more information.

This prospectus includes industry and market data and other information, which we have obtained from, or is based upon, market research, independent industry publications or other publicly available information. Although we believe each such source to have been reliable as of its respective date, we have not independently verified the information contained in such sources. Any such data and other information is subject to change based on various factors, including those described below under the heading “Risk Factors” and elsewhere in this prospectus.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.  It may not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the “Risk Factors”, Glossary of Natural Gas and Oil Terms and the financial statements and related notes and the unaudited pro forma combined financial statements included herein.  This prospectus includes forward-looking statements that involve risks and uncertainties.  See “Cautionary Note Regarding Forward-Looking Statements.”

About the Company

Carbon Natural Gas Company (a Delaware corporation reincorporated from Indiana in August 2007 and formerly known as St. Lawrence Seaway Corporation “SLSC”), owns and operates natural gas and crude oil interests in the Appalachian and Illinois Basins of the United States.  It produces and sells natural gas, natural gas condensate and natural gas liquids, as well as crude oil.  Carbon’s acreage is held and its exploration and production activities are conducted indirectly through wholly owned and majority-owned subsidiaries.

·                  Nytis Exploration (USA) Inc. (“Nytis USA”) was organized as a Delaware corporation in 2004.  Nytis now is owned 100% by Carbon.

·                  Soon after formation, Nytis USA identified natural gas and oil interests located in Clearfield County, Pennsylvania, and organized (along with a minority owner) a subsidiary limited liability company, Nytis Exploration of Pennsylvania LLC, a Pennsylvania limited liability company (“Nytis PA”), which acquired those interests.  Nytis PA is owned 85% by Nytis.

·                  Thereafter, Nytis USA identified natural gas and oil interests (owned by Addington Exploration, LLC (“Addington”)) located primarily in Illinois, Indiana, Kentucky, Ohio, Tennessee and West Virginia.  To acquire the Addington assets, Nytis USA formed (along with a different unaffiliated person) Nytis Exploration Company LLC (“Nytis LLC”).  Nytis LLC is owned 98.1% by Nytis USA.  Nytis LLC continued acquiring interests complementary to the Addington assets, including the 2006 acquisition of Pennsylvania properties from DCPA, LLC (an affiliate of Delta Petroleum Corporation).  In the spring of 2010, Nytis PA and Nytis LLC sold all of the Pennsylvania assets and received total proceeds of approximately $30.3 million ($21 million to Nytis LLC and $9.3 million to Nytis PA).  In this transaction, Nytis PA sold all of its assets, and this subsidiary is being dissolved and its business wound up.

Now, substantially all the natural gas and oil interests are owned by Nytis LLC, which continues to acquire and exploit its properties.  As of June 30, 2011, Nytis LLC owns interests in approximately 826 gross (480 net) productive natural gas and oil wells on approximately 321,000 (248,000 net) undeveloped acres in the Appalachian and Illinois Basins.

·                  On January 31, 2011, Nytis USA entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SLSC, which was closed on February 14, 2011.  At that date, SLSC acquired all of the issued and outstanding shares of Nytis USA from the Nytis USA stockholders, and thereby became the indirect owner of all of Nytis USA’s equity interests in Nytis LLC and Nytis PA, in exchange for the issuance by SLSC to the Nytis USA stockholders of 47,000,003 restricted shares of SLSC common stock (which then constituted 98.9% of SLSC’s issued and outstanding common stock), and Nytis USA became a wholly-owned subsidiary of SLSC, and Nytis LLC and Nytis PA became majority-owned indirect subsidiaries of SLSC (the “Merger”) .

In connection with the closing of the Merger, the officers and directors of Nytis USA became the officers and directors of SLSC.

On May 2, 2011, SLSC’s name was changed to Carbon Natural Gas Company.

Carbon now is a holding company which conducts substantially all its natural gas and oil operations through Nytis LLC.

Unless stated otherwise below, “Carbon,” “Company” and “we” (and related first person plural nouns and adjectives) collectively refer to Carbon Natural Gas Company, and its subsidiaries Nytis USA, Nytis LLC, and Nytis PA.

Our principal executive offices are located at 1700 Broadway, Suite 2020, Denver CO 80290. Our telephone number is (720) 407-7043.

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Shares Covered by This Prospectus

This prospectus relates to the resale or other disposition by the selling securityholders of 44,444,444 shares of our common stock that are currently outstanding and were issued on or about June 29, 2011.  On June 29, 2011, we entered into the Private Placement Purchase Agreement with 23 accredited investors, pursuant to which we issued to these investors an aggregate of 44,444,444 shares of our common stock at a purchase price of $0.45 per share.  In connection with the Private Placement, we entered into a registration rights agreement with the investors who purchased common stock in the Private Placement (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, we agreed to file the registration statement to which this prospectus is a part with the Securities and Exchange Commission covering the resale of the shares of common stock purchased by the investors in the Private Placement.

The Offering

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Information in this prospectus includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934 (the “1934 Act”). All statements, other than statements of historical fact, are forward-looking statements.

Examples of such statements in this prospectus concern planned capital expenditures for oil and natural gas exploration in 2011; cash expected to be available for continued work programs; recovered volumes and values of oil and natural gas approximating estimates of oil and natural gas reserves; drilling and completion activities in the Appalachian and Illinois Basins; timing for drilling of additional wells; expected spacing for wells; compliance with all oil and gas exploration and environmental regulations; and all the other statements regarding future conditions and operations.

These forward-looking statements are identified by their use of terms and phrases such as “may,” expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “anticipate,” “will,” “continue,” “potential,” and similar terms and phrases.  Though we believe that the expectations reflected in these statements are reasonable, they do involve certain assumptions, risks and uncertainties.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks, uncertainties and other factors described below, in addition to the other information set forth in this prospectus, before deciding whether to invest in shares of our common stock. Any of these risks, uncertainties and other factors could materially and adversely affect our business, financial condition, results of operations, cash flows or prospects. In that case, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock. See also “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to our Business and Industry

Natural gas and oil prices are volatile. A substantial or extended decline in natural gas and oil prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.

Our financial condition, operating results, and future rate of growth depend upon the prices that we receive for our natural gas and oil. Prices also affect our cash flow available for capital expenditures and our ability to access funds under our bank credit facility and through the capital markets. The amount available for borrowing under our bank credit facility is subject to a borrowing base, which is determined by our lender taking into account our estimated proved developed reserves and is subject to periodic redeterminations based on pricing models determined by the lender at such time. Declines in natural gas and oil prices have in the past adversely impacted the value of our estimated proved developed reserves and, in turn, the market values used by our lenders to determine our borrowing base. Future commodity price declines may have similar adverse effects on our reserves and borrowing base. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Bank Credit Facilities,” for more details. Further, because we have elected to use the full cost accounting method, each quarter we must perform a “ceiling test” that is impacted by declining prices. Significant price declines could cause us to take one or more ceiling test write-downs, which would be reflected as non-cash charges against current earnings. See Risk Factor below entitled “Lower natural gas and oil prices and other factors have resulted, and in the future may result, in ceiling test write-downs and other impairments of our asset carrying values.”

The markets for natural gas and oil have been volatile historically and are likely to remain volatile in the future. Oil spot prices reached historical highs in July 2008 and natural gas spot prices reached near historical highs in July 2008. Prices have declined significantly since that time and may continue to fluctuate widely in the future.  The prices we receive for our natural gas and oil depend upon factors beyond our control, including among others:

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·                                          worldwide and regional economic conditions impacting the global supply and demand for natural gas and oil;

·                                          the price and quantity of imports of foreign natural gas, including liquefied natural gas, and oil;

·                                          political conditions in or affecting other natural gas and oil-producing countries, including the current conflicts in the Middle East and conditions in Latin America, Russia and the independent states of the former Soviet Union;

·                                          the level of global natural gas and oil exploration and production;

·                                          the level of global natural gas and oil inventories;

·                                          prevailing prices on local natural gas and oil price indexes in the areas in which we operate;

·                                          localized and global supply and demand fundamentals and transportation availability;

·                                          weather conditions;

·                                          technological advances affecting energy consumption;

·                                          the price and availability of alternative energy; and

·                                          domestic, local and foreign governmental regulation and taxes.

These factors make it very difficult to predict future commodity price movements with any certainty. We sell the majority of our natural gas and oil production at current prices rather than through fixed-price contracts. However, we do enter into derivative instruments to reduce our exposure to fluctuations in natural gas and oil prices. See Risk Factor below entitled “Our future use of hedging arrangements could result in financial losses or reduce income.”  At June 30, 2011, 99% of our estimated proved reserves were natural gas, and, as a result, our financial results will be more sensitive to fluctuations in natural gas prices.

Furthermore, the worldwide financial and credit crisis has reduced the availability of liquidity and credit to fund the continuation and expansion of industrial business operations worldwide. The shortage of liquidity and credit combined with recent substantial losses in worldwide equity markets has led to a worldwide economic recession. The slowdown in economic activity caused by such recession has reduced worldwide demand for energy and resulted in lower natural gas and oil prices. Natural gas spot prices have recently been particularly volatile and declined from record high levels in early July 2008 of over $13.00 per MMBtu to below $3.00 per MMBtu in September 2009 and below $4.00 per MMBtu for portions of 2010, and have been in excess of $4.50 per MMBtu for portions of calendar 2011.  More recently, oil prices have been generally increasing due in part to the unrest and uncertainty in the Middle East, however, this has not had a similar effect on the price of natural gas.

We have indebtedness and may incur more debt in the future. Our leverage may materially affect our operations and financial condition.

We (through Nytis LLC) have a bank credit facility with the Bank of Oklahoma, the outstanding balance of which was $9.8 million at June 30, 2011, and we may incur more debt in the future. This indebtedness may have several important effects on our business and operations; among other things, it may:

·                                          require us to use a significant portion of our cash flow to pay principal and interest on the debt, which will reduce the amount available to fund working capital, capital expenditures, and other general corporate purposes;

·                                          limit our access to the capital markets;

·                                          increase our borrowing costs, and impact the terms, conditions, and restrictions contained in our debt agreements, including the addition of more restrictive covenants;

·                                          limit our flexibility in planning for and reacting to changes in our business as covenants and restrictions contained in our existing and possible future debt arrangements may require that we meet certain financial tests and place restrictions on the incurrence of additional indebtedness;

·                                          place us at a disadvantage compared to similar companies in our industry that have less debt; and

·                                          make us more vulnerable to economic downturns and adverse developments in our business.

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Our bank credit facility contains various restrictive covenants. A failure on our part to comply with the financial and other restrictive covenants contained in our bank credit facility could result in a default under these agreements. Any default under our bank credit facility could adversely affect our business and our financial condition and results of operations, and would impact our ability to obtain financing in the future. In addition, the borrowing base included in our bank credit facility is subject to periodic redetermination by our lender. A lowering of our borrowing base could require us to repay indebtedness in excess of the redetermined (lower) borrowing base. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Bank Credit Facility.”

A higher level of debt will increase the risk that we may default on our financial obligations. Our ability to meet our debt obligations and other expenses will depend on our future performance. Our future performance will be primarily affected by natural gas prices (and to a lesser extent, oil prices), financial, business, domestic and global economic conditions, governmental regulations and environmental regulations, and other factors, many of which we are unable to control. If our cash flow is not sufficient to service our debt, we may be required to refinance the debt, sell assets, or sell shares of our stock on terms that we do not find attractive, if it can be done at all.

A portion of our borrowings from time to time may be at variable interest rates, making us vulnerable to increases in interest rates.

Our estimates of proved reserves at June 30, 2011 and at December 31, 2010 and 2009 have been prepared under the SEC’s new rule that went into effect for fiscal years ending on or after December 31, 2009. The new SEC rule could limit our ability to book additional proved undeveloped reserves in the future.

This prospectus includes estimates of our proved reserves as of June 30, 2011, and as of December 31, 2010 and 2009, which have been prepared and presented under the SEC’s new rule relating to the reporting of natural gas and oil exploration activities.  These new rules are effective for fiscal years ending on or after December 31, 2009, and require 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. This new rule has limited and may continue to limit our potential to book additional proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to write down any proved undeveloped reserves that are not developed within the required five-year timeframe.

The SEC has released only limited interpretive guidance regarding reporting of reserve estimates under this new rule and may not issue further interpretive guidance on the new rule. Accordingly, while the estimates of our proved reserves at June 30, 2011 and December 31, 2010 and 2009 included in this prospectus have been prepared based on what we believe to be reasonable interpretations of the new SEC rule, those estimates could differ materially from any estimates we might prepare applying more specific SEC interpretive guidance as it becomes available.

Neither the estimated quantities of proved reserves and their discounted present value of future net cash flows attributable to those reserves included in this prospectus nor the independent audit of proved developed producing reserves and the Company’s estimated discounted present value of future net cash flows are intended to represent their fair, or current, market value.

Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.

The estimates of our reserves and the future net cash flows attributable to those reserves, were prepared internally by us and those estimates related to proved developed producing reserves were audited as of January 1, 2011 by the independent petroleum consultants Cawley, Gillespie & Associates, Inc. (“CG&A”).  Estimates as of our reserves as of June 30, 2011 as included in this prospectus have not been audited by CG&A.  The process of estimating natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of our reserves and could also materially affect the results of CG&A’s audit. See “Description of Business—Reserves—

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Estimated Proved Reserves” for information about our estimated natural gas reserves and the PV-10 and standardized measure of discounted future net cash flows.

In order to prepare our estimates, we must project production rates, the extent of our eventual working and net revenue interests and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.

Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas reserves will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of our reserves. In addition, we may adjust estimates of our proved reserves to reflect production history, results of exploration and development, prevailing commodity prices and other factors, many of which are beyond our control.

It should not be assumed that the present value of future net revenues from our proved reserves is the current market value of our estimated reserves. We generally base the estimated discounted future net cash flows from our proved reserves under the revised SEC regulations.  Actual future prices and costs may differ materially from those used in the present value estimate.

The estimates of our proved developed non-producing and proved undeveloped reserves were prepared internally by us and have not been audited by an independent engineer. An independent audit of these reserves might cause us to adjust our estimates of these reserves which could materially affect the quantities and present value of our reserves.

An independent engineer might interpret the available geological, geophysical, production and engineering data concerning our proved developed non-producing and proved undeveloped reserves differently than we have and might make different economic assumptions about prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.  If such an independent audit were undertaken on these reserves, it might have resulted in materially different estimates of the estimated quantities and present value of our reserves which would have materially affected the amounts of depreciation, depletion and amortization expense available to and the net income of the Company.

46% of our total proved reserves as of June 30, 2011 consist of undeveloped and developed non-producing reserves, and those reserves may not ultimately be developed or produced.

As of June 30, 2011 45% of our total proved reserves were undeveloped and 1% were developed non-producing, which includes the reserves acquired in the June purchase of assets from The Interstate Natural Gas Company LLC (and related parties).  Although we plan to develop and produce all the proved reserves, ultimately some may not be developed or produced.  In addition, not all of the undeveloped or developed non-producing reserves may begin producing at the expected times or within budget.

Lower natural gas and oil prices and other factors have resulted, and in the future may result, in ceiling test write-downs and other impairments of our asset carrying values.

We use the full cost method of accounting to report our natural gas and oil operations. Under this method, we capitalize the cost to acquire, explore for, and develop natural gas and oil properties. Under full cost accounting rules, the net capitalized costs of proved natural gas and oil properties may not exceed a “ceiling limit,” which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10%. If net capitalized costs of proved natural gas and oil properties exceed the ceiling limit, we must charge the amount of the excess to earnings. This is called a “ceiling test write-down.” Under the accounting rules, we are required to perform a ceiling test each quarter. A ceiling test write-down would not impact cash flow from operating activities, but it would reduce our stockholders’ equity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, Estimates, Judgments, and Assumptions—Full Cost Method of Accounting,” for further detail.

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Investments in unproved properties, including capitalized interest costs, are also assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data relating to the properties. The amount of impairment assessed, if any, is added to the costs to be amortized in the appropriate full cost pool. If an impairment of unproved properties results in a reclassification to proved natural gas reserves, the amount by which the ceiling limit exceeds the capitalized costs of proved natural gas reserves would be reduced.

We also assess the carrying amount of goodwill in the fourth quarter of each year and at other periods when events occur that may indicate an impairment exists. These events include, for example, a significant decline in natural gas prices.

The risk that we will be required to write-down the carrying value of our natural gas and oil properties, our unproved properties, or goodwill increases when natural gas and oil prices are low. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves or our unproved property values, or if estimated future development costs increase. For example, we recorded (i) a non-cash ceiling test write-down of approximately $16.1 million in 2009 and (ii) a non-cash ceiling test write-down of approximately $7.3 million for the quarter ended March 31, 2011.  These write-downs are reflected as a charge to net earnings. Additional write-downs of our full cost pool may be required if natural gas prices decline further, unproved property values decrease, estimated proved reserve volumes are revised downward or costs incurred in exploration, development, or acquisition activities in our full cost pool exceed the discounted future net cash flows from the additional reserves, if any, attributable to our cost pool.

Our exploration, development and exploitation projects require substantial capital expenditures. We may be unable to obtain required capital or financing on satisfactory terms, which could lead to a decline in our reserves.

The natural gas and oil industry is capital intensive. We make and expect to continue to make substantial capital expenditures for the development, exploitation, production and acquisition of natural gas and oil reserves. Cash flow used in investing activities related to capital and exploration expenditures was approximately $4.9 million and $3.8 million in 2010 and 2009, respectively.

The Company anticipates its budget for exploration and completion work on existing acreage will range between $6 million and $8 million for all of 2011.  As we recognized an operating loss of approximately $648,000 for the year ended December 31, 2010 (approximately $1.3 million excluding $692,000 of hedging gains), our planned exploration and development drilling and completion activities may be limited or delayed if cash flow from producing activities or funds available from our credit facility are not sufficient to fund the anticipated level of capital expenditures.

We intend to finance future capital expenditures, to the extent that is prudent, through cash flow from operations, and significantly from borrowings under our bank credit facility.  However, our financing needs may exceed those resources, and thus require a substantial increase in capitalization through the issuance of debt or equity securities or sale or joint venturing of selected assets. The issuance of additional indebtedness may require that a portion of operating cash flow be used to service the debt, thereby reducing the amount of cash flow available for other purposes. The actual amount and timing of future capital expenditures may differ materially from estimates as a result of, among other things, availability of personnel, commodity prices, actual drilling results, the availability of drilling rigs and other services, materials and equipment, and regulatory, technological and competitive developments. A reduction in commodity prices from current levels may result in a decrease in our actual capital expenditures. Conversely, a significant improvement in product prices could result in an increase in our capital expenditures.

Our cash flow from operations and access to capital are subject to a number of variables, primarily proved reserves, production volumes and prices, and the ability of our bank to lend.

Adverse events or trends related to these factors could reduce our ability to achieve or obtain the cash flow from operations, debt and/or equity capital necessary to sustain operations at current levels. Our Company, like the majority of smaller and mid-size independent oil and gas exploration companies, must continue acquiring and

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exploiting properties to replace depleting reserves, and the budget for these activities often will not be fully funded by operating cash flow.  Accordingly, the inability to access outside capital could result in a curtailment of operations relating to the development of our properties, which in turn could lead to a decline in reserves and adversely affect the business, and our financial condition and results of operations.

Distressed economic conditions also may adversely affect the collectability of trade receivables. For example, our accounts receivable are primarily from purchasers of our natural gas production and other exploration and production companies that own working interests in the properties that we operate. This industry concentration could adversely impact our overall credit risk, because customers and working interest owners may be similarly affected by the same adverse changes.  In addition, the possibility of a renewed credit crisis and turmoil in financial markets could cause our commodity derivative instruments to be ineffective because a counterparty might be unable to perform its obligations or even seek bankruptcy protection.

Due to these factors, we cannot be certain that funding, if needed, will be available to the extent required, or on acceptable terms. If we are unable to access funding when needed on acceptable terms, we may not be able to fully implement our business plans, complete new property acquisitions to replace reserves, take advantage of business opportunities, respond to competitive pressures, or refinance debt obligations as they come due, any of which could have a material adverse effect on operations and financial results.

Our identified drilling locations are scheduled out over many years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling. In addition, we may not be able to raise the substantial amount of capital that would be necessary to drill a substantial portion of our potential drilling locations.

We have approximately 3,000 potential drilling locations. Our management team has specifically identified and scheduled certain drilling locations as an estimation of future multi-year drilling activities on existing acreage. These locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including natural gas and oil prices, the availability and cost of capital, availability of qualified personnel, drilling and production costs, availability of drilling services and equipment, drilling results, lease expirations, gathering systems and pipeline transportation constraints, regulatory approvals and other factors. Accordingly, we cannot predict when or if the identified drilling locations will be drilled.

We could lose our undeveloped mineral leases if we don’t drill and complete wells in a timely manner.

Leased mineral properties give the holder the right to drill and complete wells in a timely manner.  Leases have a contract term that is negotiated with the mineral owners.  Generally, if a well is drilled and completed (thus “held by production”), the lease term continues so long as there is production from the well.

However, a sizeable portion of our acreage is currently undeveloped, and certain of our undeveloped leasehold acreage is subject to leases that will expire over the next several years.  Renewing leases on undrilled acreage may not be feasible due to increased cost or other reasons.  If we are unable to renew leases on undrilled acreage, we would have to write off the initial acquisition cost of such acreage, which could be substantial and our reserve estimates and the financial information related thereto may be found to be inaccurate which could have a material adverse effect on us.

Some of these leases will only allow us to hold a portion of the lease even after one or more wells have been completed.  As is customary in the natural gas and oil industry, Company management continually prioritizes the timing of all of drilling locations against drilling and completion costs, available capital, expected returns on capital (net of debt taken on for drilling and completion work), and lease expirations.

Unless we replace our reserves, our reserves and production will decline, which would adversely affect our future cash flows and results of operations.

Producing natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. As a result, we must locate, acquire and develop new reserves to replace those being depleted by production. We must do this even during periods of low prices when it is difficult to raise

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capital. Unless we conduct successful ongoing exploration, development and exploitation activities or continually acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Our future natural gas and oil reserves and production, and therefore our future cash flow and results of operations, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, exploit, find or acquire sufficient additional reserves to replace our current and future production. If we are unable to replace our current and future production, the value of our reserves will decrease, and our business, financial condition and results of operations will be adversely affected.

Drilling for and producing natural gas and oil are high risk activities with many uncertainties that could adversely affect our business, financial condition and results of operations.

Our future financial condition and results of operations will depend on the success of our exploitation, exploration, development and production activities. Exploration, exploitation, development and production are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable natural gas or oil production. The Company’s decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. For a discussion of the uncertainty involved in these processes See the Risk Factor “Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.” In addition, drilling and completion costs always are subject to change before the work is finished.  Further, many factors may curtail, delay or cancel scheduled drilling projects, including:

·                                          delays imposed by or resulting from compliance with regulatory requirements;

·                                          pressure or irregularities in geological formations;

·                                          shortages of or delays in obtaining equipment, materials and qualified personnel;

·                                          equipment failures or accidents;

·                                          adverse weather;

·                                          declines in commodity prices;

·                                          limited availability of financing at acceptable rates;

·                                          title problems; and

·                                          limitations in getting production to market due to transportation issues (see the Risk Factor entitled “Our business depends on gathering and transportation facilities owned by others. Any limitation in the availability of those facilities would interfere with our ability to market the natural gas we produce.”)

As part of our ongoing operations, we sometimes drill in new or emerging plays. As a result, drilling in these areas is subject to greater risk and uncertainty.

We have an operations group that is responsible for identifying new or emerging plays. These activities are more uncertain as to ultimate profitability than drilling in areas that are developed and have established production, because of little or sometimes no past drilling results by third parties to guide lease acquisition and drilling work. We cannot assure you that our future drilling activities in emerging plays will be successful or, if successful, will achieve the potential resource levels that we currently anticipate based on the drilling activities that have been completed, or that we will achieve the anticipated economic returns based on our current cost models.

Increasing costs could impact operating results.

Areas throughout the United States, including the Appalachian and Illinois Basins, are experiencing steadily rising costs for drilling and completion rigs, pipe, cement, electrical power, and other goods and services.  Over time, a failure of commodity prices to keep pace with the cost creep environment could adversely affect cash flow.

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We may suffer losses or incur liability for events for which we or the operator of a property have chosen not to obtain insurance.

Operations are subject to hazards and risks inherent in drilling, producing and transporting production, such as fires, natural disasters, explosions, pipeline ruptures, spills, and acts of terrorism, all of which can result in the loss of hydrocarbons, environmental pollution, personal injury claims and other property damage.  We maintain insurance coverage against some, but not all, potential losses. Pollution and environmental risks generally are not fully insurable.  Existing insurance coverage may not be renewed.  The occurrence of an event that is not covered, or not fully covered, by insurance could have a material adverse effect on our business, financial condition and results of operations.

Future use of hedging arrangements could result in financial losses or reduce income.

We may engage in hedging arrangements for a significant part of production to reduce exposure to price fluctuations in commodity prices.  These arrangements would expose the Company to risk of financial loss in some circumstances, including when production is less than expected, the counterparty to the hedging contract defaults on its contract obligations, or there is a change in the expected differential between the underlying price in the hedging agreement and the actual price received. In addition, these hedging arrangements may limit the benefits we would otherwise receive from increased commodity prices.

The use of derivatives may, in some cases, require the posting of cash collateral with counterparties. If we enter into derivative instruments that require cash collateral and commodity prices or interest rates change in a manner adverse to us, our cash otherwise available for use in our operations would be reduced which could limit our ability to make future capital expenditures and to make payments on our indebtedness, which could also limit our ability to borrow funds. Future collateral requirements will depend on arrangements with our counterparties, highly volatile natural gas prices and interest rates.

As of December 31, 2010, receivables from our derivatives counterparty were approximately $171,000 ($112,000 at June 30, 2011). Any default by this counterparty on its obligations to us would have a material adverse effect on the Company’s financial condition and results of operations.

Our business depends on gathering and transportation facilities owned by others. Any limitation in the availability of those facilities would interfere with our ability to market the natural gas we produce.

The marketability of our natural gas production depends in part on the availability, proximity and capacity of gathering and pipeline systems owned by third parties. The amount of natural gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering or transportation system, or lack of contracted capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months.  We may be provided with only minimal, if any, notice as to when these circumstances will arise, or their duration. In addition, future properties may be acquired which are not currently serviced by gathering and transportation pipelines, or the gathering and transportation pipelines in the area may not have sufficient capacity to transport the additional production.  As a result, we may not be able to sell production from these wells until the necessary systems are built.

We may incur losses as a result of title deficiencies.

We typically do not retain attorneys to examine title before acquiring leases or mineral interests.  Prior to drilling a well, however, we (or the company that is the operator) obtain a preliminary title review to initially determine that no obvious title deficiencies are anticipated.  As a result of some such examinations, certain curative work must be done to correct deficiencies in title, and such curative work may be expensive.  In some instances, curative work may not be feasible or possible, and the interest is demonstrated to have been bought in error from someone who is not the owner.  In that event, our interest would be worthless.

In addition, the Company’s reserve estimates assume that we have proper title for the properties we have acquired.  Therefore, in the event we are unable to perform curative work to correct deficiencies and our interest is deemed to be worthless, our reserve estimates and the financial information related thereto may be found to be inaccurate, which could have a material adverse effect on us.

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We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations or expose us to significant liabilities.

Our exploration, production and transportation operations are subject to complex and stringent laws and regulations. In order to conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. We may incur substantial costs in order to maintain compliance with these existing laws and regulations. In addition, our costs of compliance may increase if existing laws and regulations are revised or reinterpreted, or if new laws and regulations become applicable to our operations. Such costs could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration for, and the production and transportation of, natural gas and oil. Failure to comply with such laws and regulations, including any evolving interpretation and enforcement by governmental authorities, could have a material adverse effect on our business, financial condition and results of operations.

Changes to existing or new regulations may unfavorably impact the Company, could result in increased operating costs, and could have a material adverse effect on our financial condition and results of operations. For example, Congress is currently considering legislation that, if adopted in its proposed form, would subject companies involved in natural gas and oil exploration and production activities to, among other items, additional regulation of and restrictions on hydraulic fracturing of wells, the elimination of certain U.S. federal tax incentives and deductions available for such activities, and the prohibition or additional regulation of private energy commodity derivative and hedging activities. These and other potential regulations, particularly at the local level, could increase our operating costs, reduce our liquidity, delay or halt our operations or otherwise alter the way we conduct our business, which could in turn have a material adverse effect on our financial condition, results of operations and cash flows.

Operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities.

We may incur significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our exploration, development and production activities. These delays, costs and liabilities could arise under a wide range of federal, state and local laws and regulations relating to protection of the environment, health and safety, including regulations and enforcement policies that have tended to become increasingly strict over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. We are often required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that a proposed project may have on the environment, threatened and endangered species, and cultural and archaeological artifacts. The public may comment on and otherwise engage in the permitting process, including through judicial intervention.  As a result, the permits we need may not be issued, or if issued, may not be issued in a timely manner or may impose requirements that restrict our ability to conduct operations.

In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Strict liability and joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken.

New laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. If we are not able to recover the resulting costs through insurance or increased revenues, our business, financial condition or results of operations could be adversely affected.

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The adoption of climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for the natural gas and oil we produce.

The U.S. Congress has considered legislation to mandate reductions of greenhouse gas emissions and certain states have already implemented, or may be in the process of implementing, similar legislation. Additionally, the U.S. Supreme Court has held in its decisions that carbon dioxide can be regulated as an “air pollutant” under the Clean Air Act, which could result in future regulations even if the U.S. Congress does not adopt new legislation regarding emissions. At this time, it is not possible to predict how legislation or new federal or state government mandates regarding the emission of greenhouse gases could impact our business; however, any such future laws or regulations could require us or our customers to devote potentially material amounts of capital or other resources in order to comply with such regulations. These expenditures could have a material adverse impact on our financial condition, results of operations, or cash flows.

Even though such legislation has not yet been adopted at the national level, nearly one-half of the states have begun taking actions to control and/or reduce emissions of greenhouse gases. Although most of the state-level initiatives have to date been focused on large sources of greenhouse gas emissions, such as coal-fired electric power plants, it is possible that smaller sources of emissions could become subject to greenhouse gas emission limitations or allowance purchase requirements in the future. Any one of these climate change regulatory and legislative initiatives could have a material adverse effect on our business, financial condition and results of operations.

Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

In June 2009, legislation was introduced in both the House and Senate to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the natural gas industry in the hydraulic fracturing process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate natural gas production. Sponsors of bills have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. Both bills are still in committee.

Separately, the EPA has commenced the process of studying the possible relationship between hydraulic fracturing and drinking water, the initial results of which the EPA expects in late 2012. To receive input on development of the draft study plan, the EPA held public meetings in four locations across the country in July and September 2010, which attracted hundreds of protestors. Also in September 2010, the EPA issued voluntary information requests to nine of the leading national and regional hydraulic fracturing service providers. Although eight of the nine hydraulic fracturing companies agreed to voluntarily compile and submit the information requested by the EPA, one company refused and the EPA issued a subpoena. Because of heightened public awareness and concern related to hydraulic fracturing, additional federal regulation by the EPA, Congress, or both is likely in the coming years. If adopted, such rules could lead to operational delays or increased operating costs and could result in additional regulatory burdens that would make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business.

The adoption of derivatives legislation by Congress could have an adverse impact on our ability to hedge risks associated with our business.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) is comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The Dodd-Frank Act requires the Commodity Futures Trading Commission (“CFTC”) and the SEC to promulgate rules and regulations implementing certain portions of it by mid-July 2011 (which have in part been delayed). The CFTC has also proposed regulations to set position limits for certain futures and option contracts in the major energy markets, although it is not possible at this time to predict whether or when the CFTC will adopt similar rules or include comparable provisions in its rulemaking under the new legislation. The financial reform legislation may require us to comply with margin requirements and with certain clearing and trade-execution requirements, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative contracts to spin off some of their derivatives contracts to a separate entity, which may not be as creditworthy as the current counterparty. The Dodd-Frank Act and any new regulations could significantly increase the cost of derivative

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contracts (including through requirements to post collateral), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity contracts related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower the commodity prices we realize. Any of these consequences could have a material adverse effect on us, our financial condition, and our results of operations.

Any laws or regulations that subject us to additional capital or margin requirements relating to, or to additional restrictions on, our trading and commodity positions could have an adverse effect on our ability to hedge risks associated with our business or on the cost of our hedging activity.

Competition in the natural gas and oil industry is intense, making it more difficult for us to acquire properties, market natural gas and oil and secure trained personnel.

Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment for acquiring properties, marketing our production and securing trained personnel.  Also, there is substantial competition for investment capital in the industry. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to pay more for productive properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources permit. In addition, other companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain qualified personnel has increased over the past few years due to competition and may increase substantially in the future. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital, which could have a material adverse effect on our business, financial condition and results of operations.

The unavailability or high cost of drilling rigs, equipment, supplies, personnel and field services could adversely affect our ability to execute our exploration and development plans within our budget and on a timely basis.

The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers and other professionals in the industry can fluctuate significantly, often in correlation with natural gas and oil prices, causing periodic shortages. Historically, there have been shortages of qualified personnel, drilling and workover rigs, pipe and other equipment and materials as demand for rigs and equipment has increased along with the number of wells being drilled. We cannot predict whether these conditions will exist in the future and, if so, what their timing and duration will be. Such shortages could delay or cause us to incur significant expenditures that are not provided for in our capital budget, which could have a material adverse effect on our business, financial condition or results of operations.

The loss of senior management or technical personnel could adversely affect operations.

We depend on the services of our senior management and technical personnel. The loss of the services of our senior management or technical personnel, including Patrick McDonald, our Chairman, President and Chief Executive Officer, and Kevin Struzeski, our Chief Financial Officer, Treasurer and Secretary, could have a material adverse effect on our operations. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals.

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Our senior management and administrative staff also provide services to Nytis Exploration Company, a corporation separate from the Company and its subsidiaries.  The time that such personnel devote to the other company will impact the time each will have to devote to the Company and could adversely affect operations.

Prior to the closing of the Merger, all of the persons providing services to Nytis USA were employees of Nytis Exploration Company, a company that is separate from the Company and its subsidiaries.  Effective July 1, 2011, these persons now serve as the the administrative staff and senior management of the Company.  However, the Company allows these persons, including Mr. McDonald (CEO) and Mr. Struzeski (CFO), to continue to provide services to Nytis Exploration Company.  The Company is paid a flat fee equal to $15,000 per month for all services performed for Nytis Exploration Company, and to the extent the Company incurs out of pocket costs and expenses to third parties in connection with providing such services to Nytis Exploration Company, such costs and expenses are reimbursed by Nytis Exploration Company to the Company.

As a consequence of this arrangement, the time that the Company’s administrative staff and senior management spend on and such persons’ obligations with respect to matters other than Company matters could adversely affect the operations of the Company.

The Company has limited control over activities on properties we do not operate, which could reduce our production and revenues.

A portion of our business is conducted through joint operating agreements under which we own partial interests in oil and gas properties. If we do not operate the properties in which we own an interest, we do not have control over normal operating procedures, expenditures or future development of the underlying properties. The failure of an operator of our wells to adequately perform operations or an operator’s breach of the applicable agreements could reduce our production and revenues. The success and timing of our drilling and development activities on properties operated by others, therefore, depends upon a number of factors outside of our control, including the operator’s timing and amount of capital expenditures, expertise and financial resources, inclusion of other participants in drilling wells and use of technology. Because we do not have a majority interest in most wells that we do not operate, we may not be in a position to remove the operator in the event of poor performance.

We may be subject to risks in connection with acquisitions of properties.

The successful acquisition of producing properties requires an assessment of several factors, including:

·                                          recoverable reserves;

·                                          future commodity prices and their applicable differentials;

·                                          operating costs; and

·                                          potential environmental and other liabilities.

The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems are not necessarily observable even with inspections.  Additionally, when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. We often are not entitled to contractual indemnification for environmental liabilities and acquire properties on an “as is” basis.

We may be unable to make attractive acquisitions or successfully integrate acquired businesses, and any inability to do so may disrupt our business and hinder our ability to grow.

In the future we may make acquisitions of businesses that complement or expand our current business. We may not be able to identify attractive acquisition opportunities. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms.

The success of any completed acquisition will depend on our ability to integrate effectively the acquired business into our existing operations. The process of integrating acquired businesses may involve unforeseen difficulties and may require a disproportionate amount of our managerial and financial resources. In addition, possible future acquisitions may be larger and for purchase prices significantly higher than those paid for earlier acquisitions. No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate

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acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully, or to minimize any unforeseen operational difficulties could have a material adverse effect on the business, financial condition and results of operations.

We may incur more taxes and certain of our projects may become uneconomic if certain federal income tax deductions currently available with respect to natural gas and oil exploration and development are eliminated as a result of future legislation.

The passage of any legislation as a result of the budget proposal, the Senate bill or any other similar change in U.S. federal income tax law could eliminate certain tax deductions that are currently available with respect to natural gas and oil exploration and development. Any such change could negatively impact our financial condition and results of operations by increasing the costs we incur which would in turn make it uneconomic to drill some prospects if commodity prices are not sufficiently high, resulting in lower revenues and decreases in production and reserves.

Risks Related to the Ownership of our Common Stock

We have incurred and will continue to incur increased costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal control over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our consolidated financial statements.

As a public operating company, we incur significant administrative, legal, accounting and other burdens and expenses beyond those of a private company, including those associated with corporate governance requirements and public company reporting obligations. In particular, we have had to and will continue to expend resources to supplement our internal accounting and financial resources to obtain technical and public company training and expertise, as well as refine our quarterly and annual financial statement closing process, to enable us to satisfy such reporting obligations. However, even if we are successful in doing so, there can be no assurance that our finance and accounting organization will be able to adequately meet the increased demands that result from being a public company.

Our management team must comply with various requirements of being a public company.  We have devoted, and will continue to devote, significant resources to address these public company-associated requirements, including compliance programs and investor relations, as well as our financial reporting obligations. Complying with these rules and regulations has and will substantially increase our legal and financial compliance costs and make some activities more time-consuming and costly.

An active, liquid and orderly trading market for our common stock may not develop, and the price of our stock may be volatile and may decline in value.

There currently is not an active public market for our common stock. An active trading market may not develop or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares of common stock at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares of our common stock as consideration.

Our common stock may not be eligible for listing on a national securities exchange.

Our common stock is not currently listed on a national securities exchange, and we do not currently meet the initial quantitative listing standards of a national securities exchange. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. Until our common stock is listed on a national securities exchange, we expect that it will continue to be eligible and quoted on the OTC Bulletin Board.  In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of our common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by

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law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital.

Our common stock may be considered a “penny stock.”

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock may be less than $5.00 per share and therefore may be a “penny stock.” Broker and dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect your ability to sell shares of our common stock in the future.

As a result of the registration of the shares covered by this prospectus, a significant number of shares of our common stock have become eligible for sale, which could depress the market price for our common stock. Future sales by us or our existing shareholders could similarly depress the market price of our common stock.

As a result of the registration of the shares covered by this prospectus, a significant number of shares of our common stock have become eligible for sale in the public market, which could cause the market price for our common stock to decline significantly. If we or our existing shareholders sell a large number of shares of our common stock, or if we sell additional securities that are convertible into common stock, in the future, the market price of our common stock similarly could decline. Further, even the perception in the public market that we or our existing shareholders might sell shares of common stock could depress the market price of our common stock.

Control of our stock by current stockholders is expected to remain significant.

Currently, our directors directly and indirectly beneficially own a majority of our outstanding common stock. As a result, these affiliates have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares.

It is not likely that we will pay dividends.

We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.

Terms of subsequent financings may adversely impact your investment.

We may have to raise additional equity or debt in the future.  In that event, your rights and the value of your investment in the common stock could be reduced.  For example, if we issue debt securities, the holders of the debt would have a claim to our assets that would be prior to the rights of shareholders until the debt is paid.  Interest on these debt securities would increase costs and could negatively impact operating results.

Additionally, the borrowing base under our secured lending facility presently is $20 million (subject to increase depending on additions to reserves, and other factors), and all borrowings under the facility are secured by our oil and natural gas assets.  Borrowings outside the facility may have to be unsecured, and accordingly, such borrowings, if obtainable, would have a higher interest rate, which would increase debt service and more negatively impact operating results.

Preferred stock could be issued in series from time to time with such designations, rights, preferences, and limitations as needed to raise capital.  The terms of preferred stock will be determined by our Board of Directors and could be more advantageous to those investors than to the holders of common stock.  In addition, if we need to raise

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more equity capital from sale of common stock, institutional or other investors may negotiate terms at least and possibly more favorable than the terms of this Offering.

The Company’s Certificate of Incorporation does not provide shareholders the pre-emptive right to buy shares from the Company.  As a result, you will not have the automatic ability to avoid dilution in your percentage ownership of the company.

USE OF PROCEEDS

This prospectus relates to the sale or other disposition of shares of our common stock by the selling securityholders listed under “Selling Securityholders” and their transferees. We will not receive any proceeds from any sale of the shares by the selling securityholders.

SELLING SECURITY HOLDERS

We are registering for resale or other disposition by the selling securityholders named herein or their transferees an aggregate of 44,444,444  shares of our common stock.

On June 29, 2011, we entered into the Private Placement Purchase Agreement with 23 accredited investors, pursuant to which we issued to the investors an aggregate of 44,444,444 common shares.  An additional 22,222,222 common shares were issued to Yorktown Energy Partners IX, L.P. upon the automatic conversion of the 100 shares of Series A Convertible Preferred Stock which occurred on July 18, 2011, but these shares of common stock are not, and will not be, included in the 44,444,444 common shares covered by this Resale Registration Statement.

The following table sets forth, as of July 31, 2011, (i) the number of shares of our common stock beneficially owned by each selling securityholder named below, (ii) the number of shares of our common stock that may be sold or otherwise disposed of by each of the selling securityholders named below pursuant to this prospectus, and (iii) the number of shares of our common stock, and the percent of the class, beneficially owned by each selling securityholder named below assuming all of the shares registered hereby are sold by the selling securityholders

As of July 31, 2011, 114,185,405 shares of our common stock were issued and outstanding.

Information in the table below, and under the heading “Material Relationship with Selling Securityholders,” has been provided to us by the selling securityholders. We do not know when or in what amounts the selling securityholders may sell or otherwise dispose of the shares of our common stock covered hereby. The selling securityholders may sell or otherwise dispose of all, some or none of the shares offered by this prospectus. Because the selling securityholders may sell or otherwise dispose of all, some, or none of the shares covered hereby, we cannot estimate the number of the shares that will be sold or otherwise disposed of by the selling securityholders pursuant to this prospectus. Accordingly, for purposes of this prospectus, we have assumed that all of the shares covered by this prospectus will be sold by the selling securityholders.

Information about the selling securityholders may change over time, and changed information will be set forth in supplements to this prospectus if and when required.

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(1)                                  The beneficial ownership of the common stock by the selling stockholder set forth in the table is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling stockholders has sole or shared voting power or investment power and also any shares, which the selling stockholders has the right to acquire within 60 days.  Further, the inclusion of shares in the following table of those shares does not constitute an admission that the named selling securityholder is a direct or indirect beneficial owner of such shares.

(2)                                  Assumes that all securities registered will be sold.

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(3)                                  Michael F Price is the managing partner and member of MFP Partners, L.P, and has voting and dispositive power over the shares held by MFP Partners, L.P.

(4)                                  Lusman Capital Management, LLC has voting and dispositive power over the shares held by both Lusman Partners, LP and Lusman Master Fund, Ltd.  Joel Lusman is the control person of Lusman Capital Management, LLC and is the individual with voting and dispositive power over the shares held by each of Lusman Partners, LP and Lusman Master Fund, Ltd.

(5)                                  Paul J. Isaac is the (i) managing general partner of Arbiter Partners QP, LP; (ii) manager of Isaac Brothers LLC; and (iii) manager of 75 Prospect Partners LLC.  Through his control of such entities Mr. Isaac has voting and dispositive power over the shares held by each of the entities named in this footnote.

(6)                                  David Malkin is the President of Ralph Shuster, Inc. and holds voting and dispositive power over the shares held by the entity.

(7)                                  MGP Advisers Limited Partnership (“MGP”) is the general partner of the Special Situations Fund III, QP, L.P. AWM Investment Company, Inc. (“AWM”) is the general partner of MGP, the general partner of and investment adviser to the Special Situations Cayman Fund, L.P. and the investment adviser to the Special Situations Fund III, QP, L.P. and the Special Situations Private Equity Fund, L.P.  Austin W. Marxe and David M. Greenhouse are the principal owners of MGP and AWM.  Through their control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and investment control over the portfolio securities of each of the funds listed above.

(8)                                  Walter Carucci is a partner of Uncle Mills Partners and is the individual with voting and dispositive power over the shares held by Uncle Mills Partners.  Mr. Carucci has represented that he beneficially owns a total of 58,553 shares of Company common stock outside of his relationship with Uncle Mills Partners, and such shares are included in Uncle Mills Partners’ beneficial ownership above, but are not included in the column labeled “Number of Shares of Common Stock Offered Hereby”. Mr. Carucci has identified himself as the owner and control person of Carr Securities, a Broker/Dealer. Carr Securities served as the placement agent for the Private Placement closed on June 29, 2011. Uncle Mills Partners has represented to the Company that it purchased the shares of Company common stock that may be offered and sold pursuant to this prospectus on its own behalf in the ordinary course of business, and at the time of the purchase of the shares had no agreements or understandings, directly or indirectly, with any party to distribute the shares.

(9)                                  Nelson Obus is the control person of each of Wynnefield Small Cap Value Offshore Fund, Ltd., Wynnefield Partners Small Cap Value, LP; and Wynnefield Partners Small Cap Value, LP I, and is the individual with voting and dispositive power over the shares held by each fund.

(10)                            After reasonable efforts to contact Resolute Partners, L.P. and Low Tide Partners, L.P. the Company was unable to confirm the natural persons who exercise voting and/or dispositive powers on behalf of those entities.

Material Relationship with Selling Securityholders

Except for Uncle Mills Partners (described in note 8 of the above Selling Securityholder Table) each of the selling securityholders has certified to us that such selling securityholder is not a broker-dealer and that such selling securityholder is either (a) not an affiliate of a broker-dealer or (b) is an affiliate of a broker-dealer, but acquired the shares being registered hereby for resale in the ordinary course of business, and at the time of such acquisition, such selling securityholder had no agreements or understandings, directly or indirectly, with any person to distribute such shares.

There are not and, since the closing of the Private Placement until the date of this prospectus there have not been at any time any, relationships between us and any selling securityholder, other than any relationships directly relating to such selling securityholder’s investment in securities issued in the Private Placement.

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PLAN OF DISTRIBUTION

The selling securityholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions.  These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

The selling securityholders may use any one or more of the following methods when disposing of shares or interests therein:

·                  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

·                  block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

·                  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·                  an exchange distribution in accordance with the rules of the applicable exchange;

·                  privately negotiated transactions;

·                  short sales effected after the date the registration statement of which this prospectus is a part is declared effective by the SEC;

·                  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

·                  broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share;

·                  a combination of any such methods of sale; and

·                  any other method permitted by applicable law.

The selling securityholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling securityholders to include the pledgee, transferee or other successors in interest as selling securityholders under this prospectus.  The selling securityholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

In connection with the sale of our common stock or interests therein, the selling securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume.  The selling securityholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities.  The selling securityholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered

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by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The aggregate proceeds to the selling securityholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any.  Each of the selling securityholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents.  We will not receive any of the proceeds from this offering.

The selling securityholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.

The selling securityholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be “underwriters” within the meaning of Section 2(11) of the Securities Act.  Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act.  Selling securityholders who are “underwriters” within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of the selling securityholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers.  In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

We have advised the selling securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling securityholders and their affiliates.  In addition, to the extent applicable we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling securityholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act.  The selling securityholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling securityholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

We have agreed with the selling securityholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which all of the shares may be sold without restriction pursuant to Rule 144 of the Securities Act.

DESCRIPTION OF CAPITAL STOCK

Description of Our Common Stock

We are authorized to issue up to an aggregate of 200,000,000 shares of our common stock, par value $0.01 per share. As of July 31, 2011, an aggregate of 114,185,405 shares of our common stock were issued and outstanding. Our amended and restated certificate of incorporation, as amended, does not provide for cumulative voting.  The holders of our common stock are entitled to receive ratably such dividends, if any, as may be declared by our board of directors out of legally available funds.  However, the current policy of our board of directors is to retain earnings, if any, for our operations and expansion. Upon any liquidation, dissolution or winding-up of our company, the holders of our common stock are entitled to share ratably in all of our assets which are legally available for

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distribution, after payment of or provision for all liabilities and the preferences of any then outstanding shares of preferred stock. The holders of our common stock have no preemptive, subscription, redemption or conversion rights. All issued and outstanding shares of our common stock are fully-paid and non-assessable.

Description of the Preferred Stock

We are authorized to issue up to an aggregate of 1,000,000 shares of preferred stock, par value $0.01 per share, in one or more series as may be determined by our board of directors, which may establish from time to time the number of shares to be included in such series, and fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations, or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference thereof.  As of July 31, 2011 we did not have any shares of preferred stock issued and outstanding.  Any preferred stock established and designated by our board of directors may rank senior to our common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both.  The issuance of shares of preferred stock, the existence of unissued preferred stock, or the issuance of rights to purchase such shares of preferred stock, may have the effect of delaying or deterring an unsolicited merger or other change of control transaction.

In connection with the Private Placement, on June 16, 2011, we filed a Certificate of Designation with the Delaware Secretary of State and on June 27, 2011, we filed an Amended and Restated Certificate of Designation with the Delaware Secretary of State, which set forth the designation, preferences, relative rights, qualifications, limitations and restrictions of the Series A Convertible Preferred Stock issued in the Private Placement.  On July 18, 2011, all 100 shares of our Series A Convertible Preferred Stock automatically converted into an aggregate of 22,222,222 shares of our common stock.  Upon that conversion, all shares of our Series A Convertible Preferred Stock were cancelled, retired, and eliminated from the shares of Series A Convertible Preferred Stock that the Corporation was authorized to issue and become authorized but unissued shares of the Company’s preferred stock and may be reissued as part of a new series of the our preferred stock subject to the conditions and restriction on issuance set forth in any certificate of designation creating a series of preferred stock or any similar stock or as otherwise required by law.

Outstanding Warrants

There are three warrants outstanding that represent the right to purchase a total of 2,696,133 shares of our common stock.  Two of these warrants are held by individuals who prior to the Merger were officers and directors of the Company.  These two warrants represent the right to purchase an aggregate of 250,000 shares of our common stock at an exercise price of $1.00 per share and each expires on August 31, 2017.

The remaining warrant is held by McDonald Energy, LLC, a single member limited liability company owned by our Chairman, Chief Executive Officer and President, Patrick R. McDonald.  This warrant represents the right to purchase 2,446,133 shares of our common stock at a purchase price of $0.8498 per share.  It was issued by Nytis USA to McDonald Energy, LLC on May 19, 2005 and was assumed by the Company in connection with the Merger.  In connection with the closing of the Merger, the number of shares and the exercise price of the Nytis USA warrant was adjusted in accordance with the exchange ratio pursuant to the Merger Agreement.  This warrant expires on June 1, 2015.

Registration Rights

In connection with the Private Placement, we entered into a registration rights agreement with the investors in the Private Placement that requires us to file the registration statement of which this prospectus is a part, no later than August 13, 2011, and to have this registration statement declared effective by the SEC prior to the earlier of September 27, 2011 or five business days after the SEC has informed us that no review of this registration statement will be made or that the SEC has no further comments on this registration statement.  Further, if this registration statement covers less than all of the 44,444,444 common stock shares issued in the Private Placement to the selling securityholders and if any one or less than all selling securityholders have sold all the shares covered by this registration statement, we will be required to file a second registration statement for the remaining shares, subject to any SEC restriction on our ability to do so.

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We are required to keep each registration statement in effect until the earlier of (i) the date on which all the shares covered thereby have been sold or (ii) the date on which all such shares may be sold without restriction pursuant to Rule 144.  If we fail to satisfy our obligations under the registration rights agreement, we may be required to pay liquidated damages equal to 1.5% of the purchase price for the common stock purchased by the investors in the Private Placement (or, in the circumstances under which we fail to timely file a second registration statement as described in the last sentence of the prior paragraph, 1.5% of the purchase price for the common stock to be included in such second registration statement), for each 30-day period or pro rata for any portion thereof during which such failure continues.

In addition, if we fail to file periodic reports with the SEC during specified time periods, we may be required to pay additional liquidated damages to affected holders.

Anti-Takeover Effects of our Amended and Restated Certificate of Incorporation, Bylaws and Delaware Law

We currently have authorized but unissued shares of our common stock which will be available for future issuance without any further vote or action by our stockholders. In addition, pursuant to the terms of our amended and restated certificate of incorporation, we are authorized to issue, without stockholder approval, up to an aggregate of 1,000,000 shares of preferred stock, par value $0.01 per share, in one or more series as may be determined by our board of directors, which may establish from time to time the number of shares to be included in such series, and fix the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations, or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference thereof. Any preferred stock so established and designated by our board of directors may rank senior to our common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both.

These shares of common stock and preferred stock may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of our common stock and our preferred stock, and our ability to fix the designations, powers, preferences and rights of shares of our preferred stock, could render more difficult or discourage an attempt to obtain control over us by means of a proxy contest, tender offer or merger, or otherwise.

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by our counsel, Welborn Sullivan Meck & Tooley, P.C.

EXPERTS

The financial statements as of December 31, 2010 and 2009, and for each of the two years in the period ended December 31, 2010, included in this prospectus, have been audited by Ehrhardt Keefe Steiner & Hottman PC, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the Registration Statement.  Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

The audits, dated April 7, 2011, of our internally generated estimates, as of January 1, 2011, of the proved developed producing reserves of each of Interstate Natural Gas Company and Nytis LLC (collectively, the “Audit Reports”), included in this prospectus, were prepared by Cawley, Gillespie & Associaties, Inc., independent petroleum engineers, as stated in the Audit Reports.  Such Audit Reports have been so included in reliance upon the report of such firm given upon their authority as experts in petroleum engineering.

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DESCRIPTION OF THE BUSINESS

Glossary of Natural Gas and Oil Terms

Many of the following terms are used throughout this prospectus.  The definitions of proved developed reserves, proved reserves, and proved undeveloped reserves have been abbreviated from the applicable definitions contained in Rule 4-10(a) of Regulation S-X adopted by the Securities and Exchange Commission (the “SEC”). The entire definitions of those terms can be viewed on the SEC’s website at http://www.sec.gov.

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Corporate History and Structure

Carbon Natural Gas Company (a Delaware corporation reincorporated from Indiana in August 2007 and formerly known as St. Lawrence Seaway Corporation “SLSC”), owns and operates natural gas and crude oil interests in the Appalachian and Illinois Basins of the United States.  It produces and sells natural gas, natural gas condensate and natural gas liquids, as well as crude oil.  Carbon’s acreage is held and its exploration and production activities are conducted indirectly through majority-owned subsidiaries.

·                  Nytis Exploration (USA) Inc. (“Nytis USA”) was organized as a Delaware corporation in 2004.  Nytis now is owned 100% by Carbon (see the information on Nytis USA’s reverse acquisition of SLSC below).

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·                  Soon after formation, Nytis USA identified natural gas and oil interests located in Clearfield County, Pennsylvania, and organized (along with a minority owner) a subsidiary limited liability company, Nytis Exploration of Pennsylvania LLC, a Pennsylvania limited liability company (“Nytis PA”), which acquired those interests.  Nytis PA is owned 85% by Nytis.

·                  Thereafter, Nytis USA identified natural gas and oil interests (owned by Addington Exploration, LLC (“Addington”)) located primarily in Illinois, Indiana, Kentucky, Ohio, Tennessee and West Virginia.  To acquire the Addington assets, Nytis USA formed (along with a different unaffiliated person) Nytis LLC.  Nytis LLC is owned 98.1% by Nytis USA.  Nytis LLC continued acquiring interests complementary to the Addington assets, including the 2006 acquisition of Pennsylvania properties from DCPA, LLC (an affiliate of Delta Petroleum Corporation).  In the spring of 2010, Nytis PA and Nytis LLC sold all of the Pennsylvania assets and received total proceeds of approximately $30.3 million ($21 million to Nytis LLC and $9.3 million to Nytis PA).  In this transaction, Nytis PA sold all of its assets, and this subsidiary is being dissolved and its business wound up.

Now, substantially all the natural gas and oil interests are owned by Nytis LLC, which continues to acquire and exploit its properties.  As of June 30, 2011, Nytis LLC owns interests in approximately 826 gross (480 net) productive natural gas and oil wells on approximately 321,000 (248,000 net) undeveloped acres in the Appalachian and Illinois Basins.

·                  On January 31, 2011, Nytis USA entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SLSC, which was closed on February 14, 2011.  At that date, SLSC acquired all of the issued and outstanding shares of Nytis USA from the Nytis USA stockholders, and thereby became the indirect owner of all of Nytis USA’s equity interests in Nytis LLC and Nytis PA, in exchange for the issuance by SLSC to the Nytis USA stockholders of 47,000,003 restricted shares of SLSC common stock (which then constituted 98.9% of SLSC’s issued and outstanding common stock), and Nytis USA became a wholly-owned subsidiary of SLSC, and Nytis LLC and Nytis PA became majority-owned indirect subsidiaries of SLSC (the “Merger”).  The transactions contemplated by the Merger Agreement were intended to be a “tax-free” reorganization under Sections 351 and/or 368 of the Internal Revenue Code of 1986.

In connection with the closing of the Merger, the officers and directors of Nytis USA became the officers and directors of SLSC.

Prior to the Merger closing, SLSC was a “shell company” (as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”)), with no operations and nominal cash assets.  As a result of the Merger, SLSC exited shell company status as of February 17, 2011, when it filed a Form 8-K with complete “Form 10 Information” as required by Item 2.01(f) of Form 8-K.  On May 2, 2011, SLSC’s name was changed to Carbon Natural Gas Company.

Carbon now is a holding company which conducts substantially all its natural gas and oil operations through Nytis LLC.

Business Strategy and Strengths

Our strategy is to build value through consistent growth in reserves and production through drilling on existing properties, and acquiring more properties. We emphasize internally generated growth of land positions in low-risk, repeatable, unconventional resource plays, and invest significantly in technical staff, acreage and technology to build drilling inventory and establish value through drilling, and geological and engineering support.

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Principal strategy components:

·                  Concentrate on unconventional resources in core operating areas. Our current focus on the Appalachian and Illinois Basins allows the Company to capitalize on its regional expertise to optimize drilling and completion techniques and production.  Numerous objective reservoirs permit us to allocate capital among opportunities based on risked well economics, with a view to balancing the portfolio and achieve consistent and profitable growth in production and reserves.

All of our proved reserves and resources are classified as unconventional, including fractured shale natural gas plays, tight gas sands, and coalbed methane.  Our technical team has significant experience in drilling vertical, horizontal and directional wells, as well as fracture stimulation of unconventional formations. We utilize the latest geologic, drilling and completion technologies to increase the predictability and repeatability of finding and recovering hydrocarbons in these unconventional plays.

Production increased from 1,000 Mcfe/d average for the year ended December 31, 2005, to 2,800 Mcfe/d for the year ended December 31, 2010, and to 6,700 Mcfe/d at June 30, 2011.  Estimated proved reserves increased from 15.6 Bcfe at December 31, 2004 to 55.5 Bcfe at December 31, 2010, to 83.1 Bcfe at June 30, 2011.  The large increases in production and reserves during 2011 are primarily attributed to the June 29, 2011 acquisition of assets from The Interstate Natural Gas Company (described further below).

·                  Proven executive management team with track record of value creation.  The Company’s acreage positions provide multiple resource play opportunities.  Our management and technical personnel have extensive experience operating in the Appalachian and Illinois Basins, and have successfully built and sold unconventional resource companies in the past.

·                  Low-risk development drilling in established resource plays, and flexibility in deployment of exploration and infrastructure capital.  At June 30, 2011, the Company had a multi-year drilling inventory of approximately 3,000 potential drilling locations on acreage then held, and had drilled 93 wells from January 2005 through June 30, 2011 with an approximate 98% success rate.  Approximately 5% of the drilling locations are included in our estimated proved reserve base at June 30, 2011. The concentrated leasehold position has been delineated largely through drilling done by us, as well as with other industry players.

This property profile is always subject to change as we acquire and dispose of various parcels.  For examples, in 2010, in addition to selling all our interests (for approximately $30.3 million in gross proceeds) in Pennsylvania assets to a third party, we also sold some undeveloped acreage in West Virginia, bought an interest in 19 wells in Kentucky and an additional interest for 39 productive wells in Indiana, and bought a 50% interest in a company that owns and operates a gas gathering system in the Illinois Basin (this latter transaction added to infrastructure for the Company’s coalbed methane play in the Illinois Basin).  Also, in 2009, we were paid a total of $2.7 million for two separate farmout agreements, by which we reduced capital exposure to dry hole risk, and retain a significant working interest plus overriding royalty interest upside. See Note 4 to the

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audited consolidated financial statements included in this prospectus, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

·                  Low cost operation.  Our geographic and operating focus provides low finding and development and lease operating costs.

·                  Maintain financial flexibility and conservative financial position.  We typically use cash flow from operations and our bank credit facility with Bank of Oklahoma to fund acquisition and development drilling. In 2010, we repaid $23.5 million of borrowings under our bank credit facility with proceeds from the 2010 disposition of the Pennsylvania assets.

At June 29, 2011, as a result of the increase in proved reserves attributable to the assets acquired from The Interstate Natural Gas Company, the capacity was increased from $10 million to $20 million, and the maximum line for credit available under hedging arrangements was increased from $2.7 million to $5 million.  At July 30, 2011, $10.2 million of the credit line was available.  The maturity of all loans from the credit facility was extended from May 31, 2012 to May 31, 2014.

·                  Control over operating decisions and capital program.  At December 31, 2010, we had an average working interest of 64% in our productive wells and operated 72% of our production.  These numbers changed to 72% and 90% at June 30, 2011 respectively, as a result of buying assets from The Interstate Natural Gas Company.  The high percentage of operated wells allows us to effectively control operating costs, timing of development activities, application of technological enhancements, marketing of production, and to better manage our capital budget.  Additionally, our status as operator permits discretionary timing for much of our capital expenditures.  This allows a significant degree of flexibility to adjust size and timing of development in response to changing market conditions.

·                  Manage commodity price exposure through an active hedging program.  We maintain an active hedging program designed to mitigate volatility in commodity prices and regional basis differentials. As of June 30, 2011, we have outstanding hedges of 120,000 MMbtu for 2011 at an average price of $5.03 per MMbtu and 160,000 MMbtu for 2012 at an average price of $5.11 per MMbtu.  Substantially all of the hedges are at regional sales points in our operating regions, which mitigates the risk of basis differential to the Henry Hub index.

·                  Manage midstream assets and secure firm takeaway capacity.  We own natural gas gathering and compression facilities in the Illinois Basin, and also in the Appalachian Basin as a result of buying assets from The Interstate Natural Gas Company.  We believe access to gathering and processing infrastructure allows us to decrease dependence on third parties, and better manage the timing of our development and the pricing to the markets to which we sell our production.  In addition, we believe that to the extent that we were at risk related to pipeline capacity constraints, we have secured sufficient long-term firm takeaway capacity on major pipelines to accommodate our existing and expected production.

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Planned Expenditures for Oil and Gas Exploration and Development

We expect to spend the amounts set forth below for natural gas and oil expenditures for the year ending December 31, 2011, including expenditures for exploration and development activities on the properties acquired from The Interstate Gas Company and Alerion Driling I, LLC.  These expenditures are expected to be funded primarily from cash on hand from the Private Placement, plus positive cash flow from operations and/or loans from the credit facility.  Actual expenditures and allocations are subject to change depending on prior results, available capital and other factors.

Financial information about segments

The Company operates in one industry segment.  See Note 1 to the audited consolidated financial statements.

Limit on Operational Areas

The certificate of incorporation of Nytis USA, limits its direct and indirect activities related to the exploration, development, production, marketing and sale of oil, gas, coalbed methane and other hydrocarbons to the United States (both onshore and offshore).  As a result, Nytis USA and its subsidiaries are precluded from oil and natural gas activities outside the United States.

Operational Areas

Our oil and gas properties are located primarily in located in eastern Illinois, western Indiana, eastern Kentucky, northeastern Tennessee, and western West Virginia.  The map below shows where the Company’s natural gas and oil properties as of June 30, 2011 are located.

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Appalachian Basin

As of June 30, 2011, Nytis LLC owns working interests in 620 gross wells (451 net) and royalty interests in an additional 149 wells located in Kentucky, Ohio and West Virginia, and have leasehold positions in approximately 34,000 net developed acres and approximately 160,000 net undeveloped acres.  As of December 31, 2010, net sales were approximately 2,200 Mcfe per day, and approximately 6,100 Mcfe per day at June 30, 2011, reflecting the increases from the assets purchased from The Interstate Natural Gas Company.  See “Acquisition and Divestiture Activities” below.  Objective formations are the Berea Sandstone (for oil), and the Chattanooga Shale, Devonian Shale, Lower Huron Shale and other natural gas objective zones.

As a result of buying assets from The Interstate Natural Gas Company, the number of producing wells and the acreage position increased significantly as reflected in the immediately preceding paragraph: At June 28, 2011 (the date prior to the acquisition of assets from The Interstate Gas Natural Company), in the Appalachian Basin, Nytis LLC owned working interests in 190 gross (144 net) wells, royalty interests in an additional 149 wells, and leasehold positions in approximately 12,000 net developed acres and approximately 160,000 net undeveloped acres, and at that date, net sales were approximately 2,500 Mcfe/d per day.

Illinois Basin

As of June 30, 2011, Nytis LLC owns working interests in 57 gross (29 net) coalbed methane wells in the Illinois Basin and has a leasehold position in approximately 4,000 net developed acres and approximately 88,000 net undeveloped acres.  We are presently engaged in geological and engineering evaluation of unconventional natural gas reservoirs in the basin and have established sustained natural gas production and sales from various formations at an average depth of 700 feet.  As of December 31, 2010, net natural gas sales were approximately 800 Mcf per day.  At June 30, 2011, sales were approximately 600 Mcf per day.

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Acquisition and Divestiture Activities

Acquisitions

We pursue acquisitions that meet our criteria for investment returns and are consistent with our low-risk development focus.  Acquisitions in and around our existing core areas enable us to leverage our cost control abilities, technical expertise, and existing land and infrastructure positions. In general, our acquisition program has focused on acquisitions of properties that have development drilling opportunities and undeveloped acreage. For detailed information on other acquisition transactions through December 31, 2010, see Note 4 to the audited consolidated financial statements.  For information on such transactions through March 31, 2011, see Note 3 to the unaudited consolidated financial statements.  See also, “Recent Developments” below.

Divestitures

In February and March of 2010, Nytis LLC and Nytis PA sold all of their assets located in Pennsylvania for a purchase price of $30.3 million ($21 million to Nytis LLC and $9.3 million to Nytis PA).  The assets sold comprised all of the assets of Nytis PA and as a result, this subsidiary is in the process of being dissolved and its business wound up.  In addition, the assets sold comprised all of the assets of Nytis LLC located in Pennsylvania, including approximately 160 wells with net monthly production of approximately 28.3 MMcf.   For detailed information on other divestiture transactions, see Note 4 to the audited consolidated financial statements.

Reserves

The following table summarizes our internally estimated quantities of proved reserves as of June 30, 2011, December 31, 2010, and December 31, 2009, and the pre-tax PV-10.

Pre-tax PV-10 value, which is not a financial measure accepted under GAAP, is shown because it is a widely used industry standard.

Estimated Proved Reserves

Natural Gas Equivalents (MMcfe)

As of June 30, 2011 we had estimated proved reserves of 83.1 Bcfe. Of that total, 78.7 Bcfe (95%) were in the Appalachian Basin and 4.4 Bcfe (5%) were in the Illinois Basin.

As of June 30, 2011, proved undeveloped reserves (“PUDs”) were estimated to be 37.5 Bcfe, or 45% of estimated proved reserves, compared to 37.6 Bcfe, or 68% of estimated proved reserves as of December 31, 2010.

Independent Reserve Audit

Cawley, Gillespie and Associates, Inc., independent petroleum engineers, has prepared a reserve audit (re-issued April 7, 2011) of our internally generated estimates of the Company’s proved developed producing oil and natural gas reserves as of January 1, 2011.  The Company has estimated that our reserves at that date were 42,000 barrels of oil and 16,559 MMcf of natural gas (16,809 MMcfe) with a pre-tax PV-10 value of $19.4 million.  However, as is

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the case with CG&A’s audit of our internal estimates of ING’s reserves, it should be noted that the Company’s estimates may vary by 10% up or down.  Our estimate is further subject to the uncertainty inherent in any reserves and value estimates.  For more information, see “Preparation of Reserves Estimates” below.

Preparation of Reserve Estimates

Our internal reserve estimates as of June 30, 2011 and December 31, 2010 and 2009 presented herein were made in accordance with the SEC’s “Modernization of Oil and Gas Reporting” rule, which was effective for fiscal years ending on or after December 31, 2009. The new SEC rule included updated definitions of proved natural gas reserves, proved undeveloped natural gas reserves, natural gas producing activities and other terms used in estimating proved natural gas reserves. Proved natural gas reserves for all periods presented were calculated based on the prices for natural gas during the twelve month period before the reporting date, determined as unweighted arithmetic averages of the first-day-of-the-month prices for each month within such period, rather than the year-end spot prices, which had been used in years prior to 2009. Undrilled locations can be classified as having proved undeveloped reserves if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. The new SEC rules broadened the types of technologies that a company may use to establish reserve estimates and also broadened the definition of natural gas producing activities to include the extraction of non-traditional resources, including natural gas extracted from shales as well as bitumen extracted from oil sands. See Notes 1 and 2 to the audited consolidated financial statements included in this prospectus for additional information regarding our estimated proved reserves.

Uncertainties are inherent in estimating quantities of proved reserves, including many factors beyond our control. Reserve engineering is a subjective process of estimating subsurface accumulations of natural gas and oil that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and its interpretation. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing, and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices or development and production expenses, may require revision of such estimates. Accordingly, quantities of natural gas and oil ultimately recovered will vary from reserve estimates. See “Risk Factors,” for a description of some of the risks and uncertainties associated with our business and reserves.

The reserve estimates included in this prospectus were prepared by Nytis LLC’s internal staff of engineers with significant consultation with internal geologists. The reserve estimates are based on production performance, data acquired remotely or in wells, and are guided by petrophysical, geologic, geophysical, and reservoir engineering models. Access to the database housing reserves information is restricted to select individuals from our engineering department.  Moreover, new reserve estimates and significant changes to existing reserves are reviewed and approved by various levels of management, depending on their magnitude.

Richard Finucane is Chief Engineer for Nytis LLC.  In that capacity he oversees engineering, production, drilling and completion activities in Nytis’ operations, including property evaluation, acquisitions and divestitures.  Mr. Finucane has worked as an oil and natural gas engineer since 1978.  His initial experience was with Texaco Inc.  From 1982-1997 Mr. Finucane was employed by Ashland Exploration Company where his responsibilities included production optimization, facilities engineering, drill site selection, reservoir engineering and property evaluation.  Mr. Finucane holds a B.S. in Civil Engineering from the University of Tennessee (highest honors) and is admitted as an expert in oil and natural gas matters in civil and regulatory proceedings in Virginia, West Virginia, and Kentucky.

CG&A’s report is an audit of our internal estimating process and results, limited to an audit of our proved developed producing reserves estimates, and it does not address our internal estimates of proved developed non-producing or proved undeveloped reserves.  CG&A’s independent reports are filed as exhibits to this prospectus.

Competition

We encounter competition in all aspects of our business, including acquisition of properties and oil and natural gas leases, marketing oil and natural gas, obtaining services and labor, and securing drilling rigs and other equipment and materials necessary for drilling and completing wells. Our ability to increase reserves in the future will depend on our ability to generate successful prospects on our existing properties, execute on major development drilling

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programs, and acquire additional leases and prospects for future development and exploration. A large number of the companies that we compete with have substantially larger staffs and greater financial and operational resources than we have. Because of the nature of our natural gas assets and management’s experience in exploiting our reserves and acquiring properties, management believes that we effectively compete in our markets. See— Risk Factor entitled “Competition in the natural gas and oil industry is intense, making it more difficult for us to acquire properties, market natural gas and oil and secure trained personnel.”

Regulation

Our operations are subject to various U.S. federal, state, and local laws and regulations. These laws and regulations may be changed in response to economic or political conditions. Matters subject to current governmental regulation and/or pending legislative or regulatory changes include the discharge or other release into the environment of wastes and other substances in connection with drilling and production activities (including fracture stimulation operations), bonds or other financial responsibility requirements to cover drilling risks and well plugging and abandonment, reclamation or restoration costs, reports concerning our operations, the spacing of wells, unitization and pooling of properties, taxation, and the use of derivative hedging instruments. Failure to comply with the laws and regulations in effect from time to time may result in the assessment of administrative, civil, and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions that could delay, limit, or prohibit certain of our operations. In the past, regulatory agencies have imposed price controls and limitations on production. In order to conserve supplies of oil and gas, oil and gas conservation commissions and other agencies may restrict the rates of flow of wells below actual production capacity, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability or fair apportionment of production from fields and individual wells.  Further, a significant spill from one of our facilities could have a material adverse effect on our results of operations, competitive position, or financial condition. The laws in the U.S., including state laws, regulate, among other things, the production, handling, storage, transportation, and disposal of natural gas and oil, by-products from each, and other substances and materials produced or used in connection with our operations. We cannot predict the ultimate cost of compliance with these requirements or their effect on our operations.

In August 2005, Congress enacted the Energy Policy Act of 2005 (“EPAct 2005”). Among other matters, EPAct 2005 amends the Natural Gas Act (“NGA”) to make it unlawful for “any entity,” including otherwise non-jurisdictional producers such as Carbon, to use any deceptive or manipulative device or contrivance in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to regulation by the Federal Energy Regulatory Commission (“FERC”), in contravention of rules prescribed by the FERC. EPAct 2005 also gives the FERC authority to impose civil penalties for violations of the NGA up to $1,000,000 per day per violation. The new anti-manipulation rule does not apply to activities that relate only to intrastate or other non-jurisdictional sales or gathering, but does apply to activities of otherwise non-jurisdictional entities to the extent the activities are conducted “in connection with” natural gas sales, purchases or transportation subject to FERC jurisdiction. It therefore reflects a significant expansion of the FERC’s enforcement authority. We do not anticipate we will be affected any differently than other producers of natural gas in respect of EPAct2005.

In December 2007, the FERC issued rules requiring that any market participant, including a producer such as Carbon, that engages in physical sales for resale or purchases for resale of natural gas that equal or exceed 2.2 million MMBtus during a calendar year must annually report such sales or purchases to the FERC, beginning on May 1, 2009. These rules are intended to increase the transparency of the wholesale natural gas markets and to assist the FERC in monitoring such markets and in detecting market manipulation. On September 18, 2008 the FERC issued its order on rehearing, which largely approved the existing rules, except the FERC exempted from the reporting requirement certain types of purchases and sales, including purchases and sales of unprocessed natural gas and bundled sales of natural gas made pursuant to state regulated retail tariffs. Also, the FERC clarified that other end use purchases and sales are not exempt from the reporting requirements. The monitoring and reporting required by the new rules will likely increase our administrative costs. Carbon does not anticipate it will be affected any differently than other producers of natural gas.

Additional proposals and proceedings that might affect the natural gas industry are regularly considered by Congress, the states, the FERC, and the courts. For instance, legislation has been introduced in the U.S. Congress to amend the federal Safe Drinking Water Act to subject hydraulic fracturing operations—an important process used in the completion of our natural gas wells—to regulation under the Safe Drinking Water Act. If adopted, this

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legislation could establish an additional level of regulation, and impose additional costs, on our operations. We cannot predict when or whether any such proposal, or any additional new legislative or regulatory proposal, may become effective. No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the federal government.

Environmental

As an operator of natural gas and oil properties in the U.S., we are subject to stringent national, state, provincial, and local laws and regulations relating to environmental protection as well as controlling the manner in which various substances, including wastes generated in connection with exploration, production, and transportation operations, are released into the environment. Compliance with these laws and regulations can affect the location or size of wells and facilities, prohibit or limit the extent to which exploration and development may be allowed, and require proper closure of wells and restoration of properties when production ceases. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, or criminal penalties, imposition of remedial obligations, incurrence of capital or increased operating costs to comply with governmental standards, and even injunctions that limit or prohibit exploration and production activities or that constrain the disposal of substances generated by oil field operations.

We currently operate or lease, and have in the past operated or leased, a number of properties that for many years have been used for the exploration and production of natural gas and oil. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties operated or leased by us or on or under other locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under our control. These properties and the wastes disposed thereon may be subject to laws and regulations imposing joint and several liability and strict liability without regard to fault or the legality of the original conduct that could require us to remove previously disposed wastes or remediate property contamination, or to perform well or pit closure or other actions of a remedial nature to prevent future contamination.

In 2009, the U.S. House of Representatives passed a bill to control and reduce the emission of domestic greenhouse gases through the grant of emission allowances which would gradually be decreased over time.  Although similar bills were considered in the U.S. Senate, such legislation lacked bipartisan support in the current Congress. Despite the lack of federal legislation, nearly half of the states, either individually or through multi-state initiatives, have already begun implementing legal measures to reduce greenhouse gas emissions. Also, the U.S. Supreme Court held in Massachusetts et al. v. EPA (2007) that carbon dioxide may be regulated as an “air pollutant” under the federal Clean Air Act, which could result in future regulation of greenhouse gas emissions from stationary and non-stationary sources, even if Congress does not adopt new legislation specifically addressing such emissions. In December 2009, the U.S. Environmental Protection Agency (“EPA”) published its findings that emissions of greenhouse gases present an endangerment to public health and the environment because such emissions, according to the EPA, are contributing to warming of the earth’s atmosphere and other climate changes. These findings allow the EPA to implement regulations that would restrict greenhouse gas emissions under existing provisions of the Clean Air Act. Accordingly, the EPA has adopted regulations that require a reduction of greenhouse gas emissions from motor vehicles and has proposed additional regulations to further restrict such emissions.  The EPA has also finalized regulations that require certain U.S. facilities, including certain petroleum and natural gas facilities, to report their greenhouse gas emissions beginning on January 1, 2011. The adoption and implementation of these regulations impacts our business, and any such future laws and regulations could result in increased compliance costs or additional operating restrictions, and could have an adverse effect on demand for the natural gas that we produce.

We believe that it is reasonably likely that the trend in environmental legislation and regulation will continue toward stricter standards. While we believe that we are in substantial compliance with applicable environmental laws and regulations in effect at the present time and that continued compliance with existing requirements will not have a material adverse impact on us, we cannot give any assurance that we will not be adversely affected in the future. We have established internal guidelines to be followed in order to comply with environmental laws and regulations in the U.S. Although we maintain pollution insurance against the costs of cleanup operations, public liability, and

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physical damage, there is no assurance that such insurance will be adequate to cover all such costs or that such insurance will continue to be available in the future.

Employees

As of June 30, 2011, our workforce (including those employed by our subsidiary Nytis LLC) consisted of approximately 29 employees all of which are full-time employees.  None of the members of our workforce are represented by a union or covered by a collective bargaining agreement. We believe we have a good relationship with the members of our workforce.

Legal Proceedings

The Company is subject to legal claims and proceedings in the ordinary course of its oil and natural gas exploration and development business.  Management believes that none of the current pending proceedings would have a material adverse effect on the Company, should the controversies be resolved against the Company. Notwithstanding management’s belief that there are no claims that could have a material effect on the financial condition or results of the Company’s operations, the Company’s indirect subsidiary, Nytis LLC, is involved in the following matters:

In July 2010, Nytis LLC received correspondence from the Pennsylvania Department of Revenue requesting additional information relating to whether the correct realty transfer tax was paid at the time of the closing of Nytis LLC’s acquisition of properties in Pennsylvania in 2006 from DCPA, LLC (an affiliate of Delta Petroleum Corporation).Nytis LLC has submitted the requested information to the Pennsylvania Department of Revenue and is awaiting its response.

In November 2010, Nytis LLC’s was served with a summons and complaint brought by ICG Knott County, LLC and filed in the Knott County, Kentucky.  The suit is in the nature of a quiet title action and concerns ICG’s claims that it is the party to which Nytis LLC should be making certain payments under several leases.  Also in November 2010, ICG Natural Resources, LLC filed suit against Nytis LLC in Floyd County, Kentucky concerning payments allegedly due under a certain coalbed methane lease.  Nytis LLC has engaged counsel to assist it in defending against these claims.

In August 2011, Nytis LLC was served with a summons and complaint brought by RLF Chinook Properties, LLC, Charles K. and Kimberly L. Butts, Chinook Project, LLC and Chinook Enterprises, LLC (collectively, “Chinook”) and filed in the Vigo Superior Court in Vigo County, Indiana.  The suit is in the nature of a quiet title action and Chinook seeks to invalidate certain coal seam gas leases currently held by Nytis LLC.  Addington Exploration, LLC (the party from which Nytis LLC obtained the leases at issue) was named as a co-defendant in the complaint.  Nytis LLC intends to defend itself against these claims with the assistance of Indiana counsel.

PROPERTIES

Drilling Activities

The following table summarizes the number of wells drilled during the six months ended June 30, 2011 and for the years ended December 31, 2010 and 2009.  Gross wells reflect the sum of all wells in which we own an interest.  Net wells reflect the sum of our working interests in gross wells.  As of June 30, 2011, we had one well in progress.

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A non-productive well is a well found to be incapable of producing either natural gas or oil in sufficient quantities to justify completion as a natural gas or oil well; also known as a dry well or dry hole.

Natural Gas and Oil Wells and Acreage

Productive Wells

Productive wells consist of producing wells and wells capable of production, including shut-in wells. A well bore with multiple completions is counted as only one well. The following table summarizes our productive wells as of June 30, 2011 and December 31, 2010.

Acreage

The following tables summarizes developed and undeveloped acreage in which we owned a working interest or held an exploration license as of June 30, 2011 and December 31, 2010. A majority of our developed acreage is subject to mortgage liens securing our bank credit facilities. Acreage related to royalty, overriding royalty, and other similar interests is excluded from this summary, as well as acreage related to any options held by us to acquire additional leasehold interests.

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December 31, 2010

June 30, 2011

Undeveloped Acreage Expirations

The following tables set forth the number of gross and net undeveloped acres by state as of June 30, 2011 and December 31, 2010, the leases for which are scheduled to expire from the date of the table through 2013 unless production is established within the spacing unit covering the acreage prior to the expiration date or the Company extends the terms of a lease by paying delay rentals to the lessor.

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December 31, 2010

June 30, 2011