As filed with the Securities and Exchange Commission on August 19, 2011

File No. 333-173559

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Amendment No. 2
to

Form S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

NYTEX ENERGY HOLDINGS, INC.

 

(Exact name of registrant as specified in its charter)

 

1311

(Primary Standard Industrial

Classification Code Number)

12222 Merit Drive, Suite 1850

 

Dallas, Texas 75251

972-770-4700

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Approximate dates of commencement of proposed sale to public:  From time to time after this registration statement becomes effective.

 

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:  þ

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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):

 

(Do not check if a smaller reporting company)

 

Calculation of Registration Fee

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall 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 the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED AUGUST 19, 2011

 

NYTEX ENERGY HOLDINGS, INC.

 

Up to 9,663,333 Shares of Common Stock

 

This prospectus relates to the sale solely by the Selling Security Holders or their transferees (“Selling Security Holders”) identified in this prospectus of up to 9,663,333 shares of common stock, $.001 par value (“Common Stock”), of NYTEX Energy Holdings, Inc., a Delaware corporation, which includes: (i) 1,433,333 shares of Common Stock issuable upon conversion of 12% convertible debentures (“Debentures”), (ii) 430,000 shares of Common Stock issuable upon the exercise of warrants issued in conjunction with the Debentures with an exercise price of $2.00 per share (“Debenture Warrants”), (iii) 6,000,000 shares of Common Stock issuable upon conversion of shares of our Series A preferred stock, $.001 par value (“Series A Preferred Stock”), and (iv) 1,800,000 shares of Common Stock issuable upon the exercise of warrants issued in conjunction with the Series A Preferred Stock, with an exercise price of $2.00 per share (“Series A Warrants”).

 

We are not selling the shares of Common Stock pursuant to this prospectus and will not receive any proceeds from the sales of the securities registered herein by the Selling Security Holders, except for proceeds received from the exercise of the Debenture Warrants and Series A Warrants. The Selling Security Holders may sell all or a portion of the shares of Common Stock issuable upon conversion of the Debentures, Series A Preferred Stock or exercise of the Debenture Warrants and Series A Warrants from time to time in market transactions, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the prevailing market price or at negotiated prices. We will bear all costs relating to the registration of these shares of Common Stock, other than any Selling Security Holders’ legal or accounting costs or commissions. For more information regarding the sales of our Common Stock by the Selling Security Holders pursuant to this prospectus, please read “Plan of Distribution” on page 58 of this prospectus.

 

We retained the services of a Financial Industry Regulatory Authority (“FINRA”) member who recently received clearance from FINRA for quotation of our Common Stock on the over-the-counter bulletin board.

 

Investing in our securities involves a high degree of risk. Certain risks associated with an investment in our securities are described in this prospectus and certain of our filings with the Securities and Exchange Commission, as described under Risk Factors, on page 2 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of our securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

A public trading market for our Common Stock has recently initiated, and our Common Stock is now traded in very limited quantities under the symbol “NYTE” on the OTCQB market tier, an interdealer quotation system operated by OTC Markets Group, Inc.

 

 

THE DATE OF THIS PROSPECTUS IS            , 2011

 

TABLE OF CONTENTS

 

 

PROSPECTUS SUMMARY

	•	Fluid Drilling Services — This segment conducted by our wholly owned subsidiary, Francis Drilling Fluids, Ltd. (“FDF”) (through our subsidiary NYTEX FDF Acquisition, Inc. (“Acquisition Inc.”)), consists of full service drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services and equipment rental for the oil & gas industry. Since the acquisition of FDF (“FDF Acquisition”), this segment represents substantially all of our revenues from operations.
	•	Oil and Gas Operations — This segment conducted by our wholly owned subsidiary, NYTEX Petroleum, Inc. (“NYTEX Petroleum”), represents our oil and gas business. Prior to the FDF Acquisition, this segment generated virtually all of our revenues from operations.

 

An investment in our Common Stock involves a high degree of risk. Before making an investment decision, you should carefully consider all of the risks described or incorporated by reference in this prospectus. If any of the risks discussed in this prospectus actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen the value of our Common Stock could decline significantly and you may lose all or a part of your investment.

 

RISK FACTORS RELATING TO OUR OPERATIONS

 

We are in default under our senior debt facility and our mezzanine debt agreement. If we are unable to reach an agreement with these lenders to resolve the defaults, these lenders can exercise remedies which ultimately could require us to curtail or cease our operations.

 

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

 

On April 14, 2011 we received a letter from WayPoint Nytex, LLC (“WayPoint”), as mezzanine lender, stating we are in default of the Preferred Stock and Warrant Purchase Agreement among us, Acquisition Inc. and WayPoint (“WayPoint Purchase Agreement”), for defaults similar to the PNC defaults plus our failure to pay dividends when due and, therefore, that WayPoint now has the right to exercise the Control Warrant, as described on page 8. If WayPoint exercises the Control Warrant, it would own 51% of our outstanding Common Stock. We are currently in negotiations with WayPoint to obtain a waiver and modify the WayPoint Purchase Agreement. However, there are no assurances that we will be successful in our negotiations with WayPoint.

 

In addition to being in default under the WayPoint Purchase Agreement, on May 4, 2011, WayPoint provided us with formal written notice (“Put Notice”) of its election to cause us to repurchase all securities that WayPoint acquired in connection with the WayPoint Purchase Agreement for an aggregate purchase price of $30,000,000 within five business days following the date of the Put Notice. These securities are enumerated more fully described under (i) the Risk Factor entitled “Exercise of the WayPoint Control Warrant would result in a change in control,” on page 8 herein, (ii) the Risk Factor entitled “The WayPoint Warrants possess full anti-dilution provisions, and may result in a duplication of dilution,” and (iii) “Transactions with Related Parties and Control Persons.” We did not and do not have the funds available to repurchase these securities, but continue to negotiate with WayPoint to remedy the defaults and resolve WayPoint’s demands in the Put Notice. However, there are no assurances that we will be successful in these negotiations, and WayPoint has reserved all other rights, remedies, actions and powers to which it may be entitled. As a result, WayPoint may seek certain remedies afforded to it under the WayPoint Purchase Agreement including the exercise of its Purchaser and Control Warrants, which would provide WayPoint with ownership of a majority of our outstanding Common Stock, and thereby give WayPoint significant control over our board of directors and operations. Alternatively, WayPoint could initiate collection efforts regarding our failure to pay dividends and repurchase the securities.

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

 

In exchange for WayPoint’s $20 million investment that was used to finance our acquisition of FDF, our newly created subsidiary Acquisition Inc. issued WayPoint 20,750 shares of Senior Series A Redeemable Preferred Stock. Acquisition Inc. is the sole owner of Francis Oaks, LLC, which in turn wholly owns FDF. As long as any such shares are outstanding, the holders of such shares, voting as a single class, are entitled to elect two members to the board of Acquisition Inc. Upon the occurrence of a default, as defined in the WayPoint Purchase Agreement, and as more fully described under the Risk Factor entitled “Exercise of the WayPoint Control Warrant would result in a change of control,” on page 8 herein, that remains uncured for 75 days, the holders of a majority of shares of Senior Series A Redeemable Preferred Stock may increase the number of directors constituting the board of directors of Acquisition Inc. up to that number that would give such holders control of a majority of the board, and to designate such additional directors. On May 9, 2011, WayPoint notified Acquisition Inc. that, because of the continuing occurrences of default, it elected to increase the board from four members to five, and designated Mr. J.J. Schickel, Jr. to fill this newly created vacancy. Mr. Schickel served in this capacity until May 20, 2011, when WayPoint replaced Mr. Schickel with Mr. Lee Buchwald. As of June 30, 2011, the board of Acquisition Inc. included Michael Galvis, Kenneth K. Conte, John Henry Moulton (a WayPoint designee), Thomas Drechsler (a WayPoint designee) and Mr. Buchwald (a WayPoint designee). For more information about Mr. Moulton and Mr. Drechsler, see “Transactions with Related Persons and Certain Control Persons”, on page 50 herein. While members of a board of directors owe fiduciary duties to all stockholders, WayPoint has interests that are in addition to, or different from the interests of our stockholders generally and that create potential conflicts of interest.

 

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

 

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

 

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

 

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

 

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

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

 

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

 

We now have, and expect to continue to have, a significant amount of indebtedness. Our outstanding indebtedness consists of a senior credit facility, the Debentures, and dividends payable on our Series A Preferred Stock and on the Senior Series A Redeemable Preferred Stock of Acquisition Inc., which are described in “Liquidity and Capital Resources” on page 35 of this prospectus. As of June 30, 2011, we owed $17,939,025 under our senior credit facility, $2,035,000 under the Debentures and dividends of $1,218,485 on the Senior Series A Redeemable Preferred Stock of Acquisition Inc. and $223,245 on our Series A Preferred Stock. Additionally, the election of WayPoint to exercise its put right requires that we repurchase their securities for $30 million. We do not have the funds available to satisfy these obligations. Our current and future indebtedness could have important consequences. For example, those levels of indebtedness and obligations could:

 

 

 

 

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

 

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

 

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

 

We cannot be certain that our existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under either the Senior Facility, our Preferred Stock, or the WayPoint Purchase Agreement. However, management has implemented plans to improve liquidity through slowing or stopping certain planned capital expenditures, through the sale of selected assets deemed unnecessary to our business, and improvements to results from operations. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain an additional credit facility. We cannot assure you that any additional equity sales or financing will be available in amounts or on terms acceptable to us, if at all. The sale of additional equity securities could result in additional dilution to our stockholders and result in a significant reduction of your percentage interest in us. The incurrence of

additional indebtedness would result in increased debt service obligations and could result in additional operating and financing covenants that would further restrict our operations. There can be no assurance that we will be successful with our plans or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.

 

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

 

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

 

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

 

The deterioration in the global economic environment since 2008 has caused the oilfield services industry to cycle into a downturn, and the rate at which it may continue to improve, or return to former levels, is uncertain. Those adverse changes in capital markets and declines in prices for oil and gas caused many oil and gas producers to announce reductions in capital budgets for future periods. In the last part of 2008, oil and gas prices declined rapidly, resulting in decreased drilling activities. During the second half of 2009, oil prices began to increase and remained relatively stable through the latter half of 2010 and into 2011, which has resulted in increases in drilling activities, and have been increasingly expanding in the oil-driven markets. However, natural gas prices continued to decline significantly through most of 2009 and remained depressed throughout 2010 and into 2011, which resulted in decreased activity in the natural gas-driven markets. Limitations on the availability of capital, or higher costs of capital, for financing expenditures have caused and may continue to cause these and other oil and gas producers to make additional reductions to capital budgets in the future even if commodity prices increase from current levels. These cuts in spending may curtail drilling programs as well as discretionary spending on well services, which could result in a reduction in the demand for our services, the rates we can charge and our utilization. In addition, certain of our customers could become unable to pay their suppliers, including us. As a result of these conditions, our customers’ spending patterns have become increasingly unpredictable, making it difficult for us to predict our future operating results. Additionally, any of these conditions or events could adversely affect our operating results.

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Other factors may also inhibit our ability to find enough workers to meet our employment needs. Our services require skilled workers who can perform physically demanding work. As a result of our industry volatility and the demanding nature of the work, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. We believe that our success is dependent upon our ability to continue to employ and retain skilled technical personnel. Our inability to employ or retain skilled technical personnel may adversely affect our ability to complete our ongoing projects or engage new business in the future, which generally could have a material adverse effect on our operations.

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

 

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

 

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

 

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

 

 

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

 

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

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

 

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

 

RISK FACTORS RELATING TO AN INVESTMENT IN OUR SECURITIES

 

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

 

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

 

The Control Warrant may also become exercisable after the Purchaser Warrant has been fully exercised and WayPoint has disposed of all shares of Common Stock acquired pursuant to that warrant. Based on the current number of shares outstanding, the Purchaser Warrant could be exercised for approximately 14,000,000 shares of Common Stock. Assuming that the Control Warrant becomes exercisable and all of the shares acquired upon exercise of the Purchaser Warrant are disposed of by the holder before the Control Warrant is exercised, the Control Warrant would be exercisable for 51% of our Common Stock, which currently would result in the issuance of approximately an additional 41,850,000 shares of Common Stock to WayPoint and result in the total number of shares of Common Stock outstanding exceeding 80,000,000 shares. Thus, the Purchaser Warrant and the Control Warrant could result in duplicative dilution.

 

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

 

The Control Warrant becomes exercisable at an exercise price of $0.01 per share, upon the earliest to occur of (i) the occurrence of a Default (defined below) that remains uncured for seventy-five days; provided, that payment to the holders of Senior Series A Redeemable Preferred Stock of our subsidiary Acquisition Inc. of all amounts owing to them as a result of a Default shall be considered a cure of a Default; (ii) the date on which a Change of Control (defined below) occurs, if Acquisition Inc. is not able to redeem all of the Senior Series A Redeemable Preferred Stock in accordance with its terms; (iii) seventy-five days after the date on which the third Default has occurred within a consecutive twelve-month period; and (iv) May 23, 2016, if Acquisition Inc. is not able to redeem all of the Senior Series A Redeemable Preferred Stock in accordance with its terms (the “Default Conditions”). The term “Default” includes 14 categories of events, which are

listed in Section 11.1 of the WayPoint Purchase Agreement and which list includes, among other events, (i) the failure of Acquisition Inc. to timely make a redemption payment to holders of the Senior Series A Redeemable Preferred Stock, (ii) the failure of Acquisition Inc. to timely make a dividend payment to holders of the Senior Series A Redeemable Preferred Stock, (iii) our failure or the failure of Acquisition Inc. to perform covenants in the WayPoint Purchase Agreement, (iv) our failure to meet a fixed-charge coverage ratio, leverage ratio or minimum EBITDA test in the WayPoint Purchase Agreement; (v) we or any of our subsidiaries becomes in default on other indebtedness, individually or in the aggregate, in excess of $250,000; (vi) we, Acquisition Inc., Francis Oaks, LLC, FDF or any FDF subsidiary (the “Francis Group”) becomes subject to bankruptcy or receivership proceedings, (vii) a judgment or judgments is entered against is entered against us, Acquisition Inc. or Francis Group in excess of $1,000,000, and such judgment is not satisfied; (viii) we, Acquisition Inc. or Francis Group breaches a representation or warranty in the WayPoint Purchase Agreement or the documents related thereto; (ix) a Change of Control occurs; and (x) certain liabilities in excess of $250,000 arise under ERISA. “Change of Control” means (i) a sale of shares of our stock, Acquisition Inc. or Francis Group, or a merger involving any of them, as a result of which holders of the voting capital stock of the applicable entity immediately prior to such transaction do not hold at least 50% of the voting power of the applicable entity or the resulting or surviving entity or the acquiring entity; (ii) a disposition of all or substantially all of our assets, Acquisition Inc. or Francis Group; (iii) a voluntary or involuntary liquidation, dissolution or winding up by us, Acquisition Inc. or Francis Group; (iv) either Michael K. Galvis or Michael G. Francis shall sell at least five percent (5%) of our equity held by them immediately prior to such sale; (v) Michael K. Galvis ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days; or (vi) Michael G. Francis ceases to be the Chief Executive Officer of FDF and is not replaced by a candidate suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be the Chief Executive Officer of the FDF and is not replaced by a candidate suitable to WayPoint within 30 days. As stated in more detail above, certain of the Default Conditions have occurred, and the Control Warrant is, as of the date of this prospectus, exercisable.

 

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

 

If the market price per share of our Common Stock at the time of conversion of our Convertible Debentures or Series A Preferred Stock and exercise of any warrants, options, or any other convertible securities is in excess of the various conversion or exercise prices of these derivative securities, conversion or exercise of these derivative securities would have a dilutive effect on our Common Stock. As of June 30, 2011, we had (i) outstanding Convertible Debentures which are convertible into an aggregate of 1,356,667 shares of our Common Stock at a conversion price of $1.50 per share, (ii) 6,000,000 shares of Series A Preferred Stock which are convertible into an aggregate of 6,000,000 shares of our Common Stock at $1.00 per share, (iii) warrants to purchase 2,230,000 shares of our Common Stock at an exercise price of $2.00 per share of our Common Stock and (iv) outstanding 9% convertible debentures issued by NYTEX Petroleum which are convertible into an aggregate 586,506 shares of Common Stock at a conversion price of $2.00 per share (the “NYTEX Petroleum Convertible Debentures”). Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our Common Stock, which may result in additional dilution of the existing ownership interests of our Common Stockholders.

 

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

 

This prospectus relates to our obligation to file a registration statement with the SEC registering for sale 9,663,333 shares of Common Stock issuable upon conversion of (i) the Debentures and (ii) Series A Preferred Stock, and upon exercise of both the Debenture Warrants and Series A Warrants. Pursuant to a registration rights agreement with the holders of the securities, we were required to file the registration statement on or before 60 days of the final closing of the Series A Preferred Stock offering, which was April 11, 2011. The

holders of Series A Preferred Stock may demand a penalty equal to two percent of the amount of their investment, or $120,000, for each month after that date that the registration statement was not filed. We filed a Form S-1 registration statement, of which this prospectus is a part, on April 15, 2011. Additionally, since the SEC did not declare the registration statement effective within 120 days of the final closing of the Series A Preferred Stock offering, which was June 10, 2011, we face an additional penalty if demanded by the holders equal to two percent of the amount of their investment, or $120,000, for each month while not effective.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We have committed limited personnel and resources to the development of the external reporting and compliance obligations that are required of a public company. We have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy

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

 

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

 

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

 

 

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

 

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

 

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

 

We cannot predict the extent to which an active public trading market for our Common Stock will develop or be sustained due to a number of factors, including the fact that we are a smaller reporting company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume. Even if we come to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company as currently constituted such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our Common

Stock is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained.

 

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

 

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

 

We do not anticipate paying any dividends.

 

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

 

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

 

We have a total of 200,000,000 shares of Common Stock authorized for issuance. As of June 30, 2011, we had 173,637,501 shares of Common Stock available for issuance. We have reserved 1,356,667 shares for conversion of our Debentures, 6,000,000 shares for conversion of our Series A Preferred Stock and 2,230,000 shares for issuance upon the exercise of outstanding warrants held by the Selling Security Holders. We have also reserved 400,000 shares of Common Stock in connection with stock grants to our employees and those of FDF. Additionally, our wholly-owned subsidiary NYTEX Petroleum, has issued debentures convertible into 586,506 shares of our Common Stock if fully converted. We may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. We may also make acquisitions that result in issuances of additional shares of our capital stock. Furthermore, the book value per share of our Common Stock may be reduced.

 

The addition of a substantial number of shares of our Common Stock into the market or by the registration of any of our other securities under the Securities Act may significantly and negatively affect the prevailing market price for our Common Stock. The future sales of shares of our Common Stock issuable upon the exercise of outstanding warrants and options may have a depressive effect on the market price of our

Common Stock, as such warrants and options are likely to be exercised only at a time when the price of our Common Stock is greater than the exercise price.

 

OTHER RISK FACTORS

 

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

 

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

 

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

 

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

 

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

 

We will not receive any of the proceeds from the sale of the shares of Common Stock offered under this prospectus by the Selling Security Holders. Rather, the Selling Security Holders will receive those proceeds directly.

 

We will, however, receive the exercise price with respect to warrants to purchase 2,230,000 shares of our Common Stock, when and if exercised by the Selling Security Holders who hold them. If all such warrants are exercised, we estimate our net proceeds would be approximately $4,460,000, which we expect to use for

general working capital purposes, unless needed to resolve any default or other obligations under our senior debt facility and WayPoint Purchase Agreement.

 

Our Common Stock trades under the symbol NYTE on the OTCQB market tier, an interdealer quotation system operated by the OTC Markets Group, Inc. The Selling Security Holders may sell their shares of Common Stock issuable upon conversion of the Debentures and Series A Preferred Stock or the exercise of the Debenture Warrants or the Series A Warrants at the prevailing market prices at the time of the sale or at privately negotiated prices. See “Plan of Distribution” on page 58 of this prospectus.

 

The conversion prices of the Debentures and Series A Preferred Stock and the exercise prices of the Debenture Warrants and Series A Warrants were determined by our board of directors following negotiations with the holders thereof and may not bear any relationship to our past, current or future operations, cash flows, net income, current financial condition, the book value of our assets or any other established criteria for value. As a result, the conversion and exercise prices thereof, respectively, should not be considered as reflective of the actual value of our Common Stock.

 

Market Information

 

Our Common Stock began trading on April 1, 2011 on the OTCQB under the symbol NYTE. As of August   , 2011, the closing price of our Common Stock was $           per share.

 

Holders

 

As of June 30, 2011, we had approximately 26,362,499 shares of Common Stock outstanding held by a total of approximately 290 stockholders of record.

 

Warrants, Convertible Debenture Shares and Restricted Stock Grants

 

As of June 30, 2011, we were committed to issue, and had reserved for issuance, a total of 13,846,868 shares of our Common Stock on exercise of all of our outstanding derivative securities, including 3,663,000 shares of Common Stock being registered for sale by the Selling Security Holders pursuant to the registration statement to which this prospectus relates. However, if all of our derivative securities, including WayPoint’s Purchase Warrant and Control Warrant, were exercised or converted, we would have 82,059,932 shares of Common Stock outstanding, on a fully diluted basis. Furthermore, there are 400,000 shares of our Common Stock reserved for issuance pursuant to restricted stock grants to our employees and employees of FDF.

 

Rule 144 Shares

 

Under Rule 144 of the Securities Act, a person who has beneficially owned restricted shares of our Common Stock for at least six months is entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding the sale and (ii) we have been subject to the Exchange Act periodic reporting requirements for at least three months before the sale.

 

Persons who have beneficially owned restricted shares of our Common Stock for at least six months but who are our affiliates at the time of, or at any time during the three months preceding the sale, are subject to additional restrictions as more fully set forth in Rule 144.

 

As of June 30, 2011 we believe 3,112,301 of our shares of Common Stock are eligible for non-affiliate resale pursuant to Rule 144.

Shares to be Registrable Pursuant to Registration Rights Agreements

 

We have entered into registration rights agreements with various holders of our securities, including the Selling Security Holders, Diana Francis and WayPoint.

 

As of June 30, 2011, those registration rights agreements cover: (i) 9,663,333 shares of Common Stock issuable upon conversion of the Debentures and Series A Preferred Stock and exercise of the Debenture Warrants and the Series A Warrants held by the Selling Security Holders; (ii) 2,058,125 shares of Common Stock held by Diana Francis; and (iii) 41,850,565 shares of Common Stock issuable upon exercise of the Purchaser Warrant and Control Warrant.

 

We were originally incorporated in Delaware in 1988 as Kismet, Inc., and while our name changed to Clear Sight Holdings, Inc. on October 16, 2006, we conducted no operations until October 31, 2008. At that time our name changed to NYTEX Energy Holdings, Inc. and our newly-formed wholly-owned subsidiary, NYTEX Petroleum, acquired the business and operations of NYTEX Petroleum, LLC, a Texas limited liability company (“NYTEX Petroleum LLC”). In this transaction, all membership units of the NYTEX Petroleum LLC were transferred to NYTEX Petroleum in exchange for shares of our Common Stock. NYTEX Petroleum LLC was originally formed on March 21, 2006, and focused on fee-based administration and management services related to oil and gas properties, while also engaging in the acquisition, promotion of and participation in the drilling of crude oil and natural gas wells. NYTEX Petroleum will continue its fee-based energy services for existing and future energy funds, with the planned growth focusing primarily on exploration and production.

 

From October 2008 until our FDF acquisition, our operations were effected through NYTEX Petroleum, and, to a lesser extent, Supreme Vacuum. On September 8, 2010, we completed the disposition of our noncontrolling interest in Supreme Vacuum Services, Inc., an oilfield fluid service company specializing in drilling and production fluids transportation, sales, and storage.

 

On November 23, 2010, through our newly-formed and wholly-owned subsidiary, Acquisition Inc., we acquired 100% of the membership interests of Francis Oaks, LLC (“Oaks”) and its wholly-owned operating subsidiary, FDF (together with Oaks, the “Francis Group”). The Francis Group has no other assets or operations other than FDF. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Oilfield Services on page 29 of this prospectus for further discussion of the acquisition of FDF.

 

FDF (website: http://www.fdfltd.com), is one of the leading distributors of oil and gas well fracturing proppants and suppliers of drilling fluids in the United States. FDF is a 34 year-old full-service provider of drilling, completion and specialized fluids and specialty additives; technical and environmental support services, industrial cleaning services; equipment rentals; and transportation, handling and storage of fluids and dry products for the oil and gas industry. Headquartered in Crowley, Louisiana, FDF serves oilfield service companies; notably Halliburton, BJ Services, Cudd and Weatherford; major and independent oil companies such as Shell, EnCana, Apache and Chesapeake; and proppant suppliers including St. Gobain, Santrol and CMC Cometals, among over 160 clients, delivering to oilfield operations in thirty-nine states.

 

Strategy

 

Our primary objective is to try to provide our stockholders with above average returns on their investment through income growth by 1) securing a distinct and sustainable competitive position as a full-service provider of products and services to the energy industry, and 2) pursuing profitable oil and gas activities. Principal components of our strategy include:

 

 

 

Oilfield Services — FDF

 

Founded in 1977 and headquartered in Crowley, Louisiana, FDF delivers its diversified range of products and services to 39 states from 22 facilities located in Louisiana, Texas, Oklahoma, Wyoming, and North Dakota. FDF has a current fleet of over 200 dry material pneumatic tank, fluid tank and industrial cleaning trucks and service rigs, 13 owned and leased rail spurs and over 150,000 barrels of liquid mud storage capacity. FDF is a full-service provider of drilling, completion and specialized fluids and specialty additives; technical and environmental support services, industrial cleaning services; equipment rental; and transportation, transloading, and contract warehousing of “frac” sand and ceramic proppant. Ceramic proppant is a sintered semi-crystalline alumina silicate, made from bauxite clay that is tumbled and fired into non-poisonous, odorless, inflammable, insoluble spheres used in hydraulic fracturing of subterranean formations surrounding wells to increase oil and gas output. We refer to “proppant material” to mean all of the forms of frac sands and ceramic proppants being used in the oil and gas industry for hydraulic fracture stimulations of oil and gas wells.

 

Hydraulic Fracturing

 

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

 

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

 

None of our businesses directly provide nor perform hydraulic fracturing. In addition, we do not take title to customers’ frac sand or proppants as our Oilfield Services business limits its involvement with hydraulic fracturing to distributing, warehousing, and transloading these products for our customers. We maintain material data safety sheets (“MSDA”) for the products we warehouse and distribute including the products listed under the heading “FDF Product Offerings.” The MSDA identifies the products, ingredients or chemicals deemed to be hazardous including their percentage content, and other relevant physical and health data. The MSDA sheets are available on our website at http://www.fdfltd.com/MSDSSheets.asp.

 

FDF Product Offerings

 

Specialized fluids and specialty additive products

 

FDF’s suite of drilling and specialized fluids and specialty additive products includes water-based and oil-based liquid drilling mud, emulsifiers and wetting agents, alkalinity control agents, lost circulation & sealing products, corrosion inhibitors, casing scrubbers as well as lubricants, detergents and defoamers. FDF offers a

complete range of high quality, field-proven products with the 24-hour dispatch and on-spot delivery including the following:

 

Liquid Water-Based Mud

 

We offer a complete range of 10.0 lb. to 19.0 lb. liquid muds for every application. From bulk barite to a variety of specialty additives, FDF offers 24-hour delivery and 150,000 barrels of storage capacity across the Gulf Coast region.

 

Oil Water-Based Mud

 

We offer liquid oil-based mud such as Invert Emulsion, Oil Base Spot and Environment Spot, all sold in 42 gallon barrels, with primary and secondary emulsifiers and wetting agents sold in five and 55 gallon barrels. Our bagged oil-based and related products sold in 50 lb. sacks are Oil Soluble Asphalt, Amine Treated Lignite, Organophilic Clay, and Hectorite Clay.

 

Completion Fluids

 

Our completion fluids include various solutions of:

 

 

We offer a variety of related products including FDF branded products such as FDF Perfseal calcium carbonate sized pellets; FDF Liquid HEC and HEC 10 (Hydroxyethcellulose); pellets and powder sacks of calcium chloride, potassium chloride ammonium chloride, sodium chloride and calcium bromide; FDF Supersweep 298 water-based casing scrub; FDF Supersweep OB oil-based casing scrub; FDF Supertron 62, Supertron 87, and FDF Supertron 6200 corrosion inhibitors; and FDF DEFOAM CF alcohol-based defoamer.

 

Specialized Mixing

 

Developed for a wide range of demanding applications, FDF offers some of the most advanced specialized drilling fluids systems in the world.

 

Barite & Hematite

 

We offer FDF brand sacks of barium sulfate and hematite including FDF Barite Bulk, FDF Barite Sack, FDF Hematite Bulk, and FDF Hematite Sack.

 

Viscosifiers

 

We offer FDF brand sacks of bentonite salt gels and polymers including FDF Benex, FDF Bentonite, FDF Bentonite NT, FDF Bentonite Bulk, FDF Attipulgite, FDF Vistek II, FDF XCD Polymer, and a mixed metal hydroxide.

 

Fluid Conditioners

 

We offer FDF brand fluid conditioners including D/FLOC-L liquid thinner, FDF CLS chrome lignosulfonate, FDF CLS Chrome Free, Desco modified tannin, FDF Lignite, FDF Sapp pyrophosphate, FDF Envirocal calcium lignin, and FDF Polyplex.

Filtration Control Agents

 

We offer starch and FDF brand filtration control agents including CM Starch and Starlose treated starch, FDF Pac Regular and FDF Pac S/L polyanionic cellulose, FDF CMC High Vis and FDF CMC Low Vis carboxymethylcellulose.

 

Shale Stabilizers

 

We offer FDF brand shale stabilizers including FDF NO-PHALT and Soltex sulfonated asphalt, and FDF PHPA liquid and FDF PHPA dry.

 

Lubricants, Detergents, & Defoamers

 

We offer FDF brand lubricants, detergents and defoamers for drilling operations including FDF Detergent drilling detergent, FDF DMS drilling mud surfactant, FDF LUBE II environmental lubricant, FDF DEFOAM environmental defoamers, and aluminum stearate.

 

Alkalinity Control

 

We offer FDF brand alkalinity control dry products including FDF KOH potassium hydroxide, FDF Caustic Soda sodium hydroxide, FDF Gypsum, FDF Lime calcium chloride, soda ash, sodium bicarbonate, and potassium acetate.

 

Lost Circulation & Sealing Products

 

We offer FDF brand and other lost circulation and sealing products including Diaseal M.D.E., Kwik-Seal, FDF Mica (F.M.C.), DELTA P cellulose fiber, FDF NUT PLUG (F.M.C.) ground walnut hulls, VENLUBE II treated cellulose fiber, MAGNAFIBER REGULAR and MAGNAFIBER FINE acid soluble cellulose, and FDF VISPLUG crosslink polymer.

 

FDF Service Offerings

 

Equipment Rentals

 

FDF’s equipment rentals division rents frac tanks (super tanks), liquid mud barges, mud pumps, portable mixing units, gas busters, hoses and fittings, hydro blasters (hot/cold), and air movers.

 

Transportation

 

We believe FDF’s transportation fleet is unequaled in reliability and supports timely delivery of proppant materials, cement, barite, fly ash and cement. With 24-hour dispatching from our strategic stock points, FDF’s truck fleet delivers in 39 states, and our barges deliver offshore to the Gulf of Mexico.

 

FDF has developed strategic alliances with its customers to provide warehouse management, logistic support and pneumatic and other specialized hauling. Materials can be accepted via standard shipment or railcar, stored at key locations, and ultimately delivered by our extensive transportation fleet.

 

We utilize the latest communications technology to provide our customers with timely and efficient logistical support through our:

 

 

Transloading Services

 

When our customers need to load and unload, warehouse, control inventory, and handle sand, cement, barite, fly ash and ceramic proppants, we are well equipped to serve our customers in our service areas. Our

transloading services department provides the personnel, process, and equipment to help ensure the accuracy and integrity of our customers’ products. We feature:

 

 

We have rail facilities at the following locations:

 

 

Technical Services

 

We offer a full range of technical assistance and support services for every stage of the drilling project. Our on-site technical representatives provide water-base, oil-base and completion services. We believe our highly trained staff of fluid engineers offers practical knowledge and experience as required by our customers. We offer:

 

 

Environmental Support

 

With tough environmental regulations now affecting every phase of operations, understanding and complying with environmental law is of critical importance. We believe FDF has been and continues to be a leader in safe and responsible fluids handling and disposal. In every phase of safety, training and operations, FDF is dedicated to the support of our customers and the protection of our environment.

 

Fluids Services

 

We offer a full range of high quality fluid products and services with 24 hour dispatch and on-site delivery. Whatever the customer fluid needs, FDF stands ready with a solution for any application. Our fluid services offerings include:

 

 

Cleaning Services

 

We offer a wide range of cleaning services as an attempt to meet our customers’ cleaning service’s needs. Our dockside facilities have personnel and equipment stationed to readily and promptly respond. With the use of our mobile recycling system we can accommodate location based cleaning jobs in our service area.

 

Through the utilization of our fluids recycling system, there is effectively no waste disposal associated with the cleaning of supply vessels that contain remnants of water-based, diesel-based, and synthetic-based muds, and selective completion fluids. Our process utilizes recycled products and allows the recycling of

barite, cement, and gel. As a result, significant cost savings are obtained along with a lower impact on of our environment. Cleaning services include:

 

 

Specialized Cleaning Equipment

 

With specialized mobile equipment and well trained personnel, FDF offers a very wide range of oil and gas industrial cleaning services able to reach the customers’ specific locations, in our ongoing attempts to meet the demands of the oil and gas industry. The following is a list of the specialized cleaning equipment we utilize:

 

FDF Hydro Excavator — HV-56 GapVax Industrial Vacuum Loader w/ Hydro Excavation Package

 

The FDF Hydro Excavator is a truck mounted, high performance, industrial vacuum loader designed to pneumatically convey virtually any dry material, sludge, liquids from remote and inaccessible locations through suction lines 8 inches in diameter and smaller. With the help of the hydraulic boom and hydro blaster, the FDF Hydro Excavator can excavate all sensitive areas where a typical excavator cannot.

 

FDF SuperVac — VTX-820 GAPVAX Tractor — Mounted Vacuum System

 

The FDF SuperVac is a truck mounted high performance blower designed to pneumatically convey any sludge, slurries and liquids through a 6 inch line. With a 130 barrel load vacuum bottle and the capability to blow-off product, the FDF SuperVac is a highly effective cleaning machine.

 

FDF SuperVac II — HV-57 GAPVAX Vacuum Loader Airmover

 

A single mode, high performance, low maintenance, truck mounted, industrial vacuum loader designed to pneumatically convey virtually any dry material, sludge, slurries, or liquids from remote and inaccessible locations through suction lines 8 inches in diameter and smaller.

 

FDF Hot Water Washer

 

The FDF Hot Water Washer unit is a high pressure, diesel powered, steam combination mobile cleaning trailer. This unit includes four wands with hose reels for simultaneous washing along with confined-space entry equipment with breathing air and essential tools.

 

FDF Hydro Blaster

 

The FDF Hydro Blaster unit is a high pressure/high volume mobile washing unit. Features include a water pressure actuated throttle control that monitors operator demand and adjusts output accordingly. When the operator pulls the trigger, the pumping system responds instantaneously providing high pressure water at a pre-selected pressure and volume. Upon release of the trigger, pressure is relieved and the system returns to idle.

 

FDF Super Wash II

 

A single mode, high performance, trailer mounted cleaning unit designed to be set up on location, either land or barge, to perform cleaning at the job site. The FDF SUPERWASH II is designed to wash with water or any type of drilling mud with either low pressure/high volume or high pressure/low volume.

 

Fluids can be recycled during washing to minimize or eliminate disposal. This unit comes with a variety of equipment and connections making it totally self-contained, including air compressor, high-pressure triplex pump, 5x6 centrifugal pump, diaphragm pumps, pressure washers and all confined space entry safety equipment needed to tackle the toughest jobs. This unit also has a Peterbilt tractor with a crew compartment on board to transport cleaning technicians to the job site.

FDF Mobile Cleaning Unit

 

The FDF mobile cleaning trailer is an all-inclusive cleaning package to address land and inland rigs and support dockside vessel cleaning. All equipment is well-organized and strategically located on the trailer for easy access and quick startup. The mobile cleaning trailer is pulled with a crew cab truck which also transports the cleaning personnel to the job site.

 

Oil and Gas — NYTEX Petroleum

 

Since 2006, NYTEX Petroleum has engaged in fee-based administrative and management services related to crude oil and natural gas properties. It also engaged in the acquisition, generation, promotion, development, exploration and participation in the drilling and production of oil and gas properties directly, through affiliations with independent operating partners and by acquiring participations in properties that are potential resources for the production of oil and gas.

 

Beginning in 2009, we became more engaged in the acquisition, generation and participation in drilling prospects and production acquisitions. Our growth initiative focuses primarily on early stage acquisition, geological and engineering high-grading and sale of leasehold acreage and producing oil and gas wells within minor oil and gas resource plays. A minor oil and gas resource play is defined herein as an oil and/or gas reservoir, other than the known major shale plays such as the Barnett, Haynesville, Eagle Ford, Bakken, Marcellus, Fayetteville and Woodford. We believe these minor plays exist and can be developed uniformly over an expansive geographical area with a high rate of success due to the recent advancements in horizontal drilling and multi-stage fracturing technologies.

 

Our oil and gas assets consist of non-operated working interests in oil and gas properties. On May 9, 2011, effective May 1, 2011, the Company entered into a Compromise Settlement Agreement and Release of All Claims (the “Settlement”) with the plaintiffs of two lawsuits filed against the Company in August 2010, whereby all parties reached a full and final settlement of all claims to such lawsuits. In exchange for the release of all claims to both suits, concurrent with the Settlement, the Company entered into a Purchase and Sale Agreement whereby the Company sold its entire interest in the Panhandle Field Producing Property to the plaintiffs for the purchase price of $782,000, resulting in a loss on litigation settlement totaling $965,065 for the three months ended March 31, 2011. Since the refrac completed in the third quarter of 2009 and through the date of this prospectus, we have not performed any hydraulic fracturing on wells that we own or operate.

 

Other Business Activities — NYTEX Petroleum

 

On May 19, 2010, NYTEX Petroleum entered into an Oil Containment Rental Agreement (“Simpson Agreement”) with Simpson Environmental Resources, Inc. (“Simpson”) to rent segments of oil containment boom (“Boom”) to Simpson to be used in the Gulf of Mexico waters to contain the BP Global oil spill under Simpson’s master service or rental agreements with general contractors of BP Global, state governments or other entities. NYTEX Petroleum also entered into binding agreements with manufacturer’s representatives to deliver Boom from Boom manufacturing plants to Simpson in mutually agreed amount of linear footages, at mutually agreed delivery locations and at mutually agreed time periods. The terms of the agreement between NYTEX Petroleum and Simpson required Simpson to pay NYTEX Petroleum 100% of the rental payment amounts Simpson collected from the contractors for the Boom until such point and time that NYTEX Petroleum received 100% of its cost of the delivered Boom from said rental payments, referred to as payout. After payout, the rental payment income was split 50% to Simpson and 50% to NYTEX Petroleum for the remaining period that the Boom was in service under such rental contracts.

 

To fund the purchases of Boom, NYTEX Petroleum entered into agreements with outside participants (“Participants Agreements”) to purchase and rent Boom pursuant to the terms of the Simpson Agreement. The Participants Agreements provided for the participants to receive 100% of the rental payments remitted by Simpson to NYTEX Petroleum until such time that the participant recovered 100% of their cost of the delivered Boom (referred to as “Participant Payout”). After Participant Payout was achieved, subsequent payments received by Simpson and remitted to NYTEX Petroleum were split as follows: 60% to the participant, 20% to NYTEX Petroleum, and 20% to DMCG, Inc., who brought the project, Simpson and Boom

manufacturers’ representatives to NYTEX Petroleum. We realized administration fee revenue of $486,291 from the oil containment boom activities for the year ended December 31, 2010.

 

Supreme Vacuum

 

From August 2008 to September 2010, through our wholly-owned subsidiary, Supreme Oilfield, we had a noncontrolling interest in Supreme Vacuum. Supreme Vacuum’s fleet of vacuum pump installed tank trucks and trailer mounted tanks provided on-site removal of salt water and other fluids that are generated as a by-product of normal drilling operations during the post fracture stimulation flowback operations and as a by-product of oil and gas production and their removal to state-approved disposal locations. It also provided fluids such as fresh and salt water for downhole drilling and workover operations as well as facilities for onsite fluid storage and then removal of the spent fluids to state-approved disposal facilities.

 

In June 2009, Supreme Vacuum completed construction of its mud reconditioning facility with sales of reconditioned drilling mud commencing shortly thereafter. The facility’s feed stock of used drilling mud is collected by Supreme Vacuum by either getting paid to haul off used drilling mud from drillsites after wells are drilled, or sometimes hauls off used drilling mud at no cost and delivering the mud to the facility’s holding tanks. As oil and gas operators or drilling contractors request reconditioned drilling mud at various mud weights (viscosities), Supreme Vacuum prepared the requested amounts of reconditioned mud at the requested weights, by adding more dry mud to the mixtures, and then delivering to the customer in its tank trucks.

 

In September 2010, we disposed of our noncontrolling interest in Supreme Vacuum.

 

Other Business Data

 

FDF Locations

 

FDF’s 22 facilities are specifically located in Ada, Clinton, and Sallisaw, Oklahoma; Alice, Jefferson, Odessa, Kermit, and Victoria, Texas; Intracoastal City, Berwick, Fourchon, Lake Charles, Cameron, Coushatta, Shreveport, and Crowley, Louisiana; Fort Smith, Arkansas; Rock Springs, Wyoming; and Plaza, North Dakota.

 

Competitive Edge

 

FDF is the oldest continuously operating drilling fluids company on the Gulf Coast. We believe FDF employees have the longest average tenure of any Gulf Coast fluids company and are empowered to satisfy our customers. We believe that our growth and long-term success would not have been possible without the commitment and hard work of our people. Many of our core processes are supported by personnel that have demonstrated their loyalty to our company over the years and have contributed their energy, ideas and their enthusiasm for our work. We believe that this allegiance and dedication are a source of our competitive edge and the foundation for our future.

 

Our fleet size is one of the largest within the transportation segment of the oilfield services industry we operate in. When our fleet size is combined with our growing amount of warehouse and storage capacity, transloading facilities, and rail spurs located in or deliverable to the major shale plays, we believe we possess a competitive edge for the inland distribution of proppant material, cement, barite, and flyash.

 

Our state-of-the-art equipment assists us in maintaining highly-qualified and motivated employees to facilitate superior customer service. We believe we are the industry pacesetter in providing innovative environmental solutions. Based on storage capacity, our liquid mud storage program is a leader in the Gulf Coast with 150,000 barrels of capacity. We also utilize the latest communication technology to provide our customers with timely and efficient logistical support.

 

Environmental Regulations

 

Our operations routinely involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and other regulated substances. Various environmental laws and regulations require prevention, and when necessary, cleanup, of spills and leaks of such materials, and some of

our operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocation of permits.

 

Seasonality

 

Weather and natural phenomena can temporarily affect the performance of our services, but we believe the widespread geographical locations of our operations serve to mitigate those effects. Examples of how weather can impact our business include the severity and duration of the winter in North America, which can have a significant impact on natural gas storage levels and drilling activity for natural gas, and hurricanes, which can disrupt our coastal and offshore operations in the Gulf of Mexico.

 

Government Regulations

 

Our operations are subject to various federal, state and local laws and regulations pertaining to health, safety and the environment. We cannot predict the level of enforcement of existing laws or regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future. We also cannot predict whether additional laws and regulations affecting our business will be adopted, or the effect such changes might have on us, our financial condition or our business.

 

Competition and Other External Factors

 

The markets in which we operate are highly competitive. Competition is influenced by such factors as price, capacity, and reputation and experience of the service provider. We believe that an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced, skilled and well-trained work force. We devote substantial resources toward employee safety and training programs. We believe many of our larger customers place increased emphasis on the safety, performance and quality of the crews, equipment and services provided by their service providers. Although we believe customers consider all of these factors, price is often the primary factor in determining which service provider is awarded the work. However, in numerous instances, we secure and maintain work for large customers for which efficiency, safety, technology, size of fleet and availability of other services are of equal importance to price.

 

The demand for our products and services fluctuates, primarily in relation to the price (or anticipated price) of oil and gas, which, in turn, is driven by the supply of, and demand for, oil and gas. Generally, as supply of those commodities decreases and demand increases, demand for our products and services increase as oil and gas producers attempt to maximize the productivity of their wells in a higher priced environment. However, in a lower oil and gas price environment, demand for our products and services generally decreases as oil and natural gas producers decrease their activity. In particular, the demand for new or existing field drilling and completion work is driven by available investment capital for such work.

 

The level of our revenues, earnings and cash flows are substantially dependent upon, and affected by, the level of U.S. oil and gas exploration and development, as well as the equipment capacity in any particular region.

 

Raw materials

 

Raw materials that are essential to our business are generally readily available. We purchase a wide variety of raw materials, parts, and components that are made by other manufacturers and suppliers for our use. We are not dependent on any single source of supply for those parts, supplies, or materials.

 

Customers

 

Our customers include major international oilfield service companies, major oil companies, independent oil and gas production companies, frac sand suppliers, ceramic proppant manufacturers, and proppant retailers. Of our consolidated revenues during the year ended December 31, 2010, BJ Services accounted for approximately 14% of our revenues. Of our consolidated revenues for the six months ended June 30, 2011,

Baker Hughes and Halliburton Energy Services accounted for approximately 21% and 12%, respectively, of our revenues.

 

Employees

 

As of July 31, 2011, we had approximately 450 employees within our Oilfield Services business and ten employees between our Oil and Gas business and at the corporate holding company level. Our employees are not represented by a labor union and are not covered by collective bargaining agreements.

 

Our corporate headquarters comprises approximately 2,400 square feet of leased office space, and is located at 12222 Merit Drive, Suite 1850, Dallas, Texas. Our primary administrative office for FDF is located in Crowley, Louisiana and includes approximately 12,250 square feet of office and approximately 78,000 square feet of warehouse and production space on approximately 32 acres of land.

 

The following is a summary of our leased and owned properties:

 

 

 

 

Our interests in oil and natural gas properties are located in Texas. See “Oil and Natural Gas Reserves” on page 26 below for additional discussion.

 

We own our administrative offices in Crowley, Louisiana, subject to a mortgage on them in favor of PNC, as well as the majority of our other facilities. We also lease a number of facilities, and we do not believe that any one of the leased facilities is individually material to our operations. We believe that our existing facilities are suitable and adequate to meet our needs.

 

Reserve Rule Changes

 

During 2009, the SEC issued its final rule on the modernization of oil and gas reporting (the “Reserve Ruling”) and the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2010-03 (“ASU 2010-03”) “Extractive Industries — Oil and Gas,” which aligns the estimation and disclosure requirements of FASB Accounting Standards Codification Topic 932 with the Reserve Ruling. The Reserve Ruling and ASU 2010-03 are effective for Annual Reports on Form 10-K for fiscal years ending on or after December 31, 2009. The key provisions of the Reserve Ruling and ASU 2010-03 are as follows:

 

 

Oil and Natural Gas Reserves

 

The following table summarizes our oil and gas production revenue and costs, our productive wells and acreage, undeveloped acreage and drilling activities for each of the last three years ended December 31:

 

 

The reserve data, present value, and engineering report with respect to our proved developed producing oil and gas reserves as of December 31, 2010 was prepared by a third party petroleum consulting firm, LaRoche Petroleum Consultants, Ltd., who meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. We did not perform any recompletions to place proved developed non-producing (“PDnP”) reserves it reported as of December 31, 2009 into production during 2010. After performing a review of recompletions and new drills in the area surrounding our PDnP reserves and finding no new data to make its 2009 PDnP reserve calculations invalid, the 2009 PDnP reserve volumes were updated with the 2010 SEC pricing and revised differentials as provided by LaRoche Petroleum Consultants were used to calculate the PDnP reserves as of December 31, 2010.

 

The PDnP reserves as of December 31, 2009 were derived from an in-house reserve study by Jason Lacewell, a petroleum engineer, who at the time was NYTEX Petroleum’s Vice President of Exploration and Production. Mr. Lacewell has over 15 years of experience in the oil and gas industry. Mr. Lacewell began his oil and gas career in 1995 when he was employed by Marathon Oil where he worked in drilling, production and reservoir engineering. Mr. Lacewell has a Masters Degree in Petroleum Engineering from Texas A&M University, a Masters Degree in Environmental Science from North Texas University and undergraduate degrees in Biology and Chemistry. Mr. Lacewell has direct and ongoing operational and prospect development experience in the following reservoir types of producing basins: Bakkan Shale, Barnett Shale, Haynesville Shale, Woodford Shale, Coalbed-Methane Plays, Permian Basin, continental and offshore Gulf of Mexico, and others. Mr. Lacewell, responsible for preparing the reserve estimates, meets the requirements regarding qualifications, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers.

Mr. Lacewell has no equity ownership in any our oil and gas properties, nor does he receive any compensation based on the volume of reserves that he projects in his reservoir studies.

 

The Panhandle Field Producing Property containing the PDnP reserves consists of ten producing wells on 328 acres in Moore and Hutchinson counties in the Texas Panhandle. Effective May 1, 2010, we sold our entire interest in the Panhandle Field Producing Property. For further information, see “Legal Proceedings” on page 58. Prior to May 1, 2011, we held a 73% working interest and we were the operator of the producing oil and gas leaseholds. The PDnP reserves are based on the ten existing wells being refrac’ed in the Red Cave formation with seven successes and three dry holes. Initial production used in the PDnP reserve study for each of the successful wells was estimated at 16.67 bopd and 20 mcfd with total cumulative production per successful well, net to us, estimated to be 11,820 barrels oil and 21,190 mcf gas. In October 2009, NYTEX Petroleum successfully performed one modern style refrac in the Red Cave formation on an existing well which has commercially produced continuously since such time.

 

The PV-10 value was prepared using constant prices as of the calculation date, discounted at 10% per annum on a pretax basis, and is not intended to represent the current market value of the estimated oil and natural gas reserves owned by NYTEX Petroleum. For further information concerning the present value of future net revenues from these proved reserves, see “Supplemental Disclosure of Oil & Gas Operations to the Notes to Consolidated Financial Statements” beginning on page F-58.

 

Management maintains internal controls designed to provide reasonable assurance that the estimates of proved reserves are computed and reported in accordance with the rules and regulations provided by the SEC. Michael Galvis, our CEO, is primarily responsible for overseeing the preparation of the reserve estimates and has over 26 years of experience in the oil and gas industry. Numerous uncertainties exist in estimating quantities of proved reserves. Reserve estimates are imprecise and subjective and may change at any time as additional information becomes available. Furthermore, estimates of oil and gas reserves are projections based on engineering data. There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment.

 

We believe NYTEX Petroleum has taken all necessary steps to fully comply with Rule 4-10(a) of Regulation S-X for oil and gas reserves.

 

The following tables set forth our estimated net proved oil and natural gas reserves and the PV-10 value of such reserves as of December 31, 2010. Table 1 shows NYTEX’s net proved oil and gas reserves and future discounted net revenues. This table includes the NYTEX non-operated properties and the Panhandle Field Producing Properties. Table 1A shows the same reserves but with a barrel of oil equivalent calculation (BOE equals 6 Mcf to 1 Bbl).

 

Table 1

TOTAL PROVED RESERVES (12/31/2010 as of date)

 

TABLE 1A
TOTAL PROVED RESERVES WITH BOE (12/31/2010 as of date, 6 mcf per barrel of oil)

 

 

 

 

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

 

Overview

 

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

 

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

 

Oilfield Services — consisting of our subsidiary, FDF, a full-service provider of drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services and equipment rental for the oil and gas industry; and

 

Oil and Gas — consisting of our wholly-owned subsidiary, NYTEX Petroleum, an exploration and production company concentrating on the acquisition and development of oil and natural gas reserves.

 

Demand for services offered by our industry is a function of our customers’ willingness to make operating and capital expenditures to explore for, develop and produce hydrocarbons in the United States, which in turn is affected by current and expected levels of oil and gas prices. As oil and gas prices increased from 2006 through most of 2008, oil and gas companies increased their drilling activities. In the last part of 2008, oil and gas prices declined rapidly, resulting in decreased drilling activities. During the second half of 2009, oil prices began to increase and remained relatively stable through the latter half of 2010, which resulted in increases in drilling activities, and have been increasingly expanding in the oil-driven markets. However, natural gas prices continued to decline significantly through most of 2009 and remained depressed throughout 2010, which resulted in decreased activity in the natural gas-driven markets. Despite natural gas prices remaining below the levels seen in recent years, several markets that produce significant natural gas liquids, such as the Eagle Ford shale and those that have other advantages like proximity to key consuming markets, such as the Marcellus shale, have continued to see increased activity. The Bakken Shale area in North Dakota and Montana has rapidly expanded as a major oil producing resource play with an increasing number of drilling rigs and service companies operating in the area since 2007.

 

Oilfield Services

 

Acquisition of FDF

 

On November 23, 2010, through our newly-formed and wholly-owned subsidiary, Acquisition Inc., we acquired 100% of the membership interests of Oaks and its wholly-owned operating subsidiary, FDF. The Francis Group has no other assets or operations other than FDF. Total consideration transferred was $51.8 million and consisted of cash of $41.3 million, 5,400,000 shares of our Common Stock at an estimated fair value of $1.86 per share, or $10 million, and a non-interest bearing promissory note payable to the seller in the principal amount of $0.7 million with a fair value of $0.5 million.

 

FDF is a full-service provider of drilling, completion, and specialized fluids, dry drilling and completion products, technical services, industrial cleaning services and equipment rental for the oil and gas industry. Headquartered in Crowley, Louisiana, FDF operates out of 22 locations in Texas, Oklahoma, Wyoming, North Dakota, and Louisiana including three coastal Louisiana facilities which provide services on land and off-shore Gulf of Mexico. FDF’s suite of fluid products includes water based, oil based and synthetic liquid drilling mud, oil based and hematite products, viscosifiers, fluid conditioners, as well as lubricants, detergents, defoamers and completion fluids. FDF’s completion fluids include calcium, sodium, zinc bromide, salt water, calcium chloride and potassium chloride. FDF’s dry products include frac sand, proppants, cement and fly ash and sack drilling mud. As part of its total solution, FDF offers transportation, technical and support services, environmental support services and industrial cleaning of drilling rigs, tanks, vessels and barges and offers

rental equipment in the form of tanks, liquid mud barges, mud pumps, and other similar equipment. FDF is a distributor, warehouser and transloader of frac sand, proppants and liquid drilling mud authorized to distribute in 39 states. The customers include exploration and production companies, oilfield and drilling service companies and frac sand and proppant manufacturers and international brokerage companies of proppants.

 

Hydraulic Fracturing

 

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

 

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

 

None of our businesses directly provide nor perform hydraulic fracturing. In addition, we do not take title to customers’ frac sand or proppants as our Oilfield Services business limits its involvement with hydraulic fracturing to distributing, warehousing, and transloading these products for our customers. We maintain material data safety sheets (“MSDA”) for the products we warehouse and distribute including the products listed under the heading “FDF Product Offerings.” The MSDA identifies the products, ingredients or chemicals deemed to be hazardous including their percentage content, and other relevant physical and health data. The MSDA sheets are available on our website at http://www.fdfltd.com/MSDSSheets.asp.

 

Oil and Gas

 

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

 

In mid-2008, NYTEX Petroleum purchased, from an unaffiliated third party, a 20% non-operating working interest in the Lakeview Shallow Prospect (“Lakeview Shallow Prospect”), a 12,000 acre coalbed methane (“CBM”) gas field drilling project in southeastern Oklahoma. The first nine wells in the Lakeview Shallow Prospect were drilled in mid-2008 when costs for drilling and tubular goods were at peak prices. The actual cost exceeded the budgeted amount by 37% resulting in a reported non-cash impairment of $499,219 for the year ended December 31, 2008. In September 2010, we elected to sell our 20% share in the Lakeview Shallow Prospect to the operator in exchange for the outstanding balance due of $161,706 resulting in the recognition of loss of $111,970 for the year ended December 31, 2010.

 

In August 2009, we acquired a 75% ownership in the Panhandle Field Producing Property, a 320 acre producing oil and gas property in the Texas panhandle consisting of 18 wells. As the new operator, we agreed to perform technically proven fracture stimulations known as “refracs” on approximately ten of the existing wells. We successfully completed the refrac on one well in the third quarter of 2009 and have put it into commercial oil production. The property lies within the vast Panhandle Field that extends into Oklahoma and Kansas, which since its discovery in 1918, has produced approximately 1.1 billion barrels of oil and 36 trillion cubic feet of gas, all at depths above 3,000 feet. Beginning in the first quarter 2010 and through the third quarter of 2010, we sold or transferred a portion of our 75% working interest in the Panhandle Field Producing Property for $859,408 in cash, recognized a gain on sale of $578,872, and retained a 28.16% working interest.

 

In December 2010, we re-acquired all but a 2.0% share of the 45.33% share sold earlier in the year for total consideration transferred of approximately $1,451,858. The total consideration transferred consisted of

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

 

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

 

On May 19, 2010, NYTEX Petroleum entered into the Simpson Agreement with Simpson to rent segments of oil containment boom (“Boom”) to Simpson to be used in the Gulf of Mexico waters to contain the BP Global oil spill under Simpson’s master service or rental agreements with general contractors of BP Global, state governments or other entities.

 

To fund the purchases of Boom, NYTEX Petroleum entered into the Participation Agreements with outside participants to act as agent on behalf of the participant to purchase and rent Boom pursuant to the terms of the Simpson Agreement. The Participation Agreements provided for the participant to receive 100% of the payments remitted by Simpson to NYTEX Petroleum until such time that the participant has recovered 100% of its cost of the delivered Boom (referred to as “Participant Payout”). After Participant Payout was achieved, subsequent payments remitted by Simpson to NYTEX Petroleum were split as follows: 60% to the participant, 20% to NYTEX Petroleum, and 20% to DMBC, Inc., who facilitated the transactions.

 

NYTEX Petroleum also entered into Gulf Oil Spill Boom Sales Agreements (“Purchaser Agreements”) with outside participants to purchase Boom and resell at a profit to buyers including, but not limited to, coastal cities, counties, parishes and BP (collectively, the “Boom Buyers”) pursuant to the terms of the Simpson Agreement. The Purchaser Agreements provided that immediately upon NYTEX Petroleum’s receipt of funds for the sale of Boom, NYTEX Petroleum would remit to purchaser 100% of purchaser’s purchase price of the Boom together with 40% of the profit, less shipping and handling and insurance costs.

 

Supreme Vacuum

 

Beginning on August 26, 2008, we made a series of equity investments in Supreme Vacuum, an oilfield fluid sales and transportation service company in South Texas, as a result of which we maintained a 71.18% ownership interest in Supreme Vacuum. On September 8, 2010, we completed the disposition of all Supreme Vacuum Shares and a promissory note payable by Supreme Vacuum to Supreme Oilfield in the original principal amount of $31,250. We have historically reported our interest in Supreme Vacuum as an unconsolidated subsidiary because we did not possess majority voting control and accordingly, the ability to exercise significant influence over Supreme Vacuum. Losses attributable to our interest in Supreme Vacuum were $308,408 and $828,169 for the years ended December 31, 2010 and 2009, respectively. We considered the continuing losses a significant contributor to our decision to dispose of the Supreme Vacuum Shares. We recognized a loss of $870,750 as a result of our sale of our interest in Supreme Vacuum.

 

Results of Operations

 

On November 23, 2010, we acquired FDF for total consideration of $51.8 million. The results of FDF are included in our consolidated statement of operations from the acquisition date. Accordingly, nearly all of the line items reported in our consolidated statement of operations for the year ended December 31, 2010 and for the six months ended June 30, 2011 have increased significantly as a result of acquiring FDF compared to the amounts reported in our consolidated statement of operations for the year ended December 31, 2009 and for the six months ended June 30, 2010, respectively.

Selected Data

 

 

 

 

Six months ended June 30, 2011 compared to the six months ended June 30, 2010

 

Revenues.  Revenues increased over the prior year period ended June 30, 2010 primarily as a result of our acquisition of FDF in November 2010. In the event domestic rig counts increase and we acquire additional operating companies, we expect a corresponding and continued increase in our future revenues.

 

Oil & gas lease operating expenses.  Lease operating expenses decreased $9,270, or 14% for the six months ended June 30, 2011 compared to the prior six months ended June 30, 2010. The decrease is due principally to general reduction in drilling activities during 2010, which has carried over to 2011.

 

Depreciation, depletion, and amortization.  Depreciation, depletion, and amortization (“DD&A”) increased over the prior period ended June 30, 2010 primarily as a result of our acquisition of FDF in November 2010 and resultant significant increase in depreciable long-lived assets. We expect DD&A to increase in the future as we acquire additional plant and equipment in our oilfield services business and we acquire additional operating companies.

 

Selling, general, and administrative expenses.  Selling, general, and administrative (“SG&A”) expenses increased for the six months ended June 30, 2011 compared to the prior six months ended June 30, 2010 due principally to our acquisition of FDF in November 2010. SG&A consists primarily of salary and wages, contract labor, professional fees, lease rental costs, fuel, and insurance costs. We expect SG&A to increase in

the future relative to increased demand for our oilfield services business and we acquire additional operating companies.

 

Litigation loss on settlement.  The litigation loss on settlement for the six months ended June 30, 2011 is a result of the settlement of two lawsuits related to the Panhandle Field Producing Property. In exchange for the release of all claims to these two suits by the plaintiffs, concurrent with entering into a Compromise Settlement Agreement and Release of All Claims, the Company entered into a Purchase and Sale Agreement whereby the Company sold its entire interest in the Panhandle Field Producing Property to the plaintiffs for the purchase price of $782,000, resulting in a loss on litigation settlement totaling $965,065 for the six months ended June 30, 2011. See Legal Proceedings on page 58 of this prospectus for further discussion.

 

Gain on sale of assets, net.  Gain on sale of assets, net decreased $556,223 for the six months ended June 30, 2011 compared to the six months ended June 30, 2010. The decrease is a result of the aggregate gain recognized on the sale of the Panhandle Field Producing Property during the six months ended June 30, 2010.

 

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

 

Change in fair value of derivative liabilities.  The increase in the current period ended June 30, 2011 as compared to the prior period ended June 30, 2010, is due to the re-valuation of the Purchaser and Controls Warrants by a third party, both deemed to be derivatives, and the change in value of the warrants issued to the holders of the Company’s Series A Convertible Preferred Stock, also deemed to be derivative. For the three months ended June 30, 2011, the fair value of the derivative liabilities decreased by an aggregate $13,230,260 due to revisions to the Company’s second-half 2011 and 2012 earnings forecasts and the expected maturity date of the Purchaser and Control Warrant derivatives. In addition, for the year ended December 31, 2010, the Control Warrant derivative was initially valued at $0; however, for the six months ended June 30, 2011, the Control Warrant derivative was valued at $8,640,000 as the conditions for exercise of the Control Warrant had been met in connection with the defaults under the WayPoint Purchase Agreement. We recognize changes in the respective fair values in the consolidated statements of operations.

 

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

 

Equity in loss of unconsolidated subsidiaries.  There was no equity in loss of unconsolidated subsidiaries for the six months ended June 30, 2011. We recognized a loss totaling $240,603 for the six months ended June 30, 2010. These losses related to our noncontrolling interests in Supreme Vacuum and Waterworks. We disposed of our noncontrolling interests in Supreme Vacuum in September 2010.

 

Income tax benefit.  Income tax benefit for the six months ended June 30, 2011 of $733,485 is the result of utilizing existing and current net operating losses to offset taxable income generated by our oilfield services business.

 

Year ended December 31, 2010 compared to the year ended December 31, 2009

 

Revenues.  Revenues increased over the prior year period primarily as a result of our acquisition of FDF in November 2010. Other revenues increased $215,448, or 60%, primarily due to the Gulf Coast rental boom/sales boom income of $468,291, offset by a decrease in administrative fee income and accounting/management fees of $270,573 attributable to a shift in our strategy to acquiring proved properties and producing operations and away from managing investment projects within the oil and gas industry. We expect revenues to increase in the future as we include the operations of FDF for a full period and we acquire additional operating companies.

Oil & gas lease operating expenses.  Lease operating expenses decreased $188,532, or 57%, in the current year ended December 31, 2010 compared to the prior year ended December 31, 2009 due principally to the partial sale of our interest in the Panhandle Field Producing Property in the first half of 2010 and a general reduction in drilling activities during 2010.

 

Depreciation, depletion, and amortization.  DD&A increased over the prior year period primarily as a result of our acquisition of FDF in November 2010 and resultant significant increase in depreciable long-lived assets. We expect depreciation, depletion, and amortization to increase in the future as we include the operations of FDF for a full year and we acquire additional operating companies.

 

Selling, general, and administrative expenses.  SG&A expenses increased for the year ended December 31, 2010 compared to the prior year ended December 31, 2009 due principally to our acquisition of FDF in November 2010. SG&A consists primarily of salary and wages, contract labor, professional fees, lease rental costs, fuel, and insurance costs. We expect SG&A to increase in the future as we include the operations of FDF for a full year and we acquire additional operating companies.

 

Gain on sale of assets, net.  Gain on sale of assets, net consists of the aggregate gain recognized on the sale of the Panhandle Field Producing Property totaling $578,872, offset by the loss on the disposal of the Lakeview Shallows property totaling $111,970. We did not recognize any such gains or losses in 2009.

 

Interest expense.  Interest expense increased over the prior year period due primarily to the acquisition of FDF in November 23, 2010 and the resultant increase in outstanding debt as compared to the amount of debt outstanding in 2009. We expect interest expense to increase in the near term as we include interest expense associated with the increased outstanding debt for a full year.

 

Change in fair value of derivative liabilities.  The increase in the current year as compared to no amount in the prior year is due to the issuance of warrants associated with the WayPoint Transaction, the issuance of the Debentures due January 2014, and the warrants issued to the holders of our Series A Preferred Stock, as these instruments were deemed to be derivatives. We recognize changes in the respective fair values in the consolidated statements of operations.

 

Accretion of preferred stock liability.  Reflects the accretion of the face amount of $20,750,000 related to the Senior Series A Redeemable Preferred Stock issued by Acquisition Inc. in connection with the WayPoint Transaction in November 2010 over the term of the instruments of approximately 5.5 years.

 

Equity in loss of unconsolidated subsidiaries.  The loss of unconsolidated subsidiaries of $317,158 for the year ended December 31, 2010 as compared to $897,834 loss recorded for the prior year ended December 31, 2009 is due primarily to the sale of our interest in Supreme Vacuum in September 2010. We expect losses related to unconsolidated subsidiaries to decrease in the future as we no longer have an interest in Supreme Vacuum.

 

Loss on sale of unconsolidated subsidiary.  We recognized a loss for the year ended December 31, 2010 due to the sale of Supreme Vacuum in September 2010.

 

Adjusted EBITDA

 

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

financial indicator of a company’s ability to incur and service debt, fund capital expenditures and make distributions to stockholders.

 

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

 

 

Liquidity and Capital Resources

 

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

 

As of June 30, 2011, we had cash and cash equivalents of $63,478, and a net working capital deficit of $52,237,578 (measured by current assets less current liabilities) principally due to (i) reporting the outstanding principal balance of amounts owed under the Senior Facility of $17,939,025 within current liabilities, and (ii) reporting the WayPoint derivative liability totaling $33,880,000 within current liabilities. See Defaults Under Financing Arrangements below for further discussion.

 

Defaults Under Financing Arrangements

 

Our loan agreements and the agreements relating to our other financing arrangements generally require that we comply with certain reporting and financial covenants. These covenants include among other things, providing the lender, within set time periods, with financial information, notifying the lender of any change in management, limitations on the amount of capital expenditures, and maintaining certain financial ratios. As a result of the challenges incurred in integrating the FDF operations and due to higher than anticipated capital expenditures at FDF, we were unable to meet several reporting and financial covenants under our Senior Facility with PNC measured as of November 30, 2010 and February 28, 2011. Failure to meet the loan covenants under the Senior Facility loan agreement constitutes a default and on April 13, 2011, PNC, as lender, provided us with a formal written notice of default. PNC has not commenced the exercise of any of its other rights and remedies, which could include foreclosure on substantially all of FDF’s assets, but has expressly reserved all such rights. At June 30, 2011 and December 31, 2010, the outstanding principal balance of the amounts owed under the Senior Facility was $17,939,025 and $17,752,723, respectively, and is, because

of this default, reported within current liabilities on the consolidated balance sheets as of June 30, 2011 and December 31, 2010. We are currently in negotiations with PNC to obtain a waiver of the defaults. However, there are no assurances that we will be successful in our negotiations with PNC or that the conditions to any waiver will be satisfactory to us.

 

In addition, due to cross-default provisions and other covenant requirements, we are also in default under the WayPoint Purchase Agreement. The amounts reported on our consolidated balance sheet as of June 30, 2011 and December 31, 2010 related to the WayPoint Purchase Agreement include a derivative liability totaling $33,880,000 and $32,554,826, respectively, which are reported as current liabilities on our consolidated balance sheets. Additionally, we have not paid dividends on Senior Series A Preferred Stock of Acquisition Inc. held by WayPoint. As of June 30, 2011, we owed dividends of $1,452,500 to WayPoint. As a result, WayPoint may seek certain remedies afforded to them under the WayPoint Purchase Agreement including the right to (i) exercise their Control Warrant, or (ii) exercise their put right and receive a waiver of defaults, or (iii) initiate collection efforts regarding any unpaid dividends and repurchase securities. We are currently in negotiations with WayPoint to remedy the events of noncompliance, modify the WayPoint Purchase Agreement, and receive waiver of defaults. However, there are no assurances that we will be successful in our negotiations with WayPoint or that the conditions to any waiver will be satisfactory to us.

 

On May 4, 2011, WayPoint provided formal written notice (“Put Notice”) to us of its election to cause us to repurchase (i) warrants issued to WayPoint (“Warrants”) that, in the aggregate, allow WayPoint to purchase that number of shares of our common stock to equal 51% of our fully diluted capital stock then outstanding, (ii) the 20,750 shares of Senior Series A Redeemable Preferred Stock of Acquisition Inc. owned by WayPoint, and (iii) one share of our Series B Preferred Stock owned by WayPoint, for an aggregate purchase price of $30,000,000 within five business days following the date of the Put Notice. We did not have the funds available to satisfy this Put Notice in a timely manner, but continue to negotiate with WayPoint to remedy the defaults and resolve WayPoint’s demands in the Put Notice. As a result, WayPoint may seek certain remedies afforded to it under the WayPoint Purchase Agreement including the exercise of its Purchaser and Control Warrants. However, there are no assurances that we will be successful in these negotiations, and WayPoint has reserved all other rights, remedies, actions and powers to which WayPoint may be entitled.

 

Notwithstanding recent workforce reductions, we may not have sufficient funds to pursue our business priorities. As a result, we are limited in our ability to remain current in making payments to trade vendors and other unsecured creditors when such payments are due, and PNC may now exercise rights regarding our defaults under the Senior Facility. These workforce reductions, as well as curtailed financial resources, may further impact our ability to implement our business priorities. However, management has implemented plans to improve liquidity through slowing or stopping certain planned capital expenditures and through the sale of selected assets deemed unnecessary to our business. In addition to these plans, we are seeking long-term financing for our unencumbered real estate properties and/or equity financing to provide cash and enhance our working capital position. Further, in May 2011, we settled outstanding litigation regarding the Panhandle Field Producing Property and in connection with the settlement, sold our entire interest in the Panhandle Field Producing Property to the plaintiffs in the litigation for the purchase price of $782,000 cash. Although these constraints have caused us to significantly scale back the rate at which we implement our business strategy, we believe that these actions should preserve our viability, provide additional time to execute our business priorities, and allow us to satisfy our financial defaults and to resolve our working capital deficit. However, there are no assurances that we will satisfy our financial defaults in a manner that allows us to continue operations as presently constructed.

 

Our future capital requirements will depend on many factors and we may require additional capital beyond our currently anticipated amounts. Any such required additional capital may not be available on reasonable terms, if at all, given our prospects, the current economic environment and restricted access to capital markets. Additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; and strategic partnerships may result in terms which reduce our economic potential from any adjustments to our existing long-term strategy. Our continuation as a going concern is dependent upon attaining and maintaining profitable operations, resolving the defaults under certain of our loan agreements

discussed above, and raising significant additional capital. The financial statements for the six months ended June 30, 2011 and 2010, and for the fiscal years ended December 31, 2010 and 2009, do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should we discontinue operations.

 

The following represents a summary of capital raised during the six months ended June 30, 2011 and fiscal year 2010.

 

$2.15 Million Debenture Offering

 

In August 2010, we initiated a $2.15 million offering of the Debentures to fund our ongoing working capital needs. Terms of the Debentures were as follows: (i) $100,000 per unit with interest at a rate of 12% per annum payable monthly with a maturity of 180 days from the date of issuance; (ii) convertible at any time prior to maturity at $1.50 per share of our Common Stock; and, (iii) each unit includes a three-year Debenture Warrant to purchase up to 20,000 shares of our Common Stock at an exercise price of $2.00 per share for a period of three years from the effective date of the warrant. As of October 12, 2010, we had raised the full $2.15 million under the Debenture offering and in connection with this offering we issued warrants to purchase up to 430,000 shares of Common Stock. In addition, we issued 45,000 shares of our Common Stock to certain Debenture holders as an inducement to acquire the Debentures. During the first quarter of 2011, the Debentures were amended such that the maturity date was extended to October 2011.

 

WayPoint Transaction

 

In connection with the FDF acquisition, on November 23, 2010, we, through our wholly-owned subsidiary, Acquisition Inc., entered into the WayPoint Purchase Agreement with WayPoint whereby, in exchange for $20 million cash, we issued to WayPoint (i) 20,750 shares of Acquisition Inc. 14% Senior Series A Redeemable Preferred Stock, par value of $0.001 with an original stated amount of $1,000 per share, (ii) one share of our Series B Preferred Stock, par value of $0.001 per share, (iii) the Purchaser Warrant, and (iv) the Control Warrant. As of June 30, 2011, we owed $1,218,485 on the Senior Series A Redeemable Preferred Stock dividends. The Control Warrant may be exercised only if certain conditions, as defined in the WayPoint Purchase Agreement, are met. As of the date of this prospectus, the Control Warrant is exercisable.

 

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

least 50% of the voting power of the applicable entity or the resulting or surviving entity or the acquiring entity; (ii) a disposition of all or substantially all of our, Acquisition Inc.’s or Francis Group assets; (iii) a voluntary or involuntary liquidation, dissolution or winding up by us, Acquisition Inc. or Francis Group; (iv) either Michael K. Galvis or Michael G. Francis shall sell at least five percent (5%) of our equity held by him immediately prior to such sale; (v) Michael K. Galvis ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days; or (vi) Michael G. Francis ceases to be the Chief Executive Officer of FDF and is not replaced by a candidate suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be the Chief Executive Officer of FDF and is not replaced by a candidate suitable to WayPoint within 30 days.

 

On April 13, 2011, we received a letter from PNC, as lender, notifying us of the existence of certain events of default under our Senior Facility. Similarly, on April 14, 2011, we received a similar notice of default from WayPoint, stating we are in Default of the WayPoint Purchase Agreement, and, therefore, that WayPoint possesses the right to exercise the Control Warrant. If WayPoint exercises the Control Warrant, they would own 51% of our outstanding Common Stock. We are currently in negotiations with WayPoint to remedy the Events of Default and modify the WayPoint Purchase Agreement. However, there are no assurances that we will be successful in our negotiations with WayPoint. On May 4, 2011, WayPoint provided formal written notice (“Put Notice”) to the Company of its election to cause the Company to repurchase(i) warrants issued to WayPoint (“Warrants”) that, in the aggregate, allow WayPoint to purchase that number of shares of the Company’s common stock to equal 51% of the Company’s fully diluted capital stock then outstanding, (ii) the 20,750 shares of Senior Series A Redeemable Preferred Stock of Acquisition Inc. owned by WayPoint, and (iii) one share of Series B Preferred Stock of the Company owned by WayPoint, for an aggregate purchase price of $30,000,000 within five business days following the date of the Put Notice. The Company did not have the funds available to satisfy this Put Notice in a timely manner, but continues to negotiate with WayPoint to remedy the defaults and resolve WayPoint’s demands in the Put Notice. As a result, WayPoint may seek certain remedies afforded to them under the WayPoint Purchase Agreement including the exercise of their Purchaser and Control Warrants. However, there are no assurances that the Company will be successful in these negotiations, and WayPoint has reserved all other rights, remedies, actions and powers to which WayPoint may be entitled.

 

In connection with the WayPoint Transaction, we issued warrants to purchase up to 423,244 shares of Common Stock at an exercise price of $0.01 per share to an unaffiliated investment group that facilitated the transaction. The warrants may be exercised for a period of five years from the date of grant. The aggregate fair value of the warrants on the date of grant was approximately $779,000 using a Monte Carlo simulation and was recorded as deferred financing costs on our consolidated balance sheets.

 

Senior Revolving Credit and Term Loan Facility

 

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

 

The Senior Facility is subject to financial and other covenants and is secured by a first lien on all of the assets of Acquisition Inc., including its interests in FDF and all of the assets of FDF.

 

On April 13, 2011, we received a letter from PNC, as lender, notifying us of the existence of certain events of default under our Senior Facility, in particular, breach of a fixed coverage ratio and breach of certain

reporting requirements. We are currently in negotiations with PNC to remedy the defaults which include management’s plans to enhance our current liquidity through delaying or stopping capital expenditures through 2011 and improvements to our results of operations. However, there are no assurances that we will be successful in our negotiations with PNC or that the terms will be satisfactory to us.

 

Private Placement — Series A Preferred Stock

 

In contemplation of the acquisition of FDF, in October 2010, we initiated a private placement of units, with each unit consisting of (i) 100,000 shares of our Series A Preferred Stock, and (ii) the Series A Warrants. Each unit was priced at $100,000. For the year ended December 31, 2010, we issued 55.8 units for gross proceeds of $5,580,000 consisting of 5,580,000 shares of Series A Convertible Preferred Stock and warrants to purchase up to 1,674,000 shares of Common Stock. At the conclusion of the private placement offering in January 2011, we had issued a total of 60 units for aggregate gross proceeds of $6,000,000.

 

The holders of the Series A Preferred Stock are entitled to payment of dividends at 9% of the purchase price per share of $1.00, with such dividends payable quarterly. Dividends are payable out of any assets legally available, are cumulative, and in preference to any declaration or payment of dividends to the holders of Common Stock. As of June 1, 2011, we owed $223,245 in dividends on the Series A Preferred Stock. Each holder of Series A Preferred Stock may, at any time, convert their shares of Series A Convertible Preferred Stock into shares of Common Stock at an initial conversion ratio of one-to-one.

 

In addition, we issued warrants to purchase up to 223,200 shares of Series A Convertible Preferred Stock to the underwriter of the private placement offering of Series A Convertible Preferred Stock. The warrants may be exercised for a period of three years from date of grant at an exercise price of $1.00 per share. The aggregate fair value of the warrants on the date of grant was approximately $283,500 using a Monte Carlo simulation.

 

9% Convertible Debenture of NYTEX Petroleum

 

As of June 30, 2011, our wholly-owned subsidiary, NYTEX Petroleum, has raised $1,170,000 in connection with the offering of 9% debentures, (“NYTEX Petroleum Debentures”). The NYTEX Petroleum Debentures are due on February 14, 2014 and been an interest rate of 9% per annum, payable on the first business day of each month, in cash.

 

The NYTEX Petroleum Debentures are convertible into shares of our Common Stock at a conversion price of $2.00 per share of Common Stock. Assuming a full conversion of all NYTEX Petroleum Debentures, all debt associated with the conversion will be extinguished.

 

Other Financings

 

In March 2006, NYTEX Petroleum LLC entered into a $400,000 revolving credit facility (“Facility”) with one of its founding members to be used for operational and working capital needs. In August 2008, the revolving nature of the Facility was terminated, with the then unpaid principal balance of $295,000 on the Facility effectively becoming a note payable to the non-executive founding member. The Facility continued to bear interest, payable monthly, at 6% per annum, be secured by the assets of NYTEX Petroleum LLC (now NYTEX Petroleum) and be personally guaranteed by NYTEX Petroleum LLC’s two founding members. In May 2009, the Facility was further amended pursuant to a letter agreement such that principal and any unpaid interest on the note payable to the non-executive founding member was to be paid in full upon completion of our $5,850,000 private placement of Common Stock, which had not occurred as of February 18, 2010. At that time the letter agreement was further amended, requiring monthly principal payments of $3,000 plus interest for eighteen months beginning March 1, 2010 and ending September 1, 2011. At the end of the eighteen-month period, the remaining principal balance and any unpaid interest are due in a lump sum. There is no penalty for early payment of principal. As of June 30, 2011 and December 31, 2010, the amount outstanding under the Facility was $150,000 and $168,000, respectively.

In July 2009, we entered into various bridge loans totaling $950,000 (“Bridge Loans”), the proceeds of which were used for the acquisition of the Panhandle Field Producing Property, its initial development costs, and working capital purposes. The Bridge Loans originally matured on January 31, 2010, with 12.5% cash interest for the six-month period, or 25% per annum, payable at maturity. The Bridge Loans have been amended multiple times to extend the maturity date. On August 23, 2010, the agreement with the Bridge Loan holders extended the maturity date of principal and interest to September 1, 2010, with no penalties for prepayment. Interest was payable at rates of 25% and 18% per annum. On September 1, 2010, the remaining Bridge Loans (all at an interest rate of 18% per annum) were further amended to extend the maturity date to December 1, 2010, with one option to extend the maturity date to July 1, 2011. The final Bridge Loan was paid in full during the quarter ended June 30, 2011.

 

In April and June 2010, we entered into short-term unsecured advance agreements with an unrelated party which accrued interest at 18% per annum, utilizing the funds for operational and working capital purposes. As of December 31, 2010, we had repaid in full all of the total borrowings of $180,000.

 

In addition, during the year ended December 31, 2010, we raised an additional $181,100 from the sale of 91,200 shares of Common Stock, $400,000 from the disposition of our interest in Supreme Vacuum, and $833,300, net of cash paid, to re-acquire the interests in December 2010, through the sale of a portion of our interest in the Panhandle Field Producing Property. These proceeds were used for general working capital purposes and the repayment of notes payable.

 

Cash Flows

 

The following table summarizes our cash flows and has been derived from our unaudited financial statements for the six months ended June 30, 2011 and 2010, and from our audited financial statements for the years ended December 31, 2010 and 2009.

 

 

Cash flows from operating activities improved from a cash outflow of $515,190 for the six months ended June 30, 2010 to a cash inflow of $2,325,535 for the six months ended June 30, 2011 due to non-cash adjustments affecting earnings including $4,340,554 increase in DD&A, $419,534 increase in share-based compensation, $1,886,364 of accretion of the Senior Series A Redeemable Preferred Stock related to the FDF acquisition, and a loss on litigation settlement of $965,065. These increases were offset by decreases of $364,086 related to the decrease in fair value of the derivative liabilities and a change of $881,066 in deferred income taxes. In addition, we had a net cash inflow related to working capital totaling $1,032,044 for the six months ended June 30, 2011 as compared to a net cash inflow of $359,689 for the six months ended June 30, 2010.

 

Cash flows used in investing activities for the six months ended June 30, 2011 were $2,824,490 compared to cash provided of $751,748 for the six months ended June 30, 2010, and consisted primarily of cash used to acquire property, plant, and equipment totaling $4,020,154, offset by proceeds from the sale of property, plant, and equipment totaling $1,195,664, both within our Oilfield Services segment. For the six months ended

June 30, 2010, cash provided by investing activities consisted primarily of proceeds from the sale of oil and gas properties totaling $859,408 offset by cash used to invest in unconsolidated subsidiaries of $105,500.

 

Cash flows provided by financing activities were $352,935 for the six months ended June 30, 2011 consisted primarily of borrowings on notes payable, which was offset by repayment of financing arrangements and the issuance of warrants related to the PPM. In addition, during the six months ended June 30, 2011, we received proceeds totaling $369,470 from the sale of additional shares of the Series A Convertible Preferred Stock. We also received proceeds totaling $936,000 from the issuance of 9% convertible debentures.

 

Year ended December 31, 2010 compared to the year ended December 31, 2009

 

Cash flows from operating activities improved from a cash outflow of $2,096,089 for the year ended December 31, 2009 to a cash outflow of $1,063,088 for the year ended December 31, 2010 due to increases in non-cash adjustments affecting earnings including $689,369 increase in DD&A, $1,015,525 increase in share-based compensation, $125,139 of amortization of debt discount related to financings associated with the FDF acquisition, $398,232 of accretion of the Senior Series A Redeemable Preferred Stock related to the FDF acquisition, $13,301,755 related to the change in fair value of the derivative liabilities, and a net gain on disposal of assets of $403,848. In addition, we had a net cash inflow related to working capital totaling $2,234,601 for the year ended December 31, 2010 as compared to a net cash inflow of $46,209 for the year ended December 31, 2009.

 

Cash flows used in investing activities increased by $40,410,551 for the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily as a result of cash used to acquire FDF in November 2010.

 

Cash flows provided by financing activities increased by $39,850,860 for the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily as a result of financing arrangements in connection with the FDF acquisition including net proceeds totaling $5,029,011 from the issuance of the Series A Preferred Stock; proceeds totaling $2,150,000 from the issuance of the Debentures; proceeds from the WayPoint Transaction accounted for as a derivative liability totaling $19,253,071; and, borrowings under notes payable including the revolving facility totaling $27,680,862, offset by payments on notes payable totaling $10,201,454 and issuance costs totaling $1,271,558.

 

Off-Balance Sheet Arrangements

 

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

 

Contractual Obligations

 

The following table summarizes our contractual obligations for the repayment of debt and payment of other contractual obligations as of December 31, 2010. The contractual obligations we will actually pay in future periods may vary from those reflected in the table because the estimates and assumptions are subjective.

 

 

Impacts of New Accounting Pronouncements

 

In May 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-4, which amends the Fair Value Measurements Topic of the Accounting Standards Codification to help achieve common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. We will adopt the ASU as required. The ASU will affect our fair value disclosures, but will not affect our results of operations, financial condition or liquidity.

 

In June 2011, the FASB issued ASU No. 2011-5, which amends the Comprehensive Income Topic of the ASU. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. We will adopt the ASU as required. The ASU will have no effect on our results of operations, financial condition or liquidity.

 

We do not believe that the adoption of the above recent pronouncements will have a material effect on our results of operations, financial position or cash flow. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on our present or future financial statements.

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we review these estimates based on information that is currently available. Changes in facts and circumstances may cause us to revise our estimates. The most significant estimates relate to revenue recognition, depreciation, depletion and amortization, the assessment of impairment of long-lived assets and oil and gas properties, income taxes, and fair value. Actual results could differ from estimates under different assumptions and conditions, and such results may affect operations, financial position, or cash flows.

 

Accounts Receivable

 

We provide credit in the normal course of business to our customers and perform ongoing credit evaluations of those customers. We maintain an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. A portion of our receivables are from the operators of producing wells in which we maintain ownership interests. These operators market our share of crude oil and natural gas production. The ability to collect is dependent upon the general economic conditions of the purchasers/participants and the oil and gas industry.

 

Inventory

 

Inventory consists of dry materials used in mixing oilfield drilling fluids and liquid drilling fluids mixed and ready for delivery to the drilling rig location. The dry materials are carried at the lower of cost or market, principally on the first-in, first-out basis. The liquid drilling materials are valued at standard cost which approximates actual cost on a first-in, first-out basis and which does not exceed market value.

Property, plant, and equipment

 

Property, plant, and equipment are recorded at cost less accumulated DD&A. Costs of improvements that appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of properties and equipment, net of the related accumulated DD&A, is removed and, if appropriate, gain or loss is recognized in the respective period’s consolidated statement of operations.

 

For our oil and gas properties, we follow the successful efforts method of accounting for oil and gas exploration and development costs. Under this method of accounting, all property acquisition costs and costs of exploratory wells are capitalized when incurred, pending determination of whether additional proved reserves are found. If an exploratory well does not find additional reserves, the costs of drilling the well are charged to expense. The costs of development wells, whether productive or nonproductive, are capitalized. Geological and geophysical costs on exploratory prospects and the costs of carrying and retaining unproved properties are expensed as incurred.

 

Long-lived Assets

 

Long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If it is determined that the carrying amount may not be recoverable, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is the estimated value at which the asset could be bought or sold in a transaction between willing parties. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as the price of oil and gas, production volumes and costs, drilling activity, and economic conditions could significantly affect these estimates.

 

We evaluate impairment of our oil and gas properties on a property-by-property basis and estimate the fair value based on discounted cash flows expected to be generated from the production of proved reserves.

 

Wells in Progress

 

We record a liability for funds held on behalf of outside investors in oil and gas exploration projects, which are to be paid to the project operator as capital expenditures are billed. The liability is reduced as we make payments on behalf of those outside investors to the operator of the project.

 

Goodwill and Acquired Intangible Assets

 

We record the difference between the purchase price and the fair value of the net assets acquired in a business combination as goodwill. Goodwill is not amortized; rather, it is measured for impairment annually, or more frequently if conditions indicate an earlier review is necessary. If the estimated fair value of goodwill is less than the carrying value, goodwill is impaired and written down to its estimated fair value.

 

Acquired intangibles are recorded at fair value as of the date acquired and consist of non-compete agreements, customer relationships, and the FDF trade name. We amortize acquired intangibles with finite lives on a straight-line basis over estimated useful lives of 5 to 20 years, and we include the amortization in DD&A. We evaluate the recoverability of intangible assets annually or whenever events or changes in circumstances indicate that an intangible asset’s carrying value may not be recoverable.

 

Asset Retirement Obligations

 

We recognize liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a

liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.

 

Fair Value Measurements

 

Certain of our assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price.”

 

Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 measurements are based on inputs other than quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active. Level 3 measurements have the lowest priority and are based upon inputs that are not observable from objective sources. The most common Level 3 fair value measurement is an internally developed cash flow model. We use appropriate valuation techniques based on the available inputs to measure the fair values of our assets and liabilities. When available, we measure the fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

 

Revenue Recognition

 

Revenues from the sale of drilling fluid products and oilfield services are recorded at the time products are sold or services are provided to third parties at a fixed or determinable price, delivery or performance has occurred, title has transferred, and collectability of the revenue is probable. We recognize revenues for promoting certain oil and gas exploration projects and administering the ownership interests of investors in those projects. Administration fees are deferred on the balance sheet as the project is undertaken. As administration services are performed, deferred administration fees are recognized as revenue when each discrete phase of a project is completed and the services have been completed.

 

Revenues from the sales of natural gas and crude oil are recorded when product delivery occurs and title and risk of loss pass to the customer, the price is fixed or determinable, and collection is reasonably assured.

 

Share Based Compensation

 

We grant share-based awards, in the form of Common Stock, to acquire goods and/or services, to members of our Board of directors, and to selected employees. All such awards are measured at fair value on the date of grant and are recognized as a component of selling, general, and administrative expenses in the accompanying statements of operations over the applicable requisite service periods.

 

Income Taxes

 

We are subject to current income taxes assessed by the federal and various state jurisdictions in the United States. In addition, we account for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

 

We recognize the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. We have not taken a tax position that, if challenged, would have a material effect on the consolidated financial statements or the effective tax rate for the six months ended June 30, 2011 and 2010, and the years ended December 31, 2010 and 2009.

 

Executive Officers

 

The following table provides information regarding persons who served as our executive officers as of June 30, 2011:

 

 

Michael K. Galvis has been the President and Chief Executive Officer and our director since October 31, 2008. He has also been the President and Chief Executive Officer and a director of NYTEX Petroleum, Inc., our wholly-owned subsidiary, since October 31, 2008, and the Chairman of FDF, our subsidiary, from November 23, 2010 until May 10, 2011. From March 2006 through October 2008, he was President, Treasurer and Secretary of NYTEX Petroleum, LLC, the predecessor to NYTEX Petroleum. From 1994 through February 2006 he was a Consultant for PetroQuest Exploration, Inc., a privately held Texas corporation engaged in the acquisition and development of oil and natural gas reserves in the U.S. He has been in the oil and gas industry since 1983 with extensive experience in the drilling, operating and participating in onshore and offshore oil and gas wells in Texas, Louisiana, Arkansas, Oklahoma, Colorado, Mississippi, Illinois, North Dakota, and New Mexico. During that period his experience included generating and funding drilling prospects and evaluating and acquiring drill-ready prospects, producing oil and gas properties, oil and gas service companies and facilities, including managing and providing consulting services regarding such assets.

 

Kenneth K. Conte was appointed our Executive Vice President and Chief Financial Officer on June 1, 2010. Prior to joining us and since December 2005, Mr. Conte served as Managing Director and Head of Mergers & Acquisitions for National Securities Corporation, New York, NY. From September 2003 to December 2005, Mr. Conte served as CEO and CFO of Windsor Technology, LLC, Rochester, NY. From April 2001 to December 2005, Mr. Conte also served as Managing Partner of Argilus Investment Banking, Rochester, NY. Prior to that, from December 1998 to April 2001, Mr. Conte served as Senior Vice President — Investment Banking for McDonald Investments, Inc., in Cleveland, Ohio. Mr. Conte also held management positions at the Corporate Banking and Finance Group for Key Bank in Rochester, at Shawmut’s LBO fund, and at The Chase Manhattan Bank. Mr. Conte obtained his MBA in Finance at the William E. Simon Graduate School of Business Administration at the University of Rochester; a BBA in Accounting from Niagara University; and holds a FINRA Series 24 — Securities Principal license, a Series 7-General Securities Representative license, and a Series 63 General Securities Law license.

 

Michael G. Francis was appointed President and Chief Executive Officer of FDF effective November 23, 2010. From April 14, 2011 until May 18, 2011, Mr. Francis was a member of our board of directors. Previously and for the past 34 years, Mr. Francis acted as Director, President and Chief Executive Officer of FDF prior to our acquisition of FDF. A native of Jena, LA, Francis has been in the oilfield all of his adult life. Mr. Francis began FDF in 1977, and has overseen its growth to where it now employs over 400 people and

operates nearly 200 trucks. He and his wife Marcia are members of the East Bayou Baptist Church in Lafayette, Louisiana. He is the past Louisiana Republican Party State Chairman (1995-2001) and Finance Chairman (1993-94); he is a former member of the Executive Board for the Boy Scouts of America — Acadia Parish and currently serves on the Executive Boards of the Welcome House of Acadia Parish and the Community Outreach Corporation. Mr. Francis also serves on the Louisiana College Board of Trustees. He has received awards for his volunteerism and business success such as Business Man of the Year, The Distinguished Citizen Award and the Silver Beaver Award from the Boy Scouts of America.

 

William G. Brehmer has been a member of our board of directors since October 31, 2008. Mr. Brehmer acted as our Chief Operating Officer and Vice President from October 31, 2008 to March 24, 2010, and also has served in such capacities for NYTEX Petroleum since October 31, 2008. Mr. Brehmer has over 25 years of experience in the oil and gas industry in the areas of contract administration, natural gas marketing, natural gas processing, natural gas liquids marketing, business planning, funding and implementation of oil and gas drilling projects, technology marketing and sales and commercial fuel marketing and operations. From April 1, 2006, through October 31, 2008, he was a Consulting Analyst and Contract Administrator for NYTEX Petroleum, LLC. From November 1, 2005, through March 31, 2006, he was an Analyst and Contract Administrator for Petro-Quest Exploration, Inc., a privately held Texas corporation engaged in the acquisition and development of oil and natural gas reserves in the U.S. From December 12, 2003, through October 31, 2005, he was President of Petro-Frac Corporation, a privately held Texas corporation focused on identifying, acquiring and developing shallow (above 4,000 feet) Austin Chalk oil reserves in east Texas.

 

Jude N. Gregory was named Vice President and Chief Financial Officer of FDF on November 23, 2010 as part of our acquisition of FDF. Mr. Gregory has served as CFO of FDF since September, 2002 having served the seven prior years as the company’s Controller. Prior to his years at FDF, he held several management positions with Albertson’s Food & Drug. Mr. Gregory earned his Bachelor of Science in Business Administration (Accounting) from the University of Southwestern Louisiana, now the University of Louisiana-Lafayette. In 1985, he was presented with his Eagle Scout Award by the Boy Scouts of America. Mr. Gregory continues to be active with the scouts as well as many other church and civic organizations.

 

Involvement of a Director in Certain Legal Proceedings

 

On September 29, 2003, the Pennsylvania Securities Commission issued a Summary Order to Cease and Desist against Aragorn Energy, LLC and William G. Brehmer to halt the offer and sale of unregistered securities in Pennsylvania. The Pennsylvania Securities Commission alleged that Aragorn Energy was selling working interests in two oil wells in Pennsylvania without registration or an applicable exemption and further alleged several misrepresentations and omissions in the offering materials relating to the interests.

 

Mr. Brehmer was one of four founding members, the organizer, managing member and the registered agent of Aragorn Energy, which was organized on January 6, 2003. Aragorn Energy acquired ownership in an oil and gas lease containing a well bore that had never been completed plus additional drilling locations. Aragorn Energy formed a joint venture to fund the completion of the well bore and drill one additional well on its lease and offered working interests in the joint venture to raise the drilling and completion capital. Each Aragorn Energy member contacted “friends and family” to raise drilling and completion capital for the joint venture. Without Mr. Brehmer’s knowledge, an Aragorn Energy member forwarded an offering document listing Mr. Brehmer as the managing member to an accredited investor whom the member had prior contact with in Pennsylvania, which offering document was subsequently forwarded to the Pennsylvania Securities Commission. Because he was not aware that any offers would be made in the state, Mr. Brehmer, as managing member of Aragorn Energy, failed to file appropriate notice of intent to use an exemption from the registrations requirements of Pennsylvania. He received a letter from the Pennsylvania Securities Commission which he forwarded to his attorney, who failed to timely respond by the deadline stated in the letter. Subsequently, Mr. Brehmer received a letter from the Pennsylvania Securities Commission stating that he had not responded to their original notice and, as a result, it had issued a permanent cease and desist against him and Aragorn Energy. Because no sales of interests were consummated by Aragorn Energy in Pennsylvania and no future Aragorn Energy offerings in Pennsylvania were planned, Mr. Brehmer decided not to take any actions to challenge or lift the cease and desist order.

Subsidiary Executive Officers, Directors and Managers

 

As discussed above in “Risk Factors”, and below in “Transactions with Related Persons and Certain Control Persons”, WayPoint holds all outstanding shares of Senior Series A Redeemable Preferred Stock in Acquisition Inc. Acquisition Inc. is the sole owner of Francis Oaks, LLC, which in turn wholly owns FDF. On May 9, 2011, WayPoint notified Acquisition Inc. that, because of the continuing occurrences of default under the WayPoint Purchase Agreement, it elected to increase the board of Acquisition Inc. from four members to five, and designed Mr. J.J. Schickel, Jr. to fill this newly created vacancy. Mr. Schickel served in this capacity until May 20, 2011, when WayPoint replaced Mr. Schickel with Mr. Lee Buchwald. As of June 30, 2011, the board of Acquisition Inc. included Michael Galvis, Kenneth K. Conte, John Henry Moulton (a WayPoint designee), Thomas Drechsler (a WayPoint designee) and Mr. Buchwald (a WayPoint designee). For more information about Mr. Moulton and Mr. Drechsler, see “Transactions with Related Persons and Certain Control Persons”, on page 50 herein.

 

On May 10, 2011, the newly constituted board of Acquisition Inc. voted to remove Michael Galvis as president and Kenneth Conte as chief financial officer, treasurer and secretary of both Oaks and FDF and replace them with Mike Francis as president and Jude Gregory as chief financial officer, treasurer and secretary. Also on May 10, 2011, the board of Acquisition Inc. voted to remove all directors and managers, as applicable, of Oaks and FDF, and replace them with Messrs. Moulton, Drechsler, Galvis, Schickel and Conte as the sole directors and managers, as applicable. Mr. Schickel served in this capacity until May 20, 2011, when WayPoint replaced Mr. Schickel with Mr. Lee Buchwald.

 

Summary Compensation Table

 

The following table summarizes the compensation of our named executive officers for the years ended December 31, 2010 and 2009:

 

 

 

 

 

Executive Employment Agreements

 

The following is a summary of the material terms of the employment agreements we have with our named executive officers:

 

Agreements with Michael K. Galvis.  On April 28, 2009, we entered into an employment agreement with Mr. Galvis (the “NYTEX Employment Agreement”). On November 22, 2010, the NYTEX Employment Agreement was amended to modify Mr. Galvis’s compensation. The NYTEX Employment Agreement provides for an annual base salary of $250,000 per year, an auto allowance of $875 per month, health insurance allowance of $1,500 per month and incentive compensation to be determined from time to time by our board of directors.

 

Agreement with Kenneth K. Conte.  On November 22, 2010, we entered into an employment agreement with Mr. Conte that superseded a previous employment agreement dated June 1, 2010. The employment agreement with Mr. Conte provides for an annual base compensation of $200,000. Additionally, Mr. Conte receives a vehicle and all expenses associated with such vehicle. Mr. Conte may also receive additional compensation as determined from time to time by our board of directors. Mr. Conte’s employment agreement has a term of two years from the date of execution with automatic one year extensions unless either party elects not to renew. Mr. Conte’s employment agreement contains typical confidentiality provisions as well as a non-competition clause for a period from the date of execution during his employment and for a three year period thereafter. In the event of termination without cause, Mr. Conte is entitled to receive a severance payment determined by dividing his base salary by 257 to compute a “daily base salary rate” and then multiplying the daily base salary rate by the product of multiplying the number of full months of his employment with us by 84%, less taxes and Social Security required to be withheld.

 

Outstanding Equity Awards at Fiscal Year-End:

 

As of December 31, 2010, the following restricted stock awarded granted have not vested:

 

 

 

 

Option Exercises and Stock Vested:

 

During 2010, the following stock awards have been granted to named executive officers and have vested:

 

 

Board of Directors

 

The following persons serve on our board of directors as of June 30, 2011:

 

 

Michael K. Galvis.  See “Executive Officers” on page 45 of this prospectus for biographical information about Mr. Galvis.

 

William G. Brehmer.  See “Executive Officers” on page 45 of this prospectus for biographical information about Mr. Brehmer.

 

Jonathan Rich has served as director since November 2010. Mr. Rich was appointed as director per the terms of our Series A Preferred Stock. Mr. Rich has been the Executive Vice President and Head of Investment Banking of National Securities Corporation, a full-service investment banking firm, since July 2008. Mr. Rich had been the Executive Vice President and Director of Investment Banking of vFinance Investments, Inc. since July 2005, and assumed his current position with National Securities when vFinance was acquired by National Holdings Corporation, the parent of National Securities Corporation in July 2008. Mr. Rich had previously served as Senior Vice President and Managing Director of Corporate Finance at First Colonial Financial Group since January 2001. First Colonial Financial was, in turn, acquired by vFinance in July 2005. Mr. Rich graduated from Tulane University with an interdisciplinary major in economics, political science, history and philosophy and received a joint J.D. / M.B.A. degree from Fordham University with a concentration in corporate finance.

 

2010 Director Compensation

 

During the year ended December 31, 2010, our directors neither received nor accrued compensation for their services as directors other than reimbursement of expenses relating to attending meetings of our board of directors.

 

Director Independence

 

The standards relied upon in determining whether a director is “independent” are those of the NASDAQ Stock Market, which include the following objective standards: (a) a director who is an employee, or whose immediate family member (defined as a spouse, parent, child, sibling, father- and mother-in-law, son- and daughter-in-law and anyone, other than a domestic employee, sharing the director’s home) is our executive officer, would not be independent for a period of three years after termination of such relationship; (b) a director who receives, or whose immediate family member receives, compensation of more than $120,000 during any period of twelve consecutive months from us, except for certain permitted payments, would not be independent for a period of three years after ceasing to receive such amount; (c) a director who is or who has an immediate family member who is, a current partner of our outside auditor or who was, or who has an immediate family member who was, a partner or employee of our outside auditor who worked on our audit at any time during any of the past three years would not be independent until a period of three years after the termination of such relationship; (d) a director who is, or whose immediate family member is, employed as an

executive officer of another company where any of our present executive officers serve on the other company’s compensation committee would not be independent for a period of three years after the end of such relationship; and (e) a director who is, or who has an immediate family member who is, a partner in, or a controlling stockholder or an executive officer of any organization that makes payments to, or receives payments from, the Company for property or services in an amount that, in any single fiscal year, exceeds the greater of $200,000, or 5% of such other company’s consolidated gross revenues, would not be independent until a period of three years after falling below such threshold.

 

In applying the above-referenced standards, we have determined that Jonathan Rich is currently our only independent director.

 

WayPoint, Thomas W. Drechsler and John Henry Moulton

 

On November 23, 2010, in connection with the FDF Acquisition, we entered into the WayPoint Purchase Agreement pursuant to which we issued WayPoint one share of our Series B Preferred Stock and 20,750 shares of Senior Series A Redeemable Preferred Stock in Acquisition Inc. As the holder of Series B Preferred Stock, WayPoint is entitled to nominate two members to our board of directors.

 

Pursuant to the terms of the WayPoint Purchase Agreement and the Control Warrant, we need consent from WayPoint to engage in certain activities, including, but not limited to, incurring further indebtedness, granting any liens on our assets, disposing of our assets, entering into mergers, or conducting acquisitions. Furthermore, if WayPoint exercised the Control Warrant, such exercise would result in a change of control of us in that the WayPoint would hold a majority of our shares which will be enough shares to elect all of the members of our board of directors and to approve any action requiring stockholder approval, including certain mergers and sales of substantially all of the our assets, regardless of the votes cast by any other stockholder.

 

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

him immediately prior to such sale; (v) Michael K. Galvis ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be our Chief Executive Officer and is not replaced by a candidate suitable to WayPoint within 30 days; or (vi) Michael G. Francis ceases to be the Chief Executive Officer of FDF and is not replaced by a candidate suitable to WayPoint within 30 days or any such replacement Chief Executive Officer ceases to be our Chief Executive Officer of FDF and is not replaced by a candidate suitable to WayPoint within 30 days.

 

On April 13, 2011, we received a letter from PNC, as lender, notifying us of the existence of certain events of default under our Senior Facility. Similarly, on April 14, 2011 we received a similar notice of Default from WayPoint, stating we are in Default of the WayPoint Purchase Agreement, and, therefore, that WayPoint possesses the right to exercise the Control Warrant. If WayPoint exercises the Control Warrant, they would own 51% of our outstanding Common Stock. We are currently in negotiations with WayPoint to remedy the Events of Default and modify the WayPoint Purchase Agreement. However, there are no assurances that we will be successful in our negotiations with WayPoint or that the terms will be satisfactory to us.

 

On May 4, 2011, WayPoint provided formal written notice (“Put Notice”) to the Company of its election to cause the Company to repurchase (i) the WayPoint Warrants that, in the aggregate, allow WayPoint to purchase that number of shares of Common Stock equal to 51% of the fully diluted Common Stock then outstanding, (ii) the 20,750 shares of Senior Series A Redeemable Preferred Stock of Acquisition Inc. owned by WayPoint, and (iii) one share of Series B Preferred Stock of the Company owned by WayPoint, for an aggregate purchase price of $30,000,000 within five business days following the date of the Put Notice. The Company did not have the funds available to satisfy this Put Notice in a timely manner, but continues to negotiate with WayPoint to remedy the defaults and resolve WayPoint’s demands in the Put Notice. As a result, WayPoint may seek certain remedies afforded to them under the WayPoint Purchase Agreement including the exercise of their Purchaser and Control Warrants. However, there are no assurances that the Company will be successful in these negotiations, and WayPoint has reserved all other rights, remedies, actions and powers to which WayPoint may be entitled.

 

On November 23, 2010, WayPoint nominated Thomas W. Drechsler and John Henry Moulton to serve on our board of directors. On May 9, 2011, Mr. Drechsler and Mr. Moulton resigned from our board of directors and WayPoint elected Mr. Moulton as an observer to our board in accordance with the WayPoint Purchase Agreement.

 

WayPoint also, on May 9, 2011, exercised its right, as a result of the defaults, as sole holder of Senior Series A Redeemable Preferred Stock of Acquisition Inc. to increase the number of directors constituting the board of directors of Acquisition Inc. from four to five, and designated Mr. J.J. Schickel, Jr. to fill this newly created vacancy. Mr. Schickel served in this capacity until May 20, 2011, when WayPoint replaced Mr. Schickel with Mr. Lee Buchwald. As of June 30, 2011, the board of Acquisition Inc. includes Messrs. Conte, Galvis, Moulton, Drechsler and Buchwald. By virtue of having the right, and having exercised the right, to designate a majority of the board of directors of our subsidiary, Acquisition Inc., WayPoint may be deemed to have control over Acquisition Inc.

 

On May 10, 2011, the newly constituted board of Acquisition Inc. voted to remove Michael Galvis as president and Kenneth Conte as chief financial officer, treasurer and secretary of both Oaks and FDF and replace them with Mike Francis as president and Jude Gregory as chief financial officer, treasurer and secretary. Also on May 10, 2011, the board of Acquisition Inc. voted to remove all directors and managers, as applicable, of Oaks and FDF, and replace them with Messrs. Moulton, Drechsler, Galvis, Schickel and Conte as the sole directors and managers, as applicable. Mr. Schickel served in this capacity until May 20, 2011, when WayPoint replaced Mr. Schickel with Mr. Lee Buchwald. More information about WayPoint and actions WayPoint has taken regarding the Acquisition Inc. Senior Series A Redeemable Preferred Stock may be found under the Risk Factor entitled, “By virtue of having the right, and having exercised the right, to designate a majority of the board of directors of our subsidiary, Acquisition Inc., WayPoint may be deemed to have control over Acquisition Inc. and its subsidiaries, including FDF, our significant operating subsidiary. WayPoint also holds the sole outstanding share of our Series B Preferred Stock, entitling it to increase the size of our board of directors and to designate a majority of our board. While members of a board of directors owe fiduciary duties to all stockholders, WayPoint has interests that are in addition to, or different from the interests of our stockholders generally and that create potential conflicts of interest” on page 3 herein.

 

The following tables set forth information concerning each of the Selling Security Holders including:

 

 

With the exception of Ronnie Lewis, TDB Associates, Inc., Myrtis Outlar and Charles Davis which own 20,000 shares of Common Stock, 134,375 shares of Common Stock, 5,000 shares of Common Stock and 5,000 shares of Common Stock, respectively, representing less than one percent of the issued and outstanding shares of our Common Stock, the shares offered for sale under this prospectus constitute all of the shares known to us to be beneficially owned by each of the Selling Security Holders, and upon completion of this offering none of the Selling Security Holders will own any shares of Common Stock. The shares of Common Stock being offered under this prospectus may be offered for sale from time to time during the period the registration statement to which this prospectus relates remains effective, by or for the accounts of the Selling Security Holders listed below.

 

None of the Selling Security Holders have a position or office with us nor have had any material relationship with us within the past three years. None of the Selling Security Holders are broker-dealers or affiliates of broker-dealers to our knowledge. The shares of Common Stock being offered under this prospectus may be offered for sale from time to time during the period the registration statement to which this prospectus relates remains effective, by or for the accounts of the Selling Security Holders listed below.

 

Series A Preferred Stockholders: