Mesa Energy Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.02 - Mesa Energy Holdings, Inc.	v228740_ex31-02.htm
EX-31.01 - Mesa Energy Holdings, Inc.	v228740_ex31-01.htm
EX-32.01 - Mesa Energy Holdings, Inc.	v228740_ex32-01.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________ to _________

Commission file number: 000-53972

MESA ENERGY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	98-0506246
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5220 Spring Valley Road, Suite 525

Dallas, Texas 75254

(Address of principal executive offices) (zip code)

(972) 490-9595

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of July 13, 2011, there were 54,058,649 shares of the registrant’s common stock outstanding.

MESA ENERGY HOLDINGS, INC.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

	ITEM 1	Financial Statements
		Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 (Unaudited)	3

		Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 and the Period from Inception (April 25, 2003) to March 31, 2011 (Unaudited)	4

		Consolidated Statement of Changes in Members’ and Stockholders’ Equity (Deficit) for the Period from Inception (April 25, 2003) to March 31, 2011 (Unaudited)	5-6

		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 and the Period from Inception (April 25, 2003) to March 31, 2011 (Unaudited)	7-8

		Notes to Consolidated Financial Statements (Unaudited)	9-19

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-26

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	27

	ITEM 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION

	ITEM 1.	Legal Proceedings	29
	ITEM 1A.	Risk Factors	29
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
	ITEM 3.	Defaults Upon Senior Securities	29
	ITEM 4.	(Reserved)	29
	ITEM 5.	Other Information	29
	ITEM 6.	Exhibits	30

	SIGNATURES		31

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Consolidated Balance Sheets

(Unaudited)

	March 31, 2011			December 31, 2010

ASSETS

Current assets
Cash and cash equivalents	$	12,558		$	6,096
Accounts receivable		8,321			8,348
Deferred financing cost, current		35,242			135,552
Prepaid expenses		5,479			3,750
TOTAL CURRENT ASSETS		61,600			153,746

Oil and gas properties, using successful efforts accounting:
Properties not subject to amortization, less accumulated impairment of $247,500		-			-
Properties subject to amortization, less accumulated depletion and impairment of $519,116		-			-
Pipeline property, less accumulated depreciation and impairment of $379,367		-			-
Land		38,345			38,345
Net oil and gas properties		38,345			38,345

Prepaid asset retirement cost		40,000			40,000
TOTAL ASSETS	$	139,945		$	232,091

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities
Accounts payable trade	$	114,385		$	67,409
Accrued expenses		728,656			778,240
Accrued expenses-related parties		138,860			131,832
Note payable		40,000			20,000
Notes payable-related parties		26,000			21,000
Convertible note payable		850,000			1,480,000
TOTAL CURRENT LIABILITIES		1,897,901			2,498,481

Non-current liabilities
Long term debt-related parties		451,400			451,400
Convertible note payable		-			665,000
Asset retirement obligations		82,022			80,217
TOTAL LIABILITIES		2,431,323			3,695,098

Commitments and contingencies		-			-

Stockholders’ deficit
Preferred stock, par value $0.0001, 10,000,000 shares authorized, -0- shares issued and outstanding		-			-
Common stock, par value $0.0001, 300,000,000 shares authorized, 48,045,351 and 40,232,021 shares issued and outstanding, respectively		4,805			4,023
Additional paid-in capital		(5,219,505	)		(6,676,229	)
Accumulated earnings during the exploration stage		2,923,322			3,209,199
TOTAL STOCKHOLDERS’ DEFICIT		(2,291,378	)		(3,463,007	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	139,945		$	232,091

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Consolidated Statements of Operations

For the Three Months Ended March 31, 2011 and 2010

and the Period from Inception (April 25, 2003) to March 31, 2011

(Unaudited)

	For the Three Months Ended March 31,						Inception to March 31,
	2011			2010			2011

Revenues	$	18,409		$	9,817		$	96,695

Operating expenses
Lease operating costs		4,380			10,008			40,216
Exploration cost		13,746			5,468			510,176
Dry hole cost		-			-			466,066
Depreciation, depletion, amortization, accretion, and impairment		1,805			7,178			1,238,545
General and administrative expenses		146,033			574,281			4,853,904
Loss on sale of Poydras Energy, LLC		-			-			1,151,997
Gain on sale of oil and gas properties		-			-			(1,673,620	)
Total operating expenses		165,964			596,935			6,587,284

Loss from operations		(147,555	)		(587,118	)		(6,490,589	)

Other income (expenses)
Interest expense		(249,008	)		(759,294	)		(3,326,243	)
Interest income		-			2,300			27,824
Gain (loss) on change of derivative value		-			(9,024,975	)		12,695,200
Other income		-			-			17,130
Total other income		(249,008	)		(9,781,969	)		9,413,911

Net income (loss)	$	(396,563	)	$	(10,369,087	)	$	2,923,322


Net income (loss) per share:
Basic	$	(0.01	)	$	(0.26	)
Diluted	$	(0.01	)	$	(0.26	)

Weighted average number of shares outstanding:
Basic		45,363,307			39,542,929
Diluted		45,363,307			39,542,929

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Consolidated Statement of Changes in Members’ and Stockholders’ Equity (Deficit)

For the Period from Inception (April 25, 2003) to March 31, 2011

(Unaudited)

				Common Stock
	Members’ Equity			Shares		Par Value		Additional Paid-in Capital (Deficit)		Accumulated Deficit			Totals
Balances at April 25, 2003 (inception)	$	-			-	$	-	$	-	$	-		$	-

Contributions		157,416			-		-		-		-			157,416

Net loss		(152,274	)		-		-		-		-			(152,274	)

Balances at December 31, 2003		5,142			-		-		-		-			5,142

Contributions		372,673			-		-		-		-			372,673

Draws		(70,000	)		-		-		-		-			(70,000	)

Imputed Interest		11,508			-		-		-		-			11,508

Net loss		(166,278	)		-		-		-		-			(166,278	)

Balances at December 31, 2004		153,045			-		-		-		-			153,045

Contributions		94,766			-		-		-		-			94,766

Imputed Interest		5,134			-		-		-		-			5,134

Net loss		(210,929	)		-		-		-		-			(210,929	)

Balances at December 31, 2005		42,016			-		-		-		-			42,016

Contributions		22,743			-		-		-		-			22,743

Net loss from January 1, 2006 to March 3, 2006		(50,495	)		-		-		-		-			(50,495	)

Merger with Mesa Energy, Inc. (Co.)		(14,264	)		19,286,248		1,929		592,311		(579,976	)		-

Fair value of options and warrants issued for services		-			-		-		19,075		-			19,075

Shares issued for cash		-			1,214,484		122		265,278		-			265,400

Net loss from March 4, 2006 to December 31, 2006		-			-		-		-		(338,074	)		(338,074	)

Balances at December 31, 2006					20,500,732		2,051		876,664		(918,050	)		(39,335	)

Shares issued for cash		-			803,079		80		208,120		-			208,200

Discount on convertible debt		-			-		-		187,427		-			187,427

Net loss		-			-		-		-		(506,940	)		(506,940	)

Balances at December 31, 2007		-			21,303,811		2,131		1,272,211		(1,424,990	)		(150,648	)

Shares issued for purchase of stock of Poydras Energy		-			2,892,937		289		749,711		-			750,000

Warrants issued with sale of oil and gas property		-			-		-		31,071		-			31,071

Shares issued for legal fees		-			9,643		1		3,749		-			3,750

Net income		-			-		-		-		115,179			115,179

Balances at December 31, 2008		-			24,206,391		2,421		2,056,742		(1,309,811	)		749,352

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Consolidated Statement of Changes in Members’ and Stockholders’ Equity (Deficit), continued

For the Period from Inception (April 25, 2003) to March 31, 2011

(Unaudited)

	Members’ Equity		Shares		Par Value		Additional Paid-in Capital (Deficit)			Accumulated Deficit			Totals

Balances at December 31, 2008	$	-		24,206,391	$	2,421	$	2,056,742		$	(1,309,811	)	$	749,352

Shares issued for warrants held by MEI shareholders		-		829,309		83		(83	)		-			-

Reverse merger with Mesa Energy Holdings		-		14,000,000		1,400		(1,400	)		-			-

Share-based compensation		-		350,000		35		340,965			-			341,000

Discount on convertible debt		-		-		-		1,530,000			-			1,530,000

Derivative liability on convertible debt		-		-		-		(9,383,380	)		-			(9,383,380	)

Net loss		-		-		-		-			(1,931,539	)		(1,931,539	)

Balances at December 31, 2009		-		39,385,700		3,939		(5,457,156	)		(3,241,350	)		(8,694,567	)

Share-based compensation		-		372,900		37		1,131,504			-			1,131,541

Conversion of convertible debt and accrued interest		-		473,421		47		185,557			-			185,604

Discount on convertible debt		-		-		-		665,000			-			665,000

Derivative liability on convertible debt		-		-		-		(3,311,820	)		-			(3,311,820	)

Net income		-		-		-		-			6,561,235			6,561,235

Balances at December 31, 2010		-		40,232,021		4,023		(6,786,915	)		3,319,885			(3,463,007	)

Share-based compensation		-		18,000		3		39,812			-			39,815

Conversion of convertible debt and accrued interest		-		6,759,330		675		1,415,728			-			1,416,403

Common shares issued to induce debt conversion		-		1,036,000		104		111,870			-			111,974

Net loss		-		-		-		-			(396,563	)		(396,563	)

Balances at March 31, 2011	$	-		48,045,351	$	4,805	$	(5,219,505	)	$	2,923,322		$	(2,291,378	)

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2011 and 2010

and the Period from Inception (April 25, 2003) to March 31, 2011

(Unaudited)

	For the Three Months Ended March 31,						Inception to March 31,
	2011			2010			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(396,563	)	$	(10,369,087	)	$	2,923,322
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Loss on sale of oil and gas properties		-			-			1,151,997
Unrealized (gain) loss on change in derivative value		-			9,024,975			(12,695,200	)
Gain on sale of assets		-			-			(1,673,620	)
Dry hole cost		-			-			466,066
Imputed interest		-			-			16,641
Amortization of debt discount		-			665,000			2,382,427
Depreciation, depletion, amortization, accretion and impairment expense		1,805			7,178			1,238,545
Amortization of deferred financing cost		100,310			35,369			285,579
Share-based compensation		39,815			309,280			1,535,181
Induced debt conversion expense		111,974			-			111,974
Changes in operating assets and liabilities:
Accounts receivable and prepaid assets		(1,702	)		7,882			(13,800	)
Accounts payable and accrued expenses		118,795			45,991			1,130,142
Accrued expenses – related parties		7,028			6,679			138,860
CASH USED IN OPERATING ACTIVITIES		(18,538	)		(266,733	)		(3,001,886	)

CASH FLOWS FROM INVESTING ACTIVITIES
Release of restricted cash		-			20,000			-
Payments for oil and gas development costs		-			(40,901	)		(2,740,463	)
Cash paid for asset retirement obligations		-			-			(46,494	)
Cash acquired from purchase of Poydras Energy, LLC		-			-			1,326
Proceeds from sale of assets		-			-			2,562,500
Purchases of fixed assets		-			-			(5,203	)
CASH USED IN INVESTING ACTIVITIES		-			(20,901	)		(228,334	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of stock		-			-			473,600
Borrowings on debt from related parties		5,000			-			749,400
Principal payments on debt from related parties		-			(43,000	)		(472,000	)
Borrowings on debt from third parties, net of financing cost		20,000			573,444			1,914,180
Members contributions		-			-			647,598
Members distributions		-			-			(70,000	)
CASH PROVIDED BY FINANCING ACTIVITIES		25,000			530,444			3,242,778

NET CHANGE IN CASH		6,462			242,810			12,558

CASH AT BEGINNING OF PERIOD		6,096			267,141			-
CASH AT END OF PERIOD	$	12,558		$	509,951		$	12,558

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Consolidated Statements of Cash Flows, continued

For the Three Months Ended March 31, 2011 and 2010

and the Period from Inception (April 25, 2003) to March 31, 2011

(Unaudited)

	For the Three Months Ended March 31,				Inception to March 31,
	2011		2010		2011
Supplemental disclosures of cash flow information:
Cash paid for interest	$	50	$	-	$	86,987
Cash paid for income taxes	$	-	$	-	$	-

Non-cash disclosures:
Accrued oil and gas acquisition and development cost	$	-	$	-	$	25,000
Sale of pipeline right-of-way for payables	$	-	$	-	$	60,000
Note payable issued for purchase of Poydras Energy, LLC	$	-	$	-	$	100,000
Common stock issued for purchase of Poydras Energy, LLC	$	-	$	-	$	750,000
Stock issued in reverse merger	$	-	$	-	$	1,400
Warrants issued with the sale of oil and gas property	$	-	$	-	$	31,071
Change in asset retirement obligation	$	-	$	-	$	47,976
Initial valuation of derivative liability upon issuance of debt	$	-	$	3,311,821	$	12,695,200
Common stock issued for conversions of notes payable and accrued interest	$	1,416,403	$	84,891	$	1,602,007

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year. These interim consolidated financial statements should be read in conjunction with the Company’s most recent audited consolidated financial statements and notes thereto dated December 31, 2010.

Reclassifications

Certain reclassifications have been made to amounts in prior periods to conform with the current period presentation. All reclassifications have been applied consistently to the periods presented.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the Company’s accounts including those of the Company’s wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Subsequent Events

The Company has evaluated all transactions through the financial statement issuance date for subsequent event disclosure consideration.

Earnings (Loss) Per Share

The Company’s earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution of securities, if any, that could share in the earnings of the Company and is calculated by dividing net income by the diluted weighted average number of common shares. The diluted weighted average number of common shares is computed using the treasury stock method for common stock that may be issued for outstanding stock options. For the three months ended March 31, 2011 and 2010, common shares of 3,400,000 and 8,580,000, respectively, for convertible debt and common shares of 848,500 and 262,000, respectively, for vested options, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.

Recently issued accounting pronouncements

The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position, results of operations or cash flows.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 2 – GOING CONCERN

The Company has incurred recurring losses from operations of $6,490,589 since inception through March 31, 2011, has a working capital deficit at March 31, 2011 of $1,836,301 and currently has limited sources of recurring revenue. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. To finance the Company’s net losses and to execute its business plan, the Company has sold debt and equity securities and officers and directors have funded the Company through the purchase of notes payable. There can be no assurance that the Company can sell stock or debt or that the officers and directors of the Company will continue or have the ability to make financing available to the Company in the future. The officers and directors are under no legal obligation to provide additional loans to the Company. If the officers and directors do not make such loans, the Company cannot create a source of recurring revenues or the Company does not receive funds from other sources, then the Company may be unable to continue to operate as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 3 – OIL AND GAS PROPERTIES

The Company’s oil and gas properties are located in the United States.

The carrying values, net of depletion, depreciation, and impairment, at March 31, 2011 and December 31, 2010 of the Company’s oil and gas properties were:

Prospect	March 31,2011		December 31, 2010

Coal Creek Prospect	$	-	$	-
Java Field		38,345		38,345
Total	$	35,345	$	38,345

Net oil and gas properties at March 31, 2011 were:

Year Incurred	Acquisition Costs		Exploration Costs		Dry Hole Cost			Disposition of assets			Depletion, Depreciation, and Impairment			Total
2007 and prior	$	236,963	$	458,958	$	-		$	-		$	(27,140	)	$	668,781
2008		-		1,595,099		(466,066	)		-			-			1,129,033
2009		556,260		488,035		-			(2,090,383	)		(7,624	)		(1,053,712	)
2010		-		405,462		-			-			(1,111,219	)		(705,757	)
2011		-		-		-			-			-			-
Total	$	793,223	$	2,947,554	$	(466,066	)	$	(2,090,383	)	$	(1,145,983	)	$	38,345

The Company holds oil and gas lease interests in Oklahoma and New York. The Oklahoma leases are classified as “Properties not subject to amortization” in the Company’s financial statements. The Company evaluates each of its properties upon completion of drilling and assessment of reserves to either classify as “Properties subject to amortization” or impair the properties.

NOTE 4 – DEBT - RELATED PARTIES

At March 31, 2011, long term debt to related parties consisted of unsecured notes payable to related parties for cash loaned to the Company. These note balances totaled $451,400 as of March 31, 2011 and December 31, 2010, and are to entities owned by the officers of the Company. They bear interest at a rate of 6% per annum. The notes mature on May 31, 2012. Also, during the quarter ended March 31, 2011, proceeds in the amount of $5,000 were received by the Company as an additional loan from the Company’s CEO. The balance of the note payable to our CEO as of March 31, 2011 and December 31, 2010 was $26,000 and $21,000, respectively, with a maturity date of August 30, 2011 and interest rate of 6%.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 5 – DEBT

On February 14, 2011, the Company received $20,000 in additional proceeds from a third party loan. The balance of the note as of March 31, 2011 and December 31, 2010 was $40,000 and $20,000, respectively. This note bears interest at a rate of 6% per annum with principal and interest due on June 8, 2011. On June 16, 2011, this note was exchanged for a convertible debenture with an interest rate of 6% and a maturity date of July 31, 2013.

NOTE 6 – CONVERTIBLE PROMISSORY NOTES

In 2009, the Company commenced a private placement (the “2009 PPO”) of 10% Secured Convertible Promissory Notes of the Company (the “Convertible Notes”), at a purchase price of 100% of face value, which, at the option of the respective holders, are convertible into shares of common stock at a conversion price of $0.25 per share, subject to adjustment in certain circumstances as provided therein. Several closings of the 2009 PPO were held during fiscal 2009 in which the Company sold an aggregate of $1,280,000 principal amount of Convertible Notes (not including the Convertible Note in the principal amount of $250,000 that was issued in exchange for the Denton Note) raising net proceeds of $1,050,818 after $229,182 of offering costs. The Convertible Notes issued are due 24 months from issuance (or earlier upon certain events of default) and bear interest at 10% per annum, payable semi-annually on December 31 and June 30 in each year (with the first interest payment due and payable on December 31, 2009). Interest will be paid in shares of the common stock valued for this purpose at 90% of the volume weighted average price of the common stock for the ten trading days preceding but not including the relevant interest payment date. The Company shall have the right to redeem from time to time, upon prior notice, all or any portion of the outstanding principal amount of the Convertible Notes, without penalty, for 100% of the principal being redeemed plus accrued and unpaid interest.

In 2010, the Company commenced a private placement (the “2010 PPO”) of 10% Secured Convertible Promissory Notes of the Company (the “Convertible Notes”), at a purchase price of 100% of face value, which, at the option of the respective holders, are convertible into shares of common stock at a conversion price of $0.25 per share, subject to adjustment in certain circumstances as provided therein. Several closings of the 2010 PPO were held during fiscal 2010 in which the Company sold an aggregate of $665,000 principal amount of Convertible Notes raising net proceeds of $573,362 after $91,638 of offering costs. The Convertible Notes issued are due 24 months from issuance (or earlier upon certain events of default) and bear interest at 10% per annum, payable semi-annually on December 31 and June 30 in each year (with the first interest payment due and payable on June 30, 2010). Interest will be paid in shares of the common stock valued for this purpose at 90% of the volume weighted average price of the common stock for the ten trading days preceding but not including the relevant interest payment date. The Company shall have the right to redeem from time to time, upon prior notice, all or any portion of the outstanding principal amount of the Convertible Notes, without penalty, for 100% of the principal being redeemed plus accrued and unpaid interest.

The Convertible Notes contain a standard “blocker” provision so that no holder shall have the right to convert any portion of its Convertible Notes to the extent that, after giving effect to such conversion, the holder and its affiliates would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion. By written notice to the Company, a holder may increase or decrease such percentage to any other percentage, provided that any such increase will not be effective until the sixty-first (61st) day after such notice is delivered and such percentage may not, in any event, exceed 9.99%. All convertible notes above are secured by substantially all of the assets of the Company.

The Company determined that the Convertible Notes issued in the 2009 and 2010 Private Placements contained provisions that protect holders from declines in the Company’s stock price that could result in modification of the exercise price under the conversion feature based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815–40. As a result, the exercise price is not indexed to the Company’s own stock. The fair value of the conversion feature was recognized as an embedded derivative instrument and will be measured at fair value at each reporting period. The Company measured the fair value of these instruments as of the date of issuance and recorded an initial derivative liability of $9,383,380 during the year ended December 31 2009 and $3,311,820 during the year ended December 31, 2010. The fair values of these instruments are re-measured each reporting period and a gain or loss is recorded for the change in fair value. The Company measured the fair value of these instruments at March 31, 2011 and December 31, 2010 and determined the conversion feature had no value. For the three months ended March 31, 2011 and 2010, the Company recorded an unrealized loss on the change in derivative value of $0 and $9,024,975, respectively, to the statement of operations. The Company determined the fair values of these securities using a binomial valuation model that utilizes the Cox-Ross-Rubenstein method of formulating the Black-Scholes equation for determining the theoretical value of convertible notes that contain options of the underlying common stock of the Company.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

Activity for derivative instrument during the three months ended March 31, 2011 was as follows:

Balance at

January 1, 2011

Activity during

the period

Decrease in fair

value of

derivative

liability

Balance at

March 31, 2011

Derivative conversion feature

The fair value of the derivative conversion feature is estimated using the following principal assumptions for the binomial valuation model on the dates of initial valuation:

Date	Probability of issuance of instruments at a price lower than the conversion price			Probable prices at which instruments will be issued

March 2011		50	%	$	0.24 - $0.15
Thereafter		50	%	$	0.24 - $0.15

	March 31, 2011

Common stock issuable upon conversion		3,400,000
Market price of common stock on measurement date, per posted closing price	$	0.15
Conversion price	$	0.25
Conversion period in years		2
Expected volatility (1)		149.8	%
Expected dividend yield (2)		0	%
Risk free interest rate (3)		3	%

Activity for derivative instruments during the year ended December 31, 2010 was as follows:

	Balance at January 1, 2010		Activity during the period		Decrease in fair value of derivative liability			Balance at December 31, 2010

Derivative conversion feature	$	7,461,680	$	3,311,820	$	(10,773,500	)	$	-

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

The fair value of the derivative conversion feature is estimated using the following principal assumptions for the binomial valuation model on the dates of valuation:

Date	Probability of issuance of instruments at a price lower than the conversion price			Probable prices at which instruments will be issued

December 2010		50	%	$	0.24 - $0.15
Thereafter		50	%	$	0.24 - $0.15

	December 31, 2010

Common stock issuable upon conversion		8,780,000
Market price of common stock on measurement date, per posted closing price	$	0.08
Conversion price	$	0.25
Conversion period in years		2
Expected volatility (1)		149.8	%
Expected dividend yield (2)		0	%
Risk free interest rate (3)		3	%

Principal repayment provisions for all long-term debt are as follows at March 31, 2011:

2011		850,000
2012		451,400
Total	$	1,301,400

On January 3, 2011, an aggregate of 1,459,267 shares of common stock was issued to convert $108,082 of accrued interest on the convertible notes.

Between January 14, 2011 and March 25, 2011, a total of $1,295,000 in convertible notes were converted to 5,180,000 common shares at $0.25 per share plus a 20% premium in shares, or 1,036,000 common shares, per agreement with note holders. Interest expense of $111,974 was recorded for the 1,036,000 of premium shares issued to note holders to induce conversion. In addition, 120,063 shares were issued in payment of $13,321 in interest accrued from January 1, 2011 to the date of conversion. As of March 31, 2011 and December 31, 2010, the remaining outstanding balance of convertible notes from the 2009 and 2010 offerings was $850,000 and $2,145,000, respectively.

NOTE 7 – ASSET RETIREMENT OBLIGATION

Asset retirement obligation balances as March 31, 2011 and December 31, 2010 consisted of:

	March 31, 2011		December 31, 2010
Asset retirement obligations at beginning of the period	$	80,217	$	55,280
Accretion expense		1,805		24,937
Asset retirement obligations at end of the period	$	82,022	$	80,217

NOTE 8 – COMMITMENTS AND CONTINGENCIES

On June 2, 2011, the Company entered into an accounting consulting agreement with BlackBriar Advisors, LLC to provide accounting services for the Company. Services will be provided for 3 months, until September 2, 2011, at a rate of $10,000 per month; in addition, upon completion of the services on September 2, 2011, the Company will issue BlackBriar 200,000 common shares.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time that may harm the Company’s business.

Other than routine litigation arising in the ordinary course of business that the Company does not expect, individually or in the aggregate, to have a material adverse effect on the Company, there is no currently pending legal proceeding.

NOTE 9 – STOCKHOLDERS’ EQUITY

On March 3, 2006, Mesa Energy, LLC, merged with Mesa Energy, Inc., a Colorado corporation. Mesa Energy, Inc. (Colorado) (formerly known as North American Risk Corporation, Inc.) issued 17,550,486 shares in exchange for all of the assets and liabilities of Mesa Energy, LLC.

On March 13, 2006, the combined entity merged with Mesa Energy, Inc., a Nevada corporation (MEI), and MEI issued 1,735,762 shares of common stock on a 1:1 basis to Mesa Energy, Inc. (Colorado).

Neither new entity had any assets, liabilities or operations. Both of the above transactions were accounted for as recapitalizations of MEI.

During the year ended December 31, 2006, MEI issued 1,214,484 shares of common stock for cash proceeds of $265,400 in a series of transactions. MEI also issued 30,000 warrants for services with an exercise price of $0.50 and an expiration date of December 15, 2009. The options and warrants were valued at $19,075 using the Black-Scholes Option Pricing Model. Immediately prior to the closing of the Merger discussed below, shares of MEI’s common stock were issued in exchange for all outstanding warrants to purchase shares of MEI’s common stock.

During the year ended December 31, 2007, MEI issued 803,079 shares of common stock for cash proceeds of $208,200.

Effective January 1, 2008, MEI issued 2,892,937 shares of common stock to entities controlled by David L. Freeman in exchange for a 50% member interest in Poydras.

On January 17, 2008, MEI granted 199,470 warrants to the Sharon Wilensky Revocable Trust, an affiliate of Roky Operating, LLC, as additional consideration in connection with Roky’s acquisition of a 40% working interest in an oil and gas property from MEI. MEI determined the relative fair value of the warrants under the Black-Scholes valuation model to be $31,071, which was recorded as additional oil and gas properties in the Main Pass 35 Project. The parameters used in the Black-Scholes valuation model were: a risk-free interest rate of 2.46%; the current stock price on the date of issuance of $0.50 per common share; the exercise price of the warrants of $0.50 per share of common stock; an expected term of three years; volatility of 98.65% and an expected dividend yield of 0.0%. Immediately prior to the closing of the Merger discussed below, shares of MEI’s common stock were issued in exchange for all outstanding warrants to purchase shares of MEI’s common stock.

On August 1, 2008, MEI sold and issued 9,643 shares of its restricted common stock to a third-party consultant at $0.75 per share for total consideration of $3,750 for consulting services.

Reverse Merger

On August 31, 2009, Mesa Energy Holdings, Acquisition Sub and MEI, entered into an agreement and plan of merger and reorganization (the “Merger Agreement”), which closed on the same date, and pursuant to which Acquisition Sub merged (the “Merger”) with and into MEI, which became a wholly owned subsidiary of Mesa Energy Holdings.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

Pursuant to the Merger, Mesa Energy Holdings, Inc. ceased to engage in the acquisition and exploration of mining properties and acquired the business of MEI to engage in exploration and production activities in the oil and gas industry, as a publicly traded company under the name Mesa Energy Holdings, Inc.

At the closing of the Merger, each of the 12,981,115 shares (25,035,700 after adjustment for stock splits or reverse merger re-capitalization) of MEI’s common stock issued and outstanding immediately prior to the closing of the Merger, included 430,000 shares (829,309 after adjustment for stock splits or reverse merger re-capitalization) of MEI’s common stock issued in exchange for outstanding warrants to purchase 430,000 shares of MEI’s common stock, was converted into 1.9286 shares of Mesa Energy Holdings, Inc.’s common stock. As a result, an aggregate of 25,035,700 shares of Mesa Energy Holdings, Inc.’s common stock was issued to the holders of MEI’s common stock. MEI did not have any stock options or other warrants to purchase shares of its capital stock outstanding at the time of the Merger. Immediately prior to the Merger, Mesa Energy Holdings, Inc. had 14,000,000 shares of common stock outstanding.

Upon the closing of the Merger, under the terms of a Split-Off Agreement and a General Release Agreement, the Company transferred all of its pre-Merger operating assets and liabilities to its wholly owned subsidiary, Mesquite Mining Group, Inc., a Delaware corporation (“Split-Off Subsidiary”) formed on August 13, 2009. Thereafter, pursuant to the Split-Off Agreement, the Company transferred all of the outstanding shares of capital stock of Split-Off Subsidiary to Beverly Frederick, the pre-Merger majority stockholder of Mesquite Mining (the “Split-Off”), in consideration of and in exchange for (i) the surrender and cancellation of an aggregate of all 21,000,000 shares of common stock held by that stockholder and (ii) certain representations, covenants and indemnities.

Investor Relations Agreement

In the Merger Agreement, the Company agreed to enter into an agreement with an investor relations firm or firms to be identified (the “IR Consultants”) to provide investor relations services to the Company, pursuant to which the Company will agree to deliver to the IR Consultants an aggregate of 1,000,000 shares of common stock (the “IR Shares”); as of September 30, 2010, 358,900 of those shares had been issued to an IR Consultants and the remainder were issued to Gottbetter & Partners, LLP to hold as escrow agent pursuant to the IR Shares Escrow Agreement. The value of the 250,000 shares issued to IR Consultants for services for the period ended September 30, 2010 was $205,000 based on the grant date fair value. The 641,100 IR Shares remaining in escrow will be valued upon their release from escrow to IR Consultants as services are performed.

2009 Equity Incentive Plan

Before the Merger, the Board of Directors of the Company adopted, and the Company’s majority stockholders approved, the 2009 Equity Incentive Plan (the “2009 Plan”), which provides for the issuance of incentive awards of up to 5,000,000 shares of common stock to officers, key employees, consultants and directors of the Company and its subsidiaries. As of December 31, 2009, no awards had been granted under the 2009 Plan.

Immediately after giving effect to (i) the Stock Split, (ii) the initial closing of the 2009 Private Placement, (iii) the closing of the Merger and (iv) the cancellation of 21,000,000 shares in the Split-Off, there were 40,035,700 shares of common stock issued or required to be issued, as follows:

The former MEI stockholders held 25,035,700 shares of common stock;

The stockholders of Mesquite Mining prior to the Merger held 14,000,000 shares of common stock;

An IR Consultant held 150,000 shares of common stock; and

850,000 shares of common stock were required to be issued to the escrow agent pursuant to an IR Shares Escrow Agreement.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

Additionally,

The investor in the initial closing of the 2009 Private Placement held a $500,000 Convertible Note convertible into 2,000,000 shares of common stock, subject to adjustment in certain circumstances as provided therein;

MEI had an outstanding convertible promissory note (the “Old Note”), in the principal amount of $250,000, which was convertible into an aggregate of 964,300 shares of common stock, subject to adjustment in certain circumstances as provided.

the 2009 Plan authorized issuance of up to 5,000,000 shares of common stock as incentive awards to executive officers, key employees, consultants and directors of the Company and its subsidiaries; however, no awards had been granted under the 2009 Plan.

No other securities convertible into or exercisable or exchangeable for common stock (including options or warrants) were outstanding at such time.

On November 6, 2009, the $250,000 Old Note was cancelled and replaced with a $250,000 Convertible Note as part of the 2009 Private Placement. Accordingly, such Convertible Note is now convertible at $0.25 per share.

The Company conducted additional closings of the 2009 PPO (the “Additional 2009 Closings”) on October 19, 2009 for $250,000, on November 3, 2009 for $250,000, on November 11, 2009 for $100,000, on November 13, 2009 for $100,000, and on November 25, 2009 for $80,000 for an aggregate principal amount (including the initial closing, but excluding the Convertible Note issued in exchange for the Denton Note) of $1,280,000. The Company conducted further additional closings of the 2009 Private Placement (“2010 PPO”) in January 2010 for $665,000. As discussed in Note 6, these notes contained an embedded derivative. The Company measured the fair value of these instruments as of the date of issuance and recorded an initial derivative liability of $3,311,820, less the discount on the 2010 Convertible Notes of $665,000, of $2,646,820.

On January 7, 2010, a holder converted an aggregate of $50,000 principal amount of Convertible Notes, together with $2,731 of interest accrued thereon into an aggregate of 203,068 shares of common stock. On February 19, 2010, the Company issued an aggregate of 36,135 shares of common stock to convert the $32,160 of interest accrued through December 31, 2009 on the then outstanding Convertible Notes.

On March 11, 2010, we issued a total of 850,000 shares of our common stock to Gottbetter & Partners, LLP to hold as escrow agent pursuant to an IR Shares Escrow Agreement between us and them. On the same date, 8,900 of such shares, valued at $18,334, were released from the escrowed shares to an investor relations firm for services provided.

On March 17, 2010, we granted Nicholas A. Spano a total of 24,000 shares of restricted stock under the 2009 Plan in connection with his serving on our Advisory Board. The applicable Restricted Stock Agreement provides that such shares vest and be released from escrow over four vesting periods as services are provided. 6,000 of such shares, valued at $15,360, vested on the date of grant. The remaining 18,000 shares will vest, and be released from escrow, on each of the first three six-month anniversaries of the date of grant as services are provided.

We also entered into a Consultant Agreement, effective as of March 17, 2010, with Mr. Spano, pursuant to which we agreed to compensate Mr. Spano with a total of 76,000 shares for certain consulting services by issuing him 26,000 shares, valued at $66,560, immediately, and an additional 25,000 shares on each of July 31, 2010 and November 30, 2010.

On April 1, 2010, Robert C. Avaltroni, former Deputy Commissioner of the Department of Environmental Protection for New York City, joined the Advisory Board and was granted the right to receive a total of 24,000 shares of restricted stock under the 2009 Equity Incentive Plan. The applicable Restricted Stock Agreement provides that the common shares vest, and be released, from escrow over four vesting periods as services are provided. The first vesting period occurred on the date of grant and the market value of the 6,000 shares of common shares released from escrow was $16,020. After September 30, 2010, the remaining 18,000 common shares will vest, and be released from escrow, in three six-month periods from the original date of grant as services are provided.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

The Company also entered into a Consultant Agreement, effective as of April 1, 2010, with Mr. Avaltroni, pursuant to which the Company agreed to compensate Mr. Avaltroni a total of 76,000 common shares for certain consulting services, by issuing him 26,000 common shares immediately, and an additional 25,000 common shares on July 31, 2010 and November 30, 2010. The market value of the 26,000 common shares issued to Mr. Avaltroni pursuant to the Consulting Agreement on April 1, 2010 was $69,420.

On May 10, 2010, the Company entered into a six-month Consulting Agreement with an IR Consultant, pursuant to which the Company instructed the escrow agent to release 200,000 common shares, valued at $189,000, of the IR Shares to such IR Consultant as compensation.

On June 30, 2010, the Company issued an aggregate of 234,218 shares of common stock to convert $103,499 of accrued interest through June 30, 2010 on the outstanding Convertible Notes.

On July 31, 2010, the Company issued 25,000 shares of common stock, valued at $8,000, to Mr. Avaltroni as the second payment under Mr. Avaltroni’s consulting agreement with the Company. On that date, the Company also issued 25,000 shares of common stock, valued at $8,000, to Nicholas A Spano, another member of our Advisory Board, as the second payment under a similar consulting agreement.

On November 30, 2010, the Company issued 25,000 shares of common stock, valued at $2,500 to Robert C. Avaltroni as the third and final payment under Mr. Avaltroni’s consulting agreement with the Company. On that date, the Company also issued 25,000 shares of common stock, valued at $2,500, to Nicholas A Spano, another member of our Advisory Board, as the third and final payment under a similar consulting agreement.

On January 3, 2011, an aggregate of 1,459,267 shares of common stock was issued to convert $108,082 of accrued interest on the convertible notes for the period July 1, 2010 to December 31, 2010.

On March 1, 2011, we issued Robert C. Avaltroni a total of 6,000 shares of restricted stock, with a fair market value of $1,140, under his Advisory Board agreement entered into on April 1, 2010 above. The remaining 12,000 shares will vest, and be released from escrow, on Apri 1, 2011 and September 18, 2011.

On March 18, 2011, we issued Nicholas A. Spano a total of 12,000 shares of restricted stock, with a fair market value of $2,280, under his Advisory Board agreement entered into on March 17, 2010 above. The remaining 6,000 shares will vest, and be released from escrow, on September 18, 2011.

NOTE 10 – STOCK OPTIONS

The Board of Directors of the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”), which provides for the issuance of incentive awards of up to 5,000,000 shares of common stock to officers, key employees, consultants and directors of the Company and its subsidiaries. As of September 30, 2010, options to purchase 1,048,000 shares of our common stock at an exercise price of $0.25 per share, and awards of 48,000 shares of restricted stock had been granted under the 2009 Plan.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

A summary of the changes in options outstanding during the three months ended March 31, 2010, is as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2010		1,048,000	$	0.25
Issued		-		-
Exercised		-		-
Cancelled/Expired		-		-
Outstanding at March 31, 2011		1,048,000	$	0.25
Exercisable at March 31, 2011		848,500	$	0.25

Options outstanding and their relative exercise price at March 31, 2011 are as follows:

Exercise price	Number of options		Remaining life	Aggregate Intrinsic Value (In-the- money) Options
$0.25		298,000	1.76 years	$	-
$0.25		500,000	3.77 years		-
$0.25		250,000	3.83 years		-

For the three months ended March 31, 2011, compensation expense related to outstanding options of $36,395 was recognized and $74,103 of compensation expense remained to be amortized.. As of March 31, 2011, the outstanding options had no intrinsic value and a weighted average remaining contractual term of 3.22 years.

NOTE 11 – SUBSEQUENT EVENTS

One April 1, 2011, the Company issued 6,000 shares of common stock, with a fair market value of $840, to Mr. Avaltroni as the third payment under Mr. Avaltroni’s advisory board agreement with the Company.

On June 1, 2011, we entered into an agreement wherein we will issue 20,000,000 common shares to acquire a 100% membership interest in Tchefuncte Natural Resources, L.L.C., a Louisiana company that owns and operates the Lake Hermitage Field in Plaquemines Parish, LA and has properties in four other fields under a Purchase and Sale Agreement. Financing is in place for this transaction and we expect it to close on or before July 31, 2011.

On June 13, 2011, we sold 320,000 shares of MSEH restricted common stock to two of our Directors, Jim Cerna and Ray Unruh, for a total of $40,000 in cash.

On June 14, 2011, the Company executed an agreement with Cherokee Financial Corp. (owned by Ray L. Unruh) wherein Cherokee agreed to accept payment in restricted common stock for the outstanding balance of principal and accrued interest on its long term note receivable from the Company. A total of 2,249,722 shares, with a fair market value of $314,961, were issued in full payment of outstanding principal of $213,400 and accrued interest of $67,815. Also on June 14, 2011, the Company executed an agreement with Sycamore Resources, Inc. (owned by Randy M. Griffin, our CEO) to convert the note payable owed to Sycamore to common stock. A total of 1,904,000 shares, with a fair market value of $266,560, were issued in full payment of the outstanding principal of $238,000.

On June 16, 2011, the Company entered into a settlement agreement with Gottbetter & Partners, LLP (“GP”) wherein GP agreed to accept 1,200,000 shares of restricted common stock, with a fair market value of $171,000, as payment in full of the outstanding balance of $455,861 in accrued legal fees owed to GP for legal work performed in 2010 and 2011. The shares were issued on June 17, 2011.

MESA ENERGY HOLDINGS, INC.

(An Exploration Stage Company)

Notes to Consolidated Financial Statements

(Unaudited)

On June 16, 2011, the Company entered into an Exchange Agreement wherein Whalehaven Capital Fund, Ltd. agreed to exchange its promissory note with a principal balance of $40,000 plus $1,019 in accrued interest for two convertible debentures totaling $41,019. These convertible debentures have a maturity date of July 31, 2013 and are convertible at any time at a conversion price of $0.125. The note will bear interest at 6% per annum payable in cash or shares at maturity.

On June 30, 2011, the Company granted Randy M. Griffin, its Chief Executive Officer, options to purchase 1,000,000 shares of common stock out of the Employee Stock Option Plan at an exercise price of $0.15 with an expiration date of June 30, 2016, said options being exercisable at any time after June 30, 2012. The options were valued at $137,878 using the Black-Scholes Model and were granted to Mr. Griffin as a bonus for the provision of his personal private risk capital and his efforts in support of the pending acquisition of Tchefuncte Natural Resources, L.L.C.

On June 30, 2011, the Company issued an aggregate of 333,576 shares of common stock to convert $42,151 of accrued interest through June 30, 2011 on the outstanding Convertible Notes.

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

This report contains forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, our inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, our inability to expand our business, government regulations, lack of diversification, volatility in the price of oil and/or natural gas, increased competition, results of arbitration and litigation, stock volatility and illiquidity, and our failure to implement our business plans or strategies. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appears in the section captioned “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on June 3, 2011.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview and Going Concern

North American Risk Management Incorporated was incorporated on January 24, 2001 in the State of Colorado to engage in the business of providing insurance to independent and fleet truck operators. However, it had no significant operations, and because its business operations did not commence in a timely manner, operations ceased after approximately six months. On February 13, 2006, North American Risk Management Incorporated changed its name to “Mesa Energy, Inc.” Then, on March 3, 2006, Mesa Energy, Inc. was the surviving entity in a merger with Mesa Energy, LLC, a Texas limited liability company, whose activities between April 2003 and March 2006 included participation in various drilling projects, both as operator and as a non-operator, as well as the acquisition of certain mineral rights. On March 13, 2006, Mesa Energy, Inc. formed a wholly owned subsidiary in the state of Nevada, also named “Mesa Energy, Inc.,” and merged with and into it in order to change its domicile to Nevada.

Mesquite Mining, Inc. was incorporated in the State of Delaware on October 23, 2007 to engage in the acquisition and exploration of mining properties. On June 19, 2009, Mesquite Mining, Inc. amended its Certificate of Incorporation (i) to change its name from Mesquite Mining, Inc. to Mesa Energy Holdings, Inc. and (ii) to increase its authorized common stock to 300,000,000 shares, and its preferred stock to 10,000,000 shares.

On August 31, 2009, we closed a reverse merger transaction pursuant to which a wholly owned subsidiary of Mesa Energy Holdings, Inc. merged with and into Mesa Energy, Inc., and Mesa Energy, Inc., as the surviving corporation, became a wholly owned subsidiary of Mesa Energy Holdings, Inc. (the “reverse merger”).

Immediately following the closing of the reverse merger, under the terms of a Split-Off Agreement and a General Release Agreement, we transferred all of our pre-merger operating assets and liabilities to our wholly owned subsidiary, Mesquite Mining Group, Inc. (“Split-Off Subsidiary”), a Delaware corporation formed on August 13, 2009. Thereafter, pursuant to the Split-Off Agreement, we transferred all of the outstanding shares of capital stock of Split-Off Subsidiary to Beverly Frederick, our pre-reverse merger majority stockholder, in exchange for (i) the surrender and cancellation of all 21,000,000 shares of our common stock held by that stockholder and (ii) certain representations, covenants and indemnities.

After the reverse merger and the split-off, Mesa Energy Holdings, Inc. succeeded to the business of Mesa Energy, Inc. as its sole line of business, and all of Mesa Energy Holdings, Inc.’s then-current officers and directors resigned and were replaced by Mesa Energy, Inc.’s officers and directors.

The reverse merger was accounted for as a reverse acquisition and recapitalization of Mesa Energy, Inc. for financial accounting purposes. Consequently, the assets and liabilities and the historical operations that are reflected in our financial statements for periods prior to the reverse merger are those of Mesa Energy, Inc. and have been recorded at the historical cost basis of Mesa Energy, Inc., and our consolidated financial statements for periods after completion of the reverse merger include both Mesa Energy Holdings, Inc.’s and Mesa Energy, Inc.’s assets and liabilities, the historical operations of Mesa Energy, Inc. prior to the reverse merger and Mesa Energy Holdings, Inc.’s operations from the closing date of the reverse merger.

The following discussion highlights the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information which management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The discussion should be read in conjunction with our unaudited financial statements and related notes and the other financial information included elsewhere in this report.

Java Field Natural Gas Development Project – Wyoming County, New York

On August 31, 2009, we acquired the Java Field, a natural gas development project targeting the Marcellus Shale present in the Appalachian basin in Wyoming County in western New York for $440,000. The acquisition included a 100% working interest in 19 leases held by production covering approximately 3,235 mineral acres, 19 existing natural gas wells, two tracts of land totaling approximately 36 acres and two pipeline systems, including a 12.4 mile pipeline and gathering system that serves the existing field as well as a separate 2.5 mile system located northeast of the field. Our average net revenue interest (NRI) in the leases is approximately 78%. We began receiving revenues for the field on October 20, 2009 for the September 2009 production month.

In late 2009, we evaluated a number of the existing wells in order to determine the viability of the re-entry of existing wellbores for plug-back and re-completion of the wells in the Marcellus Shale. As a result of this evaluation, we selected the Reisdorf Unit #1 and the Ludwig #1 as our initial targets and these two wells were re-completed in the Marcellus Shale and fracked in May and June of 2010. The initial round of testing and analysis provided a solid foundation of data that strongly supports further development of the Marcellus in western New York. Formation pressures and flow-back rates were much higher than expected providing a clear indication of the potential of the resource. We now believe that shallow horizontal drilling, as is currently being done successfully at this depth in the Fayetteville Shale in northern Arkansas, is ultimately what is needed to maximize the resource.

The State of New York has placed a moratorium on high volume frac stimulation in order to develop new permitting rules. The new permitting rules have not been completed and there can be no assurance when such permitting rules will be issued or what restrictions such permits might impose on producers. Accordingly, we are unable to continue with our development plans in New York at this time. Unless the moratorium is removed and new permitting rules provide for the economic development of these properties, production on these properties will remain marginally economic. Accordingly, management made a determination to fully impair the properties as of December 31, 2010.

A recent report released by the New York Department of Environmental Conservation proposes to remove the moratorium in all areas of the state other than in the New York City and Syracuse watersheds and to implement new permitting rules for drilling and fracking horizontal wells. Although these measures have yet to be formally adopted, we believe that this report constitutes significant progress and that its final adoption could ultimately allow us to proceed with the next phase of development of the property and the expansion of our acreage position in western New York.

Coal Creek Prospect, Sequoyah Co., Oklahoma

In December 2007, we completed a “farm-out” transaction with Wentworth Operating Company of Edmond, OK (“Wentworth”), wherein Wentworth acquired our pipeline right-of-way and planned to construct a natural gas gathering system and approximately three miles of pipeline to connect the Cook #1 and future wells to an Arkansas Oklahoma Gas Company (AOG) pipeline. In addition, Wentworth agreed to fund, drill and complete the Gipson #1, a direct offset to the Cook #1.

In December 2008, a decision was made for the Gipson #1 well to be drilled to a depth to test the Hunton zone, and, accordingly, the agreement with Wentworth was amended and Wentworth would fund 100% of the drilling costs to the casing point on the Gipson #1 well. As a result of amendments to the farm-out agreement with Wentworth, we now own 35% of the working interest in the Cook #1 and 25% of the working interest in the Gipson #1, with Wentworth and other industry partners owning the balance. The costs are now being borne by the parties per their respective working interests. Additional drilling opportunities are being evaluated by the operator and we expect a proposal for a second exploratory well in the Hunton to be forthcoming in the third quarter of 2011.

At year end, management assessed the value of this property in relation to our business plan. Even though we believe there is good potential for successful wells in the Hunton, the property no longer fits our strategic direction and management is presently making a determination whether we will sell our interest in the property. We currently have no plans to commit additional resources to develop this unproved property and, accordingly, management made a determination to fully impair the property as of December 31, 2010.

Pending Acquisition of Tchefuncte Natural Resources, LLC

Going Concern

We have incurred recurring losses from operations and an accumulated deficit during the exploration stage and have a working capital deficit at March 31, 2011 of $1,836,301 and currently have limited sources of recurring revenue. These conditions raise substantial doubt as to our ability to continue as a going concern. To finance our net losses and to execute our business plan, we sold stock and our officers and directors funded us through notes payable (see Note 4). There can be no assurance that we can sell stock or debt or that our officers and directors will continue or have the ability to continue to make financing available to us in the future. Our officers and directors are under no legal obligation to provide additional loans to us. In the event that our officers cannot make such loans, we cannot create a source of recurring revenues or that we do not receive funds from other sources, we may be unable to continue to operate as a going concern. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Adjusted EBITDA as a Non-GAAP Performance Measure

In evaluating our business, management believes earnings before interest, amortization of financing costs, taxes, depreciation, depletion, amortization and accretion of abandonment liabilities, unrealized gains and losses on financial instruments, gains and losses on sales of assets and stock-based compensation expense ("Adjusted EBITDA") is a key indicator of financial operating performance and is a measure of our ability to generate cash for operational activities and future capital expenditures. Adjusted EBITDA is not a GAAP measure of performance. We use this non-GAAP measure primarily to compare our performance with other companies in our industry and as a measure of our current liquidity. We believe that this measure may also be useful to investors for the same purposes and as an indication of our ability to generate cash flow at a level that can sustain or support our operations and capital investment program. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under GAAP, or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly titled measures that may be disclosed by other companies.

The following is a reconciliation of our net loss in accordance with GAAP to our Adjusted EBITDA for the three-month periods ending March 31, 2011 and 2010:

	For the Three Months Ended
	March 31,
	2011			2010

Net loss	$	(396,563	)	$	(10,369,087	)

Add Back:

Interest expense		148,698			723,925
Amortization of deferred financing costs		100,310			35,369
Depreciation, depletion, accretion and impairment		1,805			7,178
Gain on change in derivative value		-			9,024,975
Stock based compensation		39,815			309,280

Adjusted EBITDA	$	(105,935	)	$	(268,360	)

Results of Operations

We are an exploration stage company and have generated minimal revenues from operations to date.

Comparison of Three Months Ended March 31, 2011 and 2010

Revenues

We generated revenues of $18,409 for the three months ended March 31, 2011 while we generated revenues of $9,817 for the three months ended March 31, 2010. This revenue results from the existing producing wells in the Java Field in Wyoming County, New York and the Coal Creek Field in Sequoyah County, Oklahoma.

Operating Expenses

We incurred operating expenses of $169,964 for the three months ended March 31, 2011, as compared to $596,935 for the three months ended March 31, 2010. These expenses consisted of rent, exploration costs, legal and professional fees, depreciation and related expenses and administrative fees incurred in connection with the day to day operation of our business. The reduction in the first quarter of 2011 compared with 2010 is primarily due to non-cash compensation booked in the first quarter of 2010 related to the addition of board and advisory board members.

Interest Expense

Interest expense was $249,008 for the three months ended March 31, 2011, as compared to interest expense of $759,294 for the three months ended March 31, 2010, a decrease of $510,286. This decrease was primarily due to the conversion of $1,295,000 of convertible notes into restricted common stock during the three months ended March 31, 2011, thereby reducing the interest expense.

Gain on Change in Derivative Value

The noncash gain on change in derivative value was zero for the three months ended March 31, 2011 compared with $9,024,975 for the comparable period of 2010. The change in derivative value represents the change in potential liability for issuing shares with a higher value than the conversion price upon conversion of convertible debt into common stock. The gain on derivative value was driven primarily by the decrease in the trading price of our common stock during the three months ended March 31, 2010.

Net Loss

Our net loss for the three months ended March 31, 2011 was $396,563, $39,815 of which was non-cash compensation related to employee stock options and share issuances for services. Our net loss for the three months ended March 31, 2010 was $10,369,087, which was comprised primarily of the noncash loss on change in derivative liability of $9,024,975 as well as significant legal and other professional fee expense related to the finalization of the PPO.

Liquidity and Capital Resources

Overview

Due to our brief history and historical operating losses, our operations have not been a source of liquidity, and our sources of liquidity primarily have been debt and proceeds of the sale of common stock and working interests in oil and gas properties. Although we have begun to generate minimal revenues from the sale of natural gas from our wells in the Java Field and the Coal Creek Prospect, there can be no assurances that we will be able to increase or maintain production or that we will be able to generate sufficient liquidity from the sale of our natural gas to fund our operations. If we cannot generate revenues from the sale of our natural gas, our business, results of operations, liquidity and financial condition may suffer materially.

Various factors outside of our control, including the price of oil and natural gas, overall market and economic conditions, the downturn and volatility in the US equity markets and the trading price of our common stock may limit our ability to raise the capital needed to execute our plan of operations. We recognize that the US economy is currently experiencing a period of uncertainty. We also recognize that the price of natural gas has remained relatively flat during the last 24 months and has yet to fully recover to previous levels. If the price of natural gas remains depressed and the markets remain volatile, we expect that these or other factors could adversely affect our ability to raise additional capital. If we are unable to raise sufficient additional capital, our short-term or long-term liquidity and our ability to execute our plan of operations will be materially impaired.

On August 31, 2009, we conducted an initial closing (the “Initial Closing”) of a private placement (the “2009 Private Placement”) selling $500,000 principal amount of 10% Secured Convertible Promissory Notes, at a purchase price equal to the principal amount thereof. We conducted additional closings (the “Additional 2009 Closings”) of the 2009 Private Placement on October 19, 2009, for $250,000, on November 4, 2009, for $250,000, on November 12, 2009, for $100,000, on November 13, 2009, for $100,000, on November 25, 2009, for $80,000, for an aggregate gross amount (including the Initial Closing, but excluding the Convertible Note issued in exchange for the Denton Note (as defined below)) of $1,280,000 raised during fiscal 2009. The convertible promissory notes are, at the option of the holder, convertible into shares of our common stock at a conversion price of $0.25 per share, subject to adjustment in certain circumstances as provided in the convertible promissory notes. We paid an aggregate of $22,800 cash placement agent fees in connection with the Additional 2009 Closings. After deducting such fees and our other expenses of the offering, our net proceeds received during fiscal 2009 from the 2009 Private Placement were approximately $1,050,818.

Subsequent to December 31, 2009, we conducted further closings (the “Additional 2010 Closings”) of the 2009 Private Placement on January 15, 2010, for $615,000, and on January 25, 2010, for $50,000. We incurred an aggregate of $91,638 in placement fees in connection with the Additional 2010 Closings.

In addition, on November 6, 2009, the holder of an outstanding 12% convertible note in the principal amount of $250,000 exchanged such note for $250,000 principal amount of the convertible promissory notes under the terms of our 2009 Private Placement. No placement agent fees were paid in connection with this exchange.

As of March 31, 2011, we had a working capital deficit of $1,836,301 as compared to a working capital deficit of $2,344,735 as of December 31, 2010. The decrease in the working capital deficit was primarily attributable to the conversion of $630,000 of short-term convertible debt to common stock. Our current assets decreased by $92,146 for the period ended March 31, 2011, as compared to the period ended December 31, 2010. This decrease in current assets was due to the amortization of current portion of deferred financing costs.

We believe the following events, which have occurred subsequent to March 31, 2011, have improved our liquidity and capital resources:

On June 13, 2011, we sold 320,000 shares of restricted common stock to two of our Directors, Jim Cerna and Ray Unruh, for a total of $40,000 in cash;

On June 14, 2011, we executed an agreement with Cherokee Financial Corp. (owned by Ray L. Unruh, our CFO) wherein Cherokee agreed to accept payment in restricted common stock for the outstanding balance of principal and accrued interest on its long term note receivable. A total of 2,249,722 shares, with a fair market value of $314,961, were issued in full payment of outstanding principal of $213,400 and accrued interest of $67,815. Also on June 14, 2011, we executed an agreement with Sycamore Resources, Inc. (owned by Randy M. Griffin, our CEO) to convert the note payable owed to Sycamore to common stock. A total of 1,904,000 shares, with a fair market value of $266,560, were issued in full payment of the outstanding principal of $238,000;

On June 16, 2011, we entered into a settlement agreement with Gottbetter & Partners, LLP (“GP”) wherein GP agreed to accept 1,200,000 shares of restricted common stock, with a fair market value of $171,000, as payment in full of the outstanding balance of $455,861 in accrued legal fees owed to GP for legal work performed in 2010 and 2011; and

On June 16, 2011, we entered into an Exchange Agreement wherein Whalehaven Capital Fund, Ltd. agreed to exchange its promissory note with a principal balance of $40,000 plus $1,019 in accrued interest for two convertible debentures totaling $41,019. These convertible debentures have a maturity date of July 31, 2013 and are convertible at any time at a conversion price of $0.125. The note will bear interest at 6% per annum payable in cash or shares at maturity.

Cash and Accounts Receivable

At March 31, 2011, we had cash and cash equivalents of $12,558, compared to $6,096 at December 31, 2010. Cash increased by $6,462 primarily from operations in the first three months of 2011.

Liabilities

Accounts payable and accrued expenses increased by $4,420 to $981,901 at March 31, 2011, from $977,481 at December 31, 2010.

As of March 31, 2011, the outstanding balance of principal on debt was $1,341,400, a net decrease of $1,275,000 from the outstanding balance of $2,616,400 as of December 31, 20100. This net decrease was primarily due to the $1,295,000 conversion of debt to common stock.

Notes payable to related parties increased $5,000 from $21,000 on December 31, 2010 to $26,000 on March 31, 2011.

Cash Flows

For the three months ended March 31, 2011, the net cash used in operating activities of $18,538 reflected working capital requirements to fund operating, general and administrative activities.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not required under Regulation S-K for “smaller reporting companies.”

Item 4. Controls and Procedures

a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of March 31, 2011. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of March 31, 2011, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

As of March 31, 2011, we did not maintain effective controls over financial statement disclosure and the recording of equity and debt transactions. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management concluded that this control deficiency constituted a material weakness; and

As of March 31, 2011, we did not adequately segregate, or mitigate the risks associated with, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected. Accordingly, management concluded that this control deficiency constituted a material weakness.

We are committed to improving our accounting and financial reporting functions. As part of this commitment, we are considering the engagement of additional consultants to assist in ensuring that accounting policies and procedures are consistent across the organization and that we have adequate control over financial statement disclosures and increasing our workforce in preparation for exiting the exploration stage and beginning operations.

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: (A) insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complexity and our financial accounting and reporting requirements to ensure that recording of transactions is properly reported; and (B) lack of sufficient personnel in our accounting and financial reporting functions to achieve adequate segregation of duties.

Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our accounting staff consists of a Chief Financial Officer and an accounting clerk, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

Effective June 2, 2011, we entered into a three month consulting agreement with BlackBriar Advisors, LLC to provide additional accounting services. We believe BlackBriar has an extensive knowledge and experience with U.S. GAAP financial accounting required for a publicly traded company and also provides an independent level of review and check on the current accounting personnel. Other than the engagement of BlackBriar, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are currently not a party to any material legal proceedings or claims.

Item 1A. Risk Factors

Not required under Regulation S-K for “smaller reporting companies.”

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

On January 3, 2011, an aggregate of 1,459,267 shares of common stock was issued to convert $108,082 of accrued interest on the convertible notes for the period July 1, 2010 to December 31, 2010.

On March 23, 2011, a total of 50,000 shares were issued to Nicholas Spano and Robert Avaltroni in payment of the final installment due under Consulting Agreements.

* All of the above offerings and sales were deemed to be exempt under either rule 506 of Regulation D and Section 4(2) or Rule 902 of Regulation S of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Mesa Energy Holdings or executive officers of Mesa Energy Holdings, and transfer was restricted by Mesa Energy Holdings in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section are unaffiliated with us.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Reserved

Item 5. Other Information.

(a) Form 8-K Information

None.

(b) Director Nomination Procedures

We do not have a standing nominating committee nor are we required to have one. We do not have any established procedures by which security holders may recommend nominees to our Board of Directors, however, any suggestions on directors, and discussions of board nominees in general, is handled by the entire Board of Directors.

Item 6. Exhibits

31.01	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MESA ENERGY HOLDINGS, INC.

Date: July 15, 2011	By:	/s/ RANDY M. GRIFFIN
		Randy M. Griffin
		Chief Executive Officer (Principal Executive Officer)

Date: July 15, 2011	By:	/s/ RAY L. UNRUH
		Ray L. Unruh
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Mesa Energy Holdings, Inc. - FORM 10-Q - July 15, 2011

Attached files

Mesa Energy Holdings, Inc. Reports