Mesa Energy Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.01 - EXHIBIT 32.01 - Mesa Energy Holdings, Inc.	v327744_ex32-01.htm
EX-31.01 - EXHIBIT 31.01 - Mesa Energy Holdings, Inc.	v327744_ex31-01.htm
EX-32.02 - EXHIBIT 32.02 - Mesa Energy Holdings, Inc.	v327744_ex32-02.htm
EX-31.02 - EXHIBIT 31.02 - Mesa Energy Holdings, Inc.	v327744_ex31-02.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 September 30, 2012

¨ 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

26-1324237

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

5220 Spring Valley Road, Suite 615

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 x 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

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 November 13, 2012, there were 84,330,769 shares of the registrant’s common stock outstanding.

INDEX TO FINANCIAL STATEMENTS

	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as of September 30, 2012 and December 31, 2011	1

Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	3

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2012 and 2011	4

Notes to Consolidated Financial Statements (Unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3. Quantitative and Qualitative Disclosures About Market Risk	21

Item 4. Controls and Procedures	21

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	22

Item 1A. Risk Factors	22

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 3. Defaults Upon Senior Securities	22

Item 4. Mine Safety Disclosures	22

Item 5. Other Information	22

Item 6. Exhibits	23

Signatures	24

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Interim Financial Statements

MESA ENERGY HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2012		December 31, 2011

ASSETS
Current assets:
Cash and cash equivalents	$	2,857,685	$	3,182,392
Accounts receivable – oil and gas		1,832,355		2,460,260
Accounts receivable – other		157,819		58,818
Derivative assets, commodity contracts		111,300		656,413
Deferred financing costs – current net of accumulated amortization of $10,142 and $0, respectively		41,365		51,507
Deferred tax asset		6,643		—
Prepaid advances for oil and gas development		281,061		—
Prepaid expenses		76,820		3,971
TOTAL CURRENT ASSETS		5,365,048		6,413,361

Oil and gas properties, successful efforts accounting:
Proved properties subject to amortization – net		7,146,351		6,742,027
Unproved properties not subject to amortization		766,513		—
Support facilities and equipment – net		2,105,480		2,061,777
Land		48,345		48,345
Oil and gas properties – net		10,066,689		8,852,149

Property and equipment – net		227,685		31,834
Deferred tax asset – noncurrent		2,825,689		3,088,740
Deferred financing cost – noncurrent, net of accumulated amortization of $316,374 and $287,943, respectively		—		28,431
Derivative assets, commodity contracts – noncurrent		—		282,537
Deposit on asset retirement obligations		640,000		640,000
Other assets		4,013		5,000

TOTAL ASSETS	$	19,129,124	$	19,342,052

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Continued)

	September 30, 2012		December 31, 2011

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable – trade	$	898,548	$	1,518,603
Revenue payable		560,930		796,221
Accrued expenses		306,375		259,808
Accrued expenses – related parties		54,840		54,840
Deferred tax liability		23,431		212,781
Notes payable – current		71,834		466,655
TOTAL CURRENT LIABILITIES		1,915,958		3,308,908

Note payable – noncurrent		5,195,963		5,162,018
Convertible notes payable, net of discount		—		461,740
Derivative liability – noncurrent		112,164		113,083
Deferred tax liability - noncurrent		47,790		—
Asset retirement obligations		3,458,506		3,450,252
TOTAL LIABILITIES		10,730,381		12,496,001

Commitments and contingencies

Stockholders’ equity:
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, 83,930,769 and 79,531,616 shares issued and outstanding, respectively		8,393		7,953
Additional paid-in capital (deficiency)		753,820		(633,745	)
Retained earnings		7,636,530		7,471,843
TOTAL STOCKHOLDERS’ EQUITY		8,398,743		6,846,051

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	19,129,124	$	19,342,052

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
				(Restated)						(Restated)

Revenue	$	3,235,366		$	2,569,464		$	11,477,268		$	2,606,517

Operating expenses:
Lease operating expenses		1,548,851			991,833			5,171,819			1,005,094
Environmental remediation expenses		—			—			244,237			—
Exploration costs		137,090			27,500			233,089			40,303
Depletion, depreciation, accretion and impairment expenses		361,484			588,709			1,215,448			592,293
Gain on sale of oil and gas properties		—			(17,960	)		—			(17,960	)
Loss on settlement of asset retirement obligations		—			—			116,394			—
General and administrative expenses		834,953			692,656			2,542,226			1,042,364
Total operating expense		2,882,378			2,282,738			9,523,213			2,662,094

Income (loss) from operations		352,988			286,726			1,954,055			(55,577	)

Other income (expense):
Interest income		1,991			376			7,789			376
Interest expense		(143,940	)		(169,422	)		(418,078	)		(466,458	)
Realized gain on commodity contracts		117,741			53,092			363,733			53,092
Unrealized gain (loss) on change in fair value of derivatives – commodity contracts		(862,306	)		1,380,200			(938,606	)		1,380,200
Loss on change in fair value of derivatives – convertible debt		(17,714	)		(78,139	)		(536,422	)		(214,543	)
Gain on settlement of debt		—			—			—			223,736
Loss on extinguishment of debt		—			—			—			(17,620	)
Other income (expense)		(1,485	)		1,009			4,380			1,044

Total other income (expense)		(905,713	)		1,187,116			(1,517,204	)		959,827

Net income (loss) before income taxes		(552,725	)		1,473,842			436,851			904,250
Income tax benefit (expense)		195,850			—			(272,164	)		—
Net income (loss)	$	(356,875	)	$	1,473,842		$	164,687		$	904,250

Net income (loss) per common share:
Basic	$	(0.00	)	$	0.02		$	0.00		$	0.02
Diluted	$	(0.00	)	$	0.02		$	0.00		$	0.01

Weighted average number of common shares outstanding:
Basic		84,842,165			72,479,866			83,712,000			55,152,473
Diluted		84,842,165			81,311,627			85,485,306			60,689,074

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended September 30,
	2012			2011
				(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	164,687		$	904,250
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation, accretion and impairment expense		1,215,448			592,293
Deferred income taxes		272,164			—
Share-based compensation		273,478			183,535
Gain on sale of oil and gas properties		—			(17,960	)
Realized loss on settlement of asset retirement obligations		116,394			—
Amortization of debt discount charged to interest expense		4,279			788
Amortization of deferred financing costs		38,573			145,557
Induced debt conversion expense charged to interest expense		—			111,974
Shares issued for continuation of loan guarantees charged to interest expense		—			4,650
Gain on conversion of accounts payable to common stock		—			(223,736	)
Unrealized gain (loss) on change in fair value of derivatives – commodity contract		938,606			(1,380,200	)
Loss on change in fair value of derivatives – convertible debt		536,422			214,543
Changes in operating assets and liabilities:
Accounts receivable – oil and gas		627,905			—
Accounts receivable – other		(99,001	)		(1,114,969	)
Prepaid expenses and other assets		(263,294	)		(17,243	)
Accounts payable and accrued expenses		(855,717	)		598,375
Revenue payable		(235,291	)		212,023
Accrued expenses – related parties		—			13,978
CASH PROVIDED BY OPERATING ACTIVITIES		2,734,653			227,858

CASH FLOWS FROM INVESTING ACTIVITIES
Cash received for sale of oil and gas properties		—			17,960
Cash paid for acquisition and development of oil and gas properties		(2,024,024	)		(5,007,573	)
Cash paid to settle asset retirement obligation for oil and gas properties		(255,751	)		—
Cash paid for purchase of support facilities and equipment		(249,993	)		—
Cash paid for purchase of furniture, fixtures, and equipment		(67,710	)		(3,771	)
CASH USED IN INVESTING ACTIVITIES		(2,597,478	)		(4,993,384	)

CASH FLOWS FROM FINANCING ACTIVITIES
Installment payment on purchase of software		(11,375	)		—
Proceeds from sale of stock		—			40,000
Proceeds from borrowings on debt		11,224			5,713,086
Principal payments on notes payable		(461,731	)		(2,604	)
Principal payments on debt – related party		—			(21,000	)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(461,882	)		5,729,482

NET CHANGE IN CASH		(324,707	)		963,956
CASH AT BEGINNING OF PERIOD		3,182,392			6,096
CASH AT END OF PERIOD	$	2,857,685		$	970,052

See accompanying notes to unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

	For the Nine Months Ended September 30,
	2012		2011
			(Restated)
SUPPLEMENTAL DISCLOSURES
Cash paid for interest	$	346,345	$	54,558
Cash paid for income taxes	$	37,000	$	—

NON-CASH INVESTING AND FINANCING TRANSACTIONS
Prepaid insurance financed with a note payable	$	89,631	$	—
Software purchased with installment payments	$	136,500	$	—
Additional paid-in-capital realized as the result of settlement of derivative liability from conversion of debt	$	649,505	$	—
Common stock issued for the purchase of Tchefuncte Natural Resources, LLC	$	—	$	2,968,000
Common stock issued to settle debt	$	—	$	234,450
Debt discount	$	—	$	5,743
Common stock issued for the conversion of notes payable and accrued interest	$	466,019	$	2,040,282
Promissory note exchanged for convertible debt, net of discount	$	—	$	41,019

See accompanying notes to these unaudited consolidated financial statements.

MESA ENERGY HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Mesa Energy, Inc. (“MEI”) is a wholly owned subsidiary of Mesa Energy Holdings, Inc. (referred to individually or in conjunction with one or more of its subsidiaries as the “Company”). MEI’s predecessor entity, Mesa Energy, LLC, was formed in April 2003 as an exploration and production company in the oil and gas industry. MEI’s oil and gas operations are conducted through itself and its wholly owned subsidiaries. MEI acquired Tchefuncte Natural Resources, LLC (“TNR”) in July 2011. TNR owns interests in 80 wells and related surface production equipment in five fields located in Plaquemines and Lafourche Parishes in Louisiana. Mesa Gulf Cost Operating, LLC became the operator of all operated properties in Louisiana in October 2011. Mesa Midcontinent, LLC is a qualified operator in the state of Oklahoma and operates our properties in Garfield and Major Counties, Oklahoma. MEI is a qualified operator in the State of New York and operates the Java Field. Our operating entities have historically employed, and will continue in the future to employ, on an as-needed basis, the services of drilling contractors, other drilling related vendors, field service companies and professional petroleum engineers, geologists and land men as required in connection with future drilling and production operations. See Note 2 for more information on the acquisition of TNR.

Mesa Midcontinent, LLC, (“MMC”) is a wholly owned subsidiary of MEI. MMC owns unproved leasehold acreage in Garfield and Major Counties, Oklahoma. See Note 5 for more information on the acquisition of unproved leasehold acreage.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s latest annual report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements for fiscal year 2011, as reported in the Form 10-K, have been omitted.

Principles of Consolidation

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

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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during each reporting period. Management believes these estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from management’s estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk include cash and cash equivalents. The Company had cash deposits of $634,308 in excess of the FDIC’s current insured limit on interest bearing accounts of $250,000 as of September 30, 2012. The Company has not experienced any losses on its deposits of cash and cash equivalents.

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.

Earnings (Loss) Per Share

The Company’s earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution of securities, if any, that could share in the earnings of the Company and are 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, unvested restricted stock grants, warrants, and convertible debt. The following is a reconciliation of the numerator and denominator used for the computation of basic and diluted net income per common share:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012			2011		2012			2011
Numerator:
Net income (loss) available to stockholders	$	(356,875	)	$	1,473,842	$	164,687		$	904,250
Basic net income allocable to participating securities ⁽¹⁾		6,282			—		(3,230	)		—
Basic net income (loss) available to stockholders		(350,593	)		1,473,842		161,457			904,250
Impact of assumed conversions-interest expense, net of income taxes		—			4,093		11,359			45,105
Income (loss) available to stockholders assuming conversion of convertible debentures	$	(356,875	)	$	1,477,935	$	172,816		$	949,355

Denominator:
Weighted average number of common shares – Basic		84,842,165			72,479,866		83,712,000			55,152,473
Effect of dilutive securities ⁽²⁾ :
Options and warrants		—			1,048,000		271,661			1,048,000
Convertible promissory notes		—			7,676,152		1,501,645			4,452,377
Restricted stock granted		—			107,609		—			36,264
Weighted average number of common shares – Diluted		84,842,165			81,311,627		85,485,306			60,689,074

Net income (loss) per common share:
Basic	$	(0.00	)	$	0.02	$	0.00		$	0.02
Diluted	$	(0.00	)	$	0.02	$	0.00		$	0.01

(1)

Restricted share awards that contain nonforfeitable rights to dividends are participating securities and, therefore, are included in computing earnings using the two-class method. Participating securities, however, do not participate in undistributed net losses.

(2)

For the three months ended September 30, 2012, vested stock options representing 1,403,000 shares and 500,000 vested warrants were antidilutive and excluded from the dilutive share calculation.

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.

Subsequent Events

The Company has evaluated all subsequent events from September 30, 2012 through the issuance date of the consolidated financial statements for subsequent event disclosure consideration.

NOTE 2 – ACQUISITION OF TCHEFUNCTE NATURAL RESOURCES, LLC.

On July 22, 2011, the Company acquired 100% of the membership interests in Tchefuncte Natural Resources, LLC, which became a wholly-owned subsidiary of the Company. Assets acquired comprise five oil and gas fields in Plaquemines and Lafourche Parishes in Louisiana. In exchange for their members’ interests, the selling members of TNR received an aggregate of 21.2 million shares of the Company’s common stock valued at $2,968,000 based on the closing price of Mesa’s stock on July 22, 2011.

The following unaudited pro forma information assumes the acquisition of TNR occurred as of January 1, 2011. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the entire period presented.

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2011		September 30, 2011
			(Restated)
Revenue	$	3,196,569	$	8,643,010
Net income	$	1,357,420	$	3,913,773

Net income per common share – basic	$	0.02	$	0.06
Net income per common share – diluted	$	0.02	$	0.05

Weighted average number of common shares outstanding – basic		75,546,389		70,838,920
Weighted average number of common shares outstanding – diluted		81,846,389		76,375,521

NOTE 3 – FAIR VALUE MEASUREMENTS

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.

	September 30, 2012
	Carrying Value		Fair Value Measurement
			Level 1		Level 2		Level 3

Derivative liability – commodity contracts, net	$	864	$	—	$	864	$	—

	December 31, 2011
	Carrying Value		Fair Value Measurement
			Level 1		Level 2		Level 3

Derivative assets – commodity contracts	$	938,950	$	—	$	938,950	$	—
Derivative liability – convertible debt		113,083		—		—		113,083

The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheet at fair value. Additional information regarding our derivative instruments can be found in Note 4 – Commodity Derivative Instruments and Note 6 – Debt.

NOTE 4 – COMMODITY DERIVATIVE INSTRUMENTS

The Company has commodity derivative instruments for which it determined the fair value using period-end closing oil and gas prices, interest rates and volatility factors for the periods under each contract as of September 30, 2012. The details of the derivative instruments are summarized below:

Costless Gas Collar

		Average
Production Period	Total Volume	Floor / Ceiling		Fair Value
Sep 2012-Dec 2012(1)	132,000 MMBtu	$	2.50 / 3.50	$	(32,613	)
Jan 2013-Dec 2013(1)	230,000 MMBtu	$	2.50 / 4.50	$	(45,770	)

Gas Fixed Price Swaps

		Average
Production Period	Total Volume	Fixed Price		Fair Value
Jan 2013-Jul 2013(2)	70,000 MMBtu	$	4.00	$	33,803

Oil Fixed Price Swaps

		Average
Production Period	Total Volume	Fixed Price		Fair Value
Oct 2012-Dec 2012 (3)	3,000 Bbls	$	100.30	$	22,689
Oct 2012-Dec 2012	10,500 Bbls	$	114.50	$	46,065
Jan 2013-Jul 2013	18,900 Bbls	$	114.90	$	169,450

Average Price Oil Collar

		Average
Production Period	Total Volume	Floor / Ceiling		Fair Value
Oct 2012-Jan 2013(4)	14,175 Bbls	$	80 / 100	$	(4,205	)
Jan 2013-Feb 2013	6,525 Bbls	$	80 / 100	$	(7,634	)
Feb 2013-Aug 2013	24,708 Bbls	$	80 / 100	$	(41,056	)
Aug 2013-Feb 2014	40,908 Bbls	$	80 / 100	$	(93,155	)
Feb 2014-Jul 2014	39,424 Bbls	$	80 / 100	$	(48,435	)

(1)

Costless gas collar entered into on June 26, 2012.

(2)

Fixed price swap is the remaining put of July 25, 2011 costless gas collar unwound on June 26, 2012.

(3)

Crude oil swap entered into on January 6, 2012.

(4)

Average price collar entered into on July 19, 2012.

The Company elected not to apply hedge accounting to these derivatives. At September 30, 2012, the Company recognized a short-term derivative asset of $111,300, a short term derivative liability of $0, and a long-term derivative liability of $112,164, with the $862,306 decrease in fair value reported in other income (expense) as unrealized loss on derivative instruments for the three months ended September 30, 2012 and a $938,606 decrease in fair value reported in other income (expense) as an unrealized loss on derivative instruments for the nine months ended September 30, 2012. Net realized gains of $117,741 and $363,733 from settlements of these derivatives have been reported in other income (expense) as realized gain on commodity contracts during the three and nine months ended September 30, 2012, respectively.

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

Oil and Gas Properties

All of the Company’s oil and gas properties at September 30, 2012 and December 31, 2012 were located in the United States.

The carrying value of the Company’s oil and gas properties by field, net of depletion and impairment, at September 30, 2012 and December 31, 2011 were:

	September 30,		December 31,
Property	2012		2011

Lake Hermitage Field	$	3,297,925	$	2,509,003
Valentine Field		1,389,631		1,668,172
La Rose Field		1,480,479		1,528,908
Bay Batiste Field		995,073		1,035,944
Manila Village Field		—		—
Java Field		—		—
Turkey Creek Field		749,756		—
Total	$	7,912,864	$	6,742,027

Net oil and gas properties at September 30, 2012 were:

Year Incurred	Acquisition Costs		Exploration and Development Costs		Dry Hole Costs			Disposition of Assets			Depletion, Amortization, and Impairment			Total
2010 and prior	$	754,878	$	2,947,554	$	(466,066	)	$	(2,090,383	)	$	(1,145,983	)	$	—
2011		7,334,184		621,053		—			—			(1,213,210	)		6,742,027
2012		749,756		1,274,268		—			—			(853,187	)		1,170,837
Total	$	8,838,818	$	4,842,875	$	(466,066	)	$	(2,090,983	)	$	(3,212,380	)	$	7,912,864

During the nine months ended September 30, 2012, the Company began a leasing and acreage acquisition program in Major and Garfield Counties, Oklahoma, spending $749,576 on 1,700 net mineral acres, with the intent of initiating a drilling program in the Mississippian Limestone in the first quarter of 2013. On August 29, 2012, the Company entered into a Farmout Agreement with 20/20 Oil & Gas, Inc. whereby we acquired approximately 1,760 acres of leases that are held by production (HBP). The Company refers to its acreage position in Major and Garfield Counties, Oklahoma, as the Turkey Creek Field.

Also during the nine months ended September 30, 2012, the Company recompleted three wells in the Lake Hermitage Field and spent $1,274,268 on development activities which included $147,404 to upgrade its processing facility in the LaRose Field to better enable gas lift of the MR FEE 852 as well as to provide excess capacity for processing of third party production and $142,768 for permitting and other work preparatory to the drilling of seven new wells in the Lake Hermitage Field.

In July 2012, the Company elected to participate in the drilling and completion of the PPCO #1 sidetrack well in the Valentine Field. The Company has a 15% working interest in the well which is operated by an unaffiliated company. The operator commenced this operation early in the fourth quarter of 2012. The Company advanced $281,061 for tangible and intangible drilling costs, and has agreed to advance an additional $131,175 should the sidetrack merit completion.

During the nine months ended September 30, 2012, the Company plugged and abandoned two wells, the Southdown 2D and the LLDSB #7, retiring their costs comprising, solely, asset retirement costs for the Southdown 2D well and asset retirement costs and intangible drilling costs for the LLDSB #7. Costs of the LLDSB #7 well were retired after an unsuccessful attempt to convert it to a salt water disposal well resulted in an oil spill for which the Company incurred $244,237 of environmental remediation expense in addition to the expense of plugging and abandoning the well and recognized a loss on the settlement of the asset retirement obligation of $116,394.

Support Facilities and Equipment

The Company’s support facilities and equipment serve its oil and gas production activities. The following table details these properties and equipment, together with their estimated useful lives:

	Useful Lives		September 30,			December 31,
	(Years)		2012			2011

Tank batteries		7-12	$	772,431		$	646,214
Production facilities		7		52,786			—
Production equipment		7		1,005,990			935,000
Field offices		20		267,089			267,089
Crew boat		7		57,835			57,835
Asset retirement cost		7		256,363			256,363
Subtotal				2,412,494			2,162,501
Accumulated depreciation				(307,014	)		(100,724	)
Support facilities and equipment, net			$	2,105,480		$	2,076,777

Property and Equipment

	Useful Lives		September 30,			December 31,
	(Years)		2012			2011

Office equipment and purchased software		3	$	178,532		$	16,388
Furniture and fixtures		10		51,506			18,299
Leasehold improvements		3		8,859			—
Subtotal				238,897			34,687
Accumulated depreciation				(11,212	)		(2,853	)
Property and equipment, net			$	227,685		$	31,834

During the nine months ended September 30, 2012, property and equipment increased $204,210. The increase was the result of software purchased with installment payments of $136,500 and cash payments of $67,710 for office furniture and equipment.

Support facilities and equipment, office equipment, purchased software, office furniture and fixtures, and leasehold improvements are depreciated using the straight line method over their estimated useful lives.

NOTE 6 – DEBT

Convertible Promissory Notes

The Company had $0 and $461,740 of convertible promissory notes outstanding at September 30, 2012 and December 31, 2011, net of unamortized debt discount of $0 and $4,279, respectively. During the nine months ended September 30, 2012, convertible notes totaling $461,740 were converted into 3,728,153 common shares of the Company at $0.125 per share. The fair value of the embedded derivative at September 30, 2012 and December 31, 2011 was $0 and $113,083, respectively.

Changes in the fair value of embedded derivative instruments for the nine months ended September 30, 2012 and the year ended December 31, 2011 were as follows:

	January 1, 2012 Derivative Liability		Conversions and Change in Derivative Liability for Convertible Debt			(Gain) or Loss		September 30, 2012 Derivative Liability

Derivative conversion feature	$	113,083	$	(649,505	)	$	536,422	$	—

	January 1, 2011 Derivative Liability		Conversions and Change in Derivative Liability for Remaining Convertible Debt		(Gain) or Loss		December 31, 2011 Derivative Liability

Derivative conversion feature	$	—	$	—	$	113,083	$	113,083

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

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

December 2011		10	%	$	0.12- $0.08
September 2012		N/A			N/A
Thereafter		N/A			N/A

	September 30, 2012		December 31, 2011
Common stock issuable upon conversion		—		3,400,000
Market price of common stock on measurement date		N/A	$	0.14
Conversion price		N/A	$	0.12
Conversion period in years		N/A		1.58
Expected volatility		N/A		163.11	%
Expected dividend yield		N/A		—	%
Risk free interest rate		N/A		0.74	%

Credit Facility and Notes Payable

The Company’s notes payable were as follows:

	September 30,			December 31,
	2012			2011

Credit Facility	$	5,195,963		$	5,495,963
Term notes		71,834			132,710
Notes payable outstanding		5,267,297			5,628,673
Less: Current maturities		(71,834	)		(466,655	)
Notes payable – noncurrent	$	5,195,963		$	5,162,018

On July 22, 2011, MEI entered into a $25 million senior secured revolving line of credit (“Credit Facility") with F&M Bank and Trust Company (“F&M Bank”) that matures on July 22, 2013. Loans made under this credit facility are secured by TNR’s proved producing reserves (“PDP”) as well as guarantees provided by the Company, MEI, and the Company’s other wholly-owned subsidiaries. The Company is required to make monthly interest payments on the Credit Facility based on a variable interest rate. The interest rate is the F&M Bank Base Rate plus 1% subject to a floor of 5.75%. Interest is currently accruing at 5.75%. A 2.00% annual fee is applicable to letters of credit drawn under the Credit Facility.

The borrowing base is subject to two scheduled redeterminations each year. F&M Bank completed its first two scheduled redeterminations pursuant to the Credit Facility in April 2012 and September 2012 and increased the Company’s borrowing base from $10,500,000 to $13,500,000 pursuant to the first redetermination and again to $14,500,000 pursuant to the second. The first redetermination eliminated the Company’s obligation to make the remaining $150,000 Monthly Commitment Reduction payment required prior to the first redetermination. The second redetermination extended maturity from July 22, 2013 to July 22, 2014. Reporting requirements, loan covenants and events of default are customary for this type of Credit Facility. The Company was in compliance with all of the debt covenants as of September 30, 2012.

On August 14, 2012, Tchefuncte Natural Resources, LLC, repaid $124,518, the principal balance of loans associated with its Lake Hermitage camp and crew boat.

Term notes are associated with a copier and an insurance contract financed.

NOTE 7 – ASSET RETIREMENT OBLIGATIONS

The following table provides a reconciliation of the changes in the estimated asset retirement obligations for the nine months ended September 30, 2012 and for the year ended December 31, 2011.

	2012			2011

Beginning asset retirement obligations	$	3,450,252		$	80,217
Obligation assumed from acquisition of TNR		—			3,262,160
Accretion expense		147,611			112,311
Sale of property		—			(4,436	)
Settlement of asset retirement obligations		(139,357	)		—
Ending asset retirement obligations	$	3,458,506		$	3,450,252

Through the third quarter of 2012 we plugged and abandoned two wells, the Southdown 2D and the LLDSB #7 recognizing a loss on settlement of asset retirement obligations of $116,394. See Note 5 – Property, Plant, and Equipment for more discussion on the LLDSB #7 well as regards the events leading up to the environmental remediation expense we incurred, not included in plugging and abandonment costs, which resulted in our plugging and abandoning this well.

NOTE 8 – INCOME TAXES

As of September 30, 2012, the Company has U.S. net operating loss carry forwards of approximately $3.6 million which begin to expire in 2028. The Company also has tax credit carry forwards of approximately $35,000 in alternative minimum tax credits which do not expire.

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 nine months ended September 30, 2012.

NOTE 9 – STOCKHOLDERS’ EQUITY

The Company is authorized to issue 300 million shares of common stock with a $0.0001 par value per share and 10 million shares of preferred stock with a $0.0001 par value per share. At September 30, 2012 and December 31, 2011, the Company had 83,930,769 and 79,531,616 shares issued and outstanding, respectively. No preferred stock has been issued by the Company.

Stock Options

Options to purchase 530,000 shares of common stock were granted in 2012 with an estimated fair value of $88,001. The following summarizes the values from and assumptions for the Black-Scholes option pricing model for stock options issued during the nine months ended September 30, 2012:

Weighted average grant date fair value	$	0.19
Weighted average grant date		April 29, 2012
Weighted average risk-free interest rate		0.51	%
Expected life (in years)		5
Weighted average volatility		145.35	%
Expected dividends	$	—

The following table summarizes the Company’s employee stock option activity for the nine months ended September 30, 2012:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value

Outstanding at December 31, 2011		2,228,000		$	0.20
Granted		530,000			0.19
Exercised		—			—
Cancelled/Forfeited/Expired		(21,000	)		0.17
Outstanding at September 30, 2012		2,737,000			0.20		3.1 years	$	38,560

Exercisable at September 30, 2012		2,357,000		$	0.20		2.9 years	$	31,825

Compensation expense related to stock options of $116,018 and $139,968 was recognized for the nine months ended September 30, 2012 and 2011, respectively. At September 30, 2012, the Company had $57,857 of unrecognized compensation expense related to outstanding unvested stock options, which will be fully recognized over the next 1.5 years. No stock options have been exercised. Stock options for 21,000 shares with a fair value of $2,953 were forfeited on September 30, 2010, resulting in a fair value of stock options issued in 2012 of $85,035.

Restricted Stock

The following table summarizes the Company’s employee restricted stock activity, including activity for awards not granted under the 2009 Plan, for the nine months ended September 30, 2012:

	Shares			Weighted Average Grant Price
Unvested Restricted Shares at December 31, 2011		1,941,000		$	0.15
Granted		—			—
Vested and issued		(671,000	)		0.15
Cancelled/Forfeited/Expired		(200,000	)		0.15
Unvested Restricted Shares at September 30, 2012		1,070,000		$	0.15

At September 30, 2012, the Company had $130,709 of unrecognized compensation expense related to outstanding restricted stock granted to employees, which is expected to be recognized over the next year. Compensation expense related to restricted stock grants of $112,037 and $64,713, respectively, was recognized in the nine months ended September 30, 2012 and 2011.

Warrants

On June 15, 2012, the Company terminated the consulting agreement previously entered into with Cynergy Advisors, LLC on March 7, 2012, in consideration for which the Company issued 500,000 cashless warrants which vested immediately and are exercisable at $1 per share for a period of five years. Each warrant entitles the holder to one share of the Company’s common stock in the event of exercise. The following summarizes the values from and assumptions for the Black-Scholes option pricing model for warrants issued during the nine months ended September 30, 2012:

Grant date fair value	$	45,423
Grant date		June 26, 2012
Weighted average risk-free interest rate		0.73	%
Expected life (in years)		5
Weighted average volatility		136.27	%
Expected dividends	$	—

The following table summarizes the Company’s warrant activity for the nine months ended September 30, 2012:

	Warrants		Exercise Price		Remaining Contractual Life		Aggregate Intrinsic Value

Outstanding at December 31, 2011		—	$	—
Granted		500,000		1.00
Exercised		—		—
Cancelled/Expired		—		—
Outstanding at September 30, 2012		500,000		1.00		4.7 years	$	—

Exercisable at September 30, 2012		500,000	$	1.00		4.7 years	$	—

Share-based compensation expense related to the warrants of $45,423 was recognized for the nine months ended September 30, 2012. At September 30, 2012, the Company had $0 of unrecognized share-based expense related to outstanding warrants. No warrants have been exercised.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

On August 31, 2012, the Company entered into a contract with a software vendor for an enterprise resource planning (ERP) system with terms that provide for the payment of $136,500 software license fee in monthly installments over the course of twelve months. The contract specifies twelve equal monthly payments of $11,375 beginning September 2012. The balance owing under the contract at September 30, 2012, is $125,125.

The software license has been capitalized and will be amortized over three years beginning at such time as it has been implemented and made ready for its intended use, which is expected to be January 2013.

NOTE 11 – SUBSEQUENT EVENTS

Pursuant to separation agreements entered into by the Company with Carolyn M. Greer and Willard Powell, the Company will issue 100,000 shares of restricted common stock each to Ms. Greer and Mr. Powell on or before November 15, 2012. The Company issued these shares on October 23, 2012 and recorded their fair value of $36,000 as stock-based compensation expense.

On October 1, 2012, 200,000 shares of restricted stock with a fair value of $36,000 vested and were issued pursuant to an Employment Services Agreement.

On October 30, 2012, options for 90,000 shares of restricted common stock were awarded to two employees pursuant to the 2009 Equity Incentive Plan as follows:

Exercise price	$	0.17
Vesting period in years ⁽¹⁾		1.92
Term of options in years		5
Expected volatility		189.83	%
Expected dividend yield		0	%
Risk free interest rate		0.78	%

⁽¹⁾

Vesting schedule – December 30, 2012: 10%; March 30, 2013, September 30, 2013, and March 30, 2014: 20% each; September 30, 2014: 30%.

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, our failure to implement our business plans or strategies and general economic conditions. 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 2011 Annual Report on Form 10-K.

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

Mesa Energy Holdings, Inc. is a growth-oriented exploration and production (E&P) company with a definitive focus on growing reserves and net asset value per share, primarily through the acquisition and enhancement of high quality producing properties and the development of highly diversified developmental drilling opportunities. We currently own producing oil and natural gas properties in Plaquemines and Lafourche Parishes in Louisiana as well as developmental properties in Major and Garfield Counties, OK, and Wyoming County, NY.

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 position, results of operations and cash flows presented herein. This discussion should be read in conjunction with our unaudited financial statements, related notes and the other financial information included elsewhere in this report.

Producing Fields - Plaquemines and Lafourche Parishes, Louisiana

On July 22, 2011, Mesa Energy, Inc., our wholly owned subsidiary (“MEI”), completed the acquisition of Tchefuncte Natural Resources, LLC (“TNR”), a Louisiana operator. Immediately prior to MEI’s closing of the TNR acquisition, TNR completed the acquisition of properties in four fields in south Louisiana from Samson Contour Energy E & P, LLC. TNR, now a wholly owned subsidiary of MEI, owns 100% working interests in the Lake Hermitage Field in Plaquemines Parish, Louisiana along with various working interests in producing properties in four additional fields in Plaquemines and Lafourche Parishes, Louisiana. The total net mineral acreage held by production in the five fields is approximately 7,189 acres.

We believe that by recompleting or otherwise returning several additional shut-in wells to production, continuing to improve operational efficiencies and continued optimization of the gas lift systems, significant increases in production can continue to be achieved in these fields. Two wells were successfully recompleted to uphole zones in the Lake Hermitage Field in the fourth quarter of 2011 with positive results. The recompletion of three additional wells took place in the second quarter of 2012 and a number of additional recompletions are planned or underway, both in the Lake Hermitage Field and in the Valentine Field. All of this activity is being funded out of operating cash flow. These efforts should significantly increase production and proved developed producing (“PDP”) reserves. An extensive geological and engineering evaluation of the Valentine Field has been completed and a number of additional recompletion and/or drilling opportunities have been identified. In addition, we have submitted applications for permits to drill the first of our proved undeveloped (“PUD”) drilling locations in the Lake Hermitage Field and we expect to drill the first of several developmental wells later this year. We are reviewing a number of deep targets with potential for farm out or joint venture with other operators and continue to evaluate additional acquisition opportunities in South Louisiana.

Lake Hermitage Field – Plaquemines Parish, Louisiana

The Company owns a 100% working interest in each of the eighteen wells in the Lake Hermitage Field. Average net production for the quarter was approximately 160 BOE/D (barrels of oil equivalent per day) from seven producing wells and a total of 3,578 mineral acres is held by production in the field. The field was shut-in approximately 14 days during the third quarter due to Hurricane Isaac which passed over the Company’s Louisiana properties from August 25th to 29th. Ten wells are currently shut-in pending evaluation for workover and/or future recompletion in uphole zones. The LLDSB #1 has been permitted for conversion to a salt water disposal well which would reduce expenses and allow us to handle more fluid on a daily basis, but the conversion of this well was delayed due to Hurricane Isaac. We expect to complete this operation along with the replacement of downhole production and safety equipment in the LLDSB # 3 in the fourth quarter of 2012. There are three processing facilities and tank batteries in the field. The high gravity crude oil produced at Lake Hermitage is transported out of the field by barge.

We have submitted applications for permits to drill the first two of our PUD drilling locations in the Lake Hermitage Field and we expect to drill the first of several developmental wells later this year.

Bay Batiste Field, Plaquemines Parish, Louisiana

The Company owns an average 61% working interest in seven wells in the Bay Batiste Field. Net daily production prior to Hurricane Isaac was approximately 65 BOE/D from one producing well. The field was shut-in for repairs in late August due to the storm and came back on line in early November. The other six wells are currently shut-in pending evaluation for future workover or recompletion in uphole zones. Approximately 74 net mineral acres are held by production by the producing well. The salt water disposal well and two production facilities have plenty of excess capacity to handle production from recompleted wells or from third party operators nearby. Access to markets is excellent.

Larose Field – Lafourche Parish, Louisiana

Various working interests, some of which are non-operated, are owned by us in eight wells in the Larose Field. Average net production for the quarter was approximately 45 BOE/D from three producing wells and approximately 439 net mineral acres are held by production in the field. The non-operated wells in the field were shut-in several weeks as a result of Hurricane Isaac. Five wells are currently shut-in pending evaluation for future workover or recompletion in uphole zones. The processing facilities and tank batteries are well located and have plenty of excess capacity. Access to pipelines and crude oil markets is excellent.

Valentine Field – Lafourche Parish, Louisiana

The Company owns an average 90% working interest in forty-four wells in the Valentine Field. Net production is approximately 317 BOE/D from fourteen producing wells, and approximately 3,082 net mineral acres are held by production in the field. The field was shut-in approximately 8 days during the third quarter due to Hurricane Isaac. There are four salt water disposal wells in the field and twenty-six wells are currently shut-in pending evaluation for future workover or recompletion in uphole zones. The processing facilities and tank batteries are strategically located throughout the field and have plenty of excess capacity. A field operations center is centrally located in the field. Access to pipelines and crude oil markets is excellent.

An extensive geological and engineering evaluation of the Valentine Field has been completed and a number of additional recompletion and/or drilling opportunities have been identified. We expect to recomplete the Valentine #2 in the fourth quarter of 2012 and to pursue additional recompletions in the field later this year. In addition to numerous recompletion and workover opportunities, there is offset developmental drilling potential as well as deep gas potential. All of those potential opportunities are currently being evaluated.

In July 2012, the Company elected to participate in the drilling and completion of the PPCO #1 sidetrack well in the Valentine Field. The Company has a 15% working interest in the well which is operated by an unaffiliated company. The operator commenced this operation in the third quarter of 2012. The Company advanced $281,061 for tangible and intangible drilling costs, and has agreed to advance an additional $131,175 should the sidetrack merit completion.

SE Manila Village Field – Plaquemines Parish, Louisiana

The Company owns a non-operated working interest in two wells operated by Hilcorp in the Manila Village Field. 16.88 net mineral acres are held by production in the field. The wells are shut-in at this time.

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. The acquisition included 19 producing natural gas wells and their associated leases/units, two surface 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%. Production from the wells is nominal but serves to hold the acreage for future development. 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 recompletion 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 recompleted 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 for the time being. 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.

Mineral Acreage Leasing - Garfield and Major Counties, Oklahoma

During the current year, we began a leasing and acreage acquisition program in Major and Garfield Counties, Oklahoma, spending $749,756 on approximately 3,400 net mineral acres as of September 30, 2012, with the intent of initiating a drilling program in the Mississippian Limestone no later than the 1st quarter of 2013. We are continuing to actively lease additional acreage in the play and to pursue agreements with operators to acquire acreage that is held by production. Total capital expense required to develop the field will be determined once all acreage is obtained. We refer to our acreage position in Major and Garfield Counties, OK, as the Turkey Creek Field.

We believe that Oklahoma is a great place to develop a drilling program. It is relatively close to Dallas, is a very oil friendly state and has good availability of services and a moderate climate. The Mississippian Limestone in Oklahoma is a proven zone that has been drilled vertically in that area for many years so there is a lot of data available with no need for seismic. The emerging horizontal play is sufficiently mature to have big company names and good results, yet it is early enough that acreage can still be acquired at moderate prices. This is an opportunity to establish a repeatable drilling program in an area with a high drilling success rate.

The Mississippian Limestone in the area of interest is at a vertical depth of approximately 7,000 feet and is 300 feet to 500 feet thick. The Woodford Shale, which would be a secondary objective in any well drilled, is immediately below the Mississippian and is about 80 feet thick. Early reports indicate that the Woodford is oil bearing and quite productive in the area of interest. Potential reserves in the Mississippian on a per well basis have been reported to be 200,000 to 400,000 barrels per well. The Woodford would increase the potential reserves recoverable. A multi-stage frac is required using acid, fresh water and a simple sand proppant. The Mississippian produces some water, so disposal wells will be required. The oil is light, sweet crude with a gravity of 40 to 45 dg.

Mesa currently holds leases or farm out agreements on approximately 3,400 net mineral acres in the play and is continuing to lease additional acreage and to pursue additional farm out agreements. The Company expects to drill its first horizontal well in the play in the 4^th quarter of 2012. The location for this well has been selected, a permit application has been submitted and well planning is ongoing. Information gained from extensive logging and testing of this well will be highly beneficial in the planning of future horizontal wells on the acreage.

Adjusted EBITDA as a Non-GAAP Performance Measure

In evaluating our business, management believes earnings before interest, taxes, depreciation, depletion, amortization and accretion, 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 income in accordance with GAAP to our Adjusted EBITDA for the three and nine month periods ending September 30, 2012 and 2011:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
				(Restated)						(Restated)

Net income (loss)	$	(356,875	)	$	1,473,842			164,687		$	904,250

Adjustments:
Interest (income) expense, net		141,949			169,046			410,289			466,082
Depreciation, depletion and accretion expense		361,484			588,709			1,215,448			592,293
Gain on settlement of debt		—			—			—			(223,736	))
Share-based compensation expense		76,054			99,916			273,478			183,535
Unrealized (gain) loss on change in derivatives – commodity contracts		862,306			(1,380,200	)		938,606			(1,380,200	))
Loss on change in derivatives – convertible debt		17,714			78,139			536,422			214,543
Income tax expense (benefit)		195,850			—			(272,164	)		—
Adjusted EBITDA	$	1,298,482		$	1,029,452		$	3,266,766		$	757,143

Results of Operations

Quarter Ended September 30, 2012 Compared to Quarter Ended September 30, 2011

Revenue

Revenues from sales of oil, natural gas, and natural gas liquids (“NGL”) were $3,235,366 for the three months ended September 30, 2012 as compared to $2,569,464 for the three months ended September 30, 2011. This increase in revenues reflects the results of stimulation efforts in the wells acquired from TNR, despite a decrease in expected third quarter production due to Hurricane Isaac, as a result of which most of our Louisiana wells were shut in from several days to several weeks. Revenues were predominantly generated from oil sales of $2,744,219, which is 85% of revenue, compared to natural gas sales of $474,725 which was 14% of revenue. The average price of oil in the third quarter of 2012 and 2011 was $104.33/Bbl and $104.26 respectively. Oil sales volumes during the third quarter of 2012 and 2011 were 286 Bbls per day and 286 Bbls per day, respectively. Average natural gas prices decreased by $1.18/Mcf to $3.08/Mcf in the third quarter of 2012 from an average price of $4.26/Mcf in the third quarter of 2011. Natural gas sales volumes increased during the third quarter of 2012 to 1,678 Mcf per day from 1,282 Mcf per day during the third quarter of 2011. Included in revenue is a small volume of natural gas liquids comprising less than 1%, as well as processing income from our Square Mile facility in LaRose Field and transportation income from our Java Field.

Operating expenses

Lease operating expense. Production expense increased to $1,548,851 in the three months ended September 30, 2012 from $991,833 in the three months ended September 30, 2011. Higher expense in the third quarter of 2012 as compared to the third quarter of 2011 is the result of $123,384, net of insurance recovery, incurred in repairs necessitated by damage inflicted by Hurricane Isaac in August 2012 primarily to our Lake Hermitage and Bay Batiste properties. Additionally, as we acquired our Louisiana properties from TNR on July 22, 2011, we operated those properties for twenty-one fewer days in the third quarter of 2011 than in the third quarter of 2012. Lease operating expense for the three months ended September 30, 2012 was $22.26 per BOE and $18.07 per BOE for the three months ended September 30, 2011. Included in the calculation of lease operating expense for the three months ended September 30, 2011, is the expense associated with hurricane repairs.

Exploration expense. Exploration expense increased to $137,090 during the three months ended September 30, 2012 from $27,500 during the three months ended September 30, 2011. This was primarily due to prospecting costs incurred by us in Oklahoma and the payment of surface rentals in Louisiana.

General and administrative expense. General and administrative expense increased to $834,953 for the three months ended September 30, 2012 from $692,656 for the three months ended September 30, 2011. The increase is primarily the result of additional payroll and administrative burdens as additional employees have been hired, consultants have been engaged, and stock compensation expense has increased since our acquisition of TNR.

Depreciation, depletion, accretion, and impairment expense. The decrease in depreciation, depletion, accretion, and impairment expense to $361,484 for the three months ended September 30, 2012 from $588,709 for the three months ended September 30, 2011 reflects additional reserves at December 31, 2011, from prior reserves at time of the TNR acquisition, used in the calculation of the 2012 depletion factor. Also, the depletable base was reduced at December 31, 2011, when a significant amount of asset retirement costs were fully amortized.

Operating income. In the three months ended September 30, 2012, we recognized operating income of $352,988 compared to $286,726 in the three months ended September 30, 2011.

Interest expense. Interest expense decreased to $143,940 for the three months ended September 30, 2012, from $169,422 for the three months ended September 30, 2011. The decrease was related primarily to the conversion of convertible notes.

Losses on changes in derivative value. The unrealized loss on change in fair value of derivatives – commodity contracts for the three months ended September 30, 2012 was $862,306 compared an unrealized gain of $1,380,200 for the three months ended September 30, 2011. Unrealized losses in the third quarter of 2012 were primarily the result of changes in oil prices relative to the fixed oil prices in our swap derivatives. The loss on change in fair value of derivatives – convertible debt for the three months ended September 30, 2012 was $17,714 compared to a loss of $78,139 for the three months ended September 30, 2011, respectively. The loss associated with the convertible debt derivative represents the change in the fair value of the liability for issuing shares with a market value higher than the strike price upon conversion of convertible debt into common stock. At September 30, 2012, we had no derivative liability associated with convertible debt as all such debt was converted to the Company’s common stock in 2012.

Realized gain on commodity contracts. Cash settlements from hedging sales of oil and gas production were $117,741 for the three months ended September 30, 2012 as compared to $53,092 in the three months ended September 30, 2011. The increase is attributable to additional hedge positions we have put in place in 2012 and the amount by which the settlement value of puts exceeded the settlement value of calls.

Income tax benefit. Income tax benefit for the three months ended September 30, 2012 increased to $195,850 from $0 in the three months ended September 30, 2011, due to our having eliminated our tax valuation account at December 31, 2011, and recognized a deferred tax asset.

Net loss. Net loss for the three months ended September 30, 2012 was $356,875 ($0.00 per basic and diluted share), compared to net income of $1,473,842 ($0.02 per basic and diluted share) for the three months ended September 30, 2011. The decrease in earnings is primarily due to reduced production and sales from our Louisiana wells shut in for approximately twelve days because of Hurricane Isaac and the ensuing cleanup expense as well as the higher third quarter 2012 losses on commodity contract derivatives.

Nine months Ended September 30, 2012 Compared to the Nine months Ended September 30, 2011

Revenue

Revenues from sales of oil, natural gas, and NGL were $11,477,268 for the nine months ended September 30, 2012 as compared to $2,606,517 for the nine months ended September 30, 2011. This increase in revenues reflects additional sales volumes from producing wells acquired in the TNR Acquisition and stimulation efforts in the wells acquired, despite a decrease in expected third quarter production due to Hurricane Isaac, as a result of which most of our Louisiana wells were shut in from several days to several weeks. Revenues are predominantly generated from oil sales of $9,807,859, which is 85% of revenue, compared to natural gas sales of $1,576,485, which is 14% of revenue. The average price of oil in the first nine months of 2012 and 2011 was $109.49/Bbl and $104.26/Bbl, respectively. Oil sales volumes during the first nine months of 2012 were 329 Bbls per day compared to 286 Bbls per day in 2011. The increase in volumes is attributable to the stimulation efforts in the wells acquired from TNR, despite 2012 containing an additional ten days of production over 2011 less approximately twelve days of wells being shut in due to Hurricane Isaac. Average natural gas prices decreased $1.80/Mcf to $2.72/Mcf in the third quarter of 2012 from an average price of $4.52/Mcf in the third quarter of 2011. Natural gas sales volumes increased during the first nine months of 2012 to 2,132 Mcf per day from 972 Mcf per day during the first nine months of 2011, also reflective of our acquisition of TNR. Included in revenue is a small volume of NGL comprising just under 1% as well as production processing income from our Square Mile facility and transportation income from our Java Field.

Operating expenses

Lease operating expense. Production expense increased to $5,171,819, including $123,384 of expenses associated with cleanup from Hurricane Isaac, in the nine months ended September 30, 2012 from $1,005,094 in the nine months ended September 30, 2011. Higher expense in the third quarter of 2012 as compared to the third quarter of 2011is the result of the addition of TNR operations in the third quarter of 2011. Lease operating expense for the nine months ended September 30, 2012 was $20.56 per BOE compared to $17.60 per BOE for the nine months ended September 30, 2011. Included in the calculation of lease operating expense for the nine months ended September 30, 2011, is the expense associated with hurricane repairs in the third quarter.

Environmental remediation expense. Environmental remediation expense for the nine months ended September 30, 2012 was $244,237 as compared to $0 for the nine months ended September 30, 2011 and was incurred in connection with an oil spill which occurred while attempting to convert the LLDSB #7 well to a salt water disposal well. As a result of the spill and additional complications, the conversion of the well was unsuccessful and the well was plugged and abandoned.

Exploration expense. Exploration expense increased to $233,089 during the nine months ended September 30, 2012 from $40,303 during the nine months ended September 30, 2011. This increase was primarily due to prospecting costs incurred by us in Oklahoma and payment of surface rentals in Louisiana.

General and administrative expense. General and administrative expense increased to $2,542,226 for the nine months ended September 30, 2012 from $1,042,364 for the first nine months of 2011. The increase is primarily the result of additional payroll and administrative burdens due to the TNR acquisition and non-cash stock-based compensation expense of $273,478.

Depreciation, depletion, accretion, and impairment expense. The increase in depreciation, depletion, accretion, and impairment expense to $1,215,448 for the nine months ended September 30, 2012 from $592,293 for the nine months ended September 30, 2011 reflects additional reserves at December 31, 2011, from prior reserves at time of the TNR acquisition, used in the calculation of the 2012 depletion factor. Also, the depletable base was reduced at December 31, 2011, when a significant amount of asset retirement costs were fully amortized. Additionally, the 2012 depletion component reflects a full nine months of production, while the September 30, 2011, depletion expense component reflected only 71 production days in 2011.

Loss on settlement of asset retirement obligation. We recognized a loss of $116,394 for the plugging and abandonment of two wells for the nine months ended September 30, 2012. We incurred no such loss in the nine months ended September 30, 2011, but did have a gain of $17,960 on the sale of our Coal Creek Property in Oklahoma..

Operating income. In the nine months ended September 30, 2012, we recognized operating income of $1,954,055 compared to an operating loss of $55,577 in the nine months ended September 30, 2011.

Interest expense. For the nine months ended September 30, 2012 interest expense decreased to $418,078 from $466,458 for the nine months ended September 30, 2011. The decrease was the result of 2011 induced debt conversion expenses, not incurred in 2012, charged to interest expense, which were offset by additional interest expense and fees in the first nine months of 2012 related to the Credit Facility with F&M Bank and as a result of lower 2012 convertible debt balances which were eliminated in the third quarter. The Credit Facility with F&M Bank was closed during the third quarter of 2011.

Losses on changes in derivative value. The unrealized loss on change in fair value of derivatives – commodity contracts for the nine months ended September 30, 2012 was $938,606 compared to an unrealized gain of $1,380,200 for the nine months ended September 30, 2011. Unrealized losses in the nine months ended September 30, 2012 were primarily the result of changes in oil prices relative to the fixed oil prices in our swap derivatives. Loss on change in fair value of derivatives – convertible debt for the nine months ended September 30, 2012 and 2011 was $536,422 and $214,543, respectively. An unrealized loss associated with the convertible debt derivative represents the change in the fair value of potential liability for issuing shares with a higher market value than the strike price upon conversion of convertible debt into common stock. All outstanding convertible debt was converted to common stock in the nine months ended September 30, 2012.

Realized gain on commodity contracts. Cash settlements from hedging our sales of oil and gas production were $363,733 for the nine months ended September 30, 2012 as compared to $53,092 in the nine months ended September 30, 2011. This increase is attributable to additional hedge positions we have put in place in 2012 and the amount by which the settlement value of puts exceeded the settlement value of calls.

Income tax expense. Income tax expense for the nine months ended September 30, 2012 increased to $272,164 from $0 in the nine months ended September 30, 2011, due to our having taxable income in the nine months ending September 30, 2012, while incurring a net loss for the nine months ended September 2011.

Net income. Our net income for the nine months ended September 30, 2012 was $164,687 ($0.00 per basic and diluted share), compared to $904,250 ($0.02 per basic and $0.01 per diluted share) for the nine months ended September 30, 2011. The decrease in net income in the first nine months of 2012 compared to 2011 is due primarily to significantly higher 2012 losses on commodity contract derivatives and losses on convertible debt derivative liability.

Liquidity and Capital Resources

Overview

As of September 30, 2012, we had working capital of $3,449,090. As of December 31, 2011, we had working capital of $3,104,453. The increase in the working capital was attributable to:

A full nine months of 2012 revenues from the properties acquired from TNR versus only 71 days of revenue from the TNR properties for the nine months ended September 30, 2011.

A reduction in the current portion of long term debt due to the elimination of the requirement that we pay the monthly commitment reduction of our long-term note with F&M Bank upon credit redetermination in the second quarter of 2012, the conversion of all convertible debt to common stock, and the retirement of loans associated with our Lake Hermitage camp and crew boat.

Cash and Accounts Receivable

At September 30, 2012, we had cash and cash equivalents of $2,857,685, compared to $3,182,392 at December 31, 2011. Cash decreased by $324,707 due to cash provided by operations of $2,734,653 offset by cash of $3,059,360 used in investing and financing activities, the latter primarily comprising debt repayments.

Liabilities

Accounts payable, accrued expenses, revenue payable, and accrued expenses-related party decreased to $1,820,693 at September 30, 2012, from $2,629,472 at December 31, 2011, primarily due to a decrease in accounts payable and revenue payable net of an increase of $125,125 in accounts payable comprising our purchase with payment terms over twelve months for a new enterprise resource planning (ERP) system.

As of September 30, 2012, the outstanding balance of principal on debt was $5,267,797, a net decrease of $822,616 from the outstanding balance of $6,090,413, as of December 31, 2011. The decrease was primarily due to repayment of $300,000 on the F&M Bank credit facility, the conversion of $461,740 of convertible notes to common stock, and retirement of the loans associated with our Lake Heritage Camp and crew boat during the nine months ended September 30, 2012.

Cash Flows

For the nine months ended September 30, 2012, the net cash provided by operating activities was $2,734,653, which was used to fund our capital expenditures and credit facility repayments for the period, compared to $227,858 for the nine months ended September 30, 2011. We expect to fund operations and the existing capital expenditure budget for the next twelve months out of operating cash flow. However, we are actively pursuing additional capital to fund an accelerated drilling program.

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 September 30, 2012. 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 management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses described below, as of September 30, 2012, our disclosure controls and procedures are not presently designed at a level 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 September 30, 2012, 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 employees and have engaged consultants to assist in the preparation and filing of financial reports

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 have remedied a prior material weakness in our internal control over financial reporting in that, due to full integration of the TNR acquisition into our accounting processes and the engagement of our CFO and accounting consultants with appropriate levels of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with our increased complexity and financial accounting and reporting requirements, we are able to ensure our financial reporting occurs in a timely manner.

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.

In the third quarter of 2012, we hired an Operations Controller to manage and perform our transactional accounting functions. We also purchased an enterprise resource planning (ERP) system and are in the process of implementing it.

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 September 21, 2012, Brio Capital, L.P. elected to convert $50,000 of its Convertible Promissory Note resulting in the issuance of 400,000 shares.

The above referenced conversion was deemed to be exempt under rule 506 of Regulation D under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
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**		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02**		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101INS		XBRL Instance Document***
101SCH		XBRL Schema Document***
101CAL		XBRL Calculation Linkbase Document***
101LAB		XBRL Labels Linkbase Document***
101PRE		XBRL Presentation Linkbase Document***
101DEF		XBRL Definition Linkbase Document***

*		Filed herewith.

**		This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except if and to the extent that the Registrant specifically incorporates it by reference.

***

To be furnished by amendment. The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

***

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: November 13, 2012	By:	/s/ RANDY M. GRIFFIN
		Randy M. Griffin
		Chief Executive Officer (Principal Executive Officer)

Date: November 13, 2012	By:	/s/ RACHEL L. DILLARD
		Rachel L. Dillard
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Mesa Energy Holdings, Inc. - FORM 10-Q - November 13, 2012

Attached files

Mesa Energy Holdings, Inc. Reports