UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549





FORM
10-Q





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





For
the quarterly period ended September 30, 2009





oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from _____ to _____





BONANZA OIL AND GAS,
INC.


(Exact
Name of Registrant as Specified in Its Charter)





Nevada
            000-52411
            76-0720654(State
      or Other Jurisdiction
              of
      Incorporation or
              Organization)
            (Commission
      File No.)
            (I.R.S.
      Employer
              Identification
      No.)





3417
      Mercer
              Suite
      E
              Houston,
      TX   77027
            
            (713) 333-5808(Address
      of Principal Executive Offices)
            
            (Registrant’s
      telephone number)





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
o





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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files)     Yes o           No
o





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





Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer o
            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 section
12b-2 of the Exchange Act)


Yes o    No
x





State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date.





Common Stock, par value $0.001
              (Class)
            
            44,936,017
              (Outstanding
      at November 18, 2009)


1





BONANZA
OIL & GAS, INC.





TABLE
OF CONTENTS




PART
      IITEM
      1.
              FINANCIAL
      STATEMENTS
              
              
              3ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
      AND RESULTS OF OPERATIONS
              
              
              17ITEM
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUTMARKET
      RISK
              
              
              23ITEM
      4.
              CONTROLS
      AND PROCEDURES
              
              
              24ITEM
      4T.
              CONTROLS
      AND PROCEDURES
              
              
              24PART
      IIITEM
      1.
              LEGAL
      PROCEEDINGS
              
              
              24ITEM
      1A.
              RISK
      FACTORS
              
              
              24ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OFPROCEEDS
              
              
              24ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES
              
              
              25ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              
              25ITEM
      5.
              OTHER
      INFORMATION
              
              
              25ITEM
      6.
              EXHIBITS
              
              
              26SIGNATURES
              
              
              
              27







2





PART
I. FINANCIAL INFORMATION





Item 1.
Financial Statements




BONANZA
      OIL AND GAS, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSSeptember
      30,
              
              
              December
      31,2009
              
              
              2008(Unaudited)
              
              
              (Audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              209
              
              
              $
              3,881Accounts
      receivable
              
              
              -
              
              
              
              5,068Drilling
      advances
              
              
              -
              
              
              
              395,350Other
              
              
              494
              
              
              
              152,900703
              
              
              
              557,199PROPERTY
      AND EQUIPMENT:Oil
      and gas, on the basis of full cost accounting:Proved
      properties
              
              
              5,246,926
              
              
              
              4,941,803Unproved
      properties and properties under development
              
              
              8,265,889
              
              
              
              7,599,369Other
              
              
              9,669
              
              
              
              11,67913,522,484
              
              
              
              12,552,851Less:
      Accumulated depreciation, depletion and amortization
              
              
              (4,421,931
              )
              
              
              (4,325,679
              )9,100,553
              
              
              
              8,227,172$
              9,101,256
              
              
              $
              8,784,371LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              593,677
              
              
              $
              138,389Accrued
      operating expenses
              
              
              355,387
              
              
              
              52,224Accrued
      exploration and development expenditures
              
              
              1,584,894
              
              
              
              1,558,408Notes
      payable, net of $250,296 of unamortizeddiscount
      at December 31, 2008
              
              
              2,660,000
              
              
              
              2,099,7045,193,958
              
              
              
              3,848,725COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITY:Common
      stock, $0.001 par value, 60,000,000 shares authorized;41,208,017
      and 36,100,317 issued and outstanding, respectively
              
              
              41,208
              
              
              
              36,100Preferred
      stock - Series A, $0.001 par value, 5,000,000 shares
      authorized;0
      shares issued and outstanding, respectively
              
              
              -
              
              
              
              -Preferred
      stock - Series B, $0.001 par value, 5,000,000 shares
      authorized;0
      shares issued and outstanding, respectively
              
              
              -
              
              
              
              -Preferred
      stock - Series C, $0.001 par value, 5,000,000 shares
      authorized;0
      shares issued and outstanding, respectively
              
              
              -
              
              
              
              -Additional
      paid-in capital
              
              
              12,442,502
              
              
              
              11,962,198Accumulated
      deficit
              
              
              (8,576,412
              )
              
              
              (7,062,652
              )3,907,298
              
              
              
              4,935,646$
              9,101,256
              
              
              $
              8,784,371The
      accompanying notes are an integral part of these consolidated unaudited
      financial statements.


3
  BONANZA
      OIL AND GAS, INC. AND SUBSIDIARIESSTATEMENTS
      OF CONSOLIDATED OPERATIONS(Unaudited)For
      the Three Months Ended
              
              
              For
      the Nine Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008REVENUES:Crude
      oil sales
              
              $
              59,506
              
              
              $
              83,031
              
              
              $
              192,323
              
              
              $
              112,49759,506
              
              
              
              83,031
              
              
              
              192,323
              
              
              
              112,497OPERATING
      EXPENSES:Depreciation,
      depletion and amortization
              
              
              22,976
              
              
              
              21,011
              
              
              
              96,251
              
              
              
              25,942Lease
      operating expenses
              
              
              43,668
              
              
              
              7,138
              
              
              
              113,372
              
              
              
              25,911Severance
      and other taxes
              
              
              2,578
              
              
              
              3,759
              
              
              
              8,416
              
              
              
              5,185General
      and administrative
              
              
              160,124
              
              
              
              295,618
              
              
              
              988,849
              
              
              
              1,249,638Financing
      costs, net
              
              
              69,416
              
              
              
              810,475
              
              
              
              499,195
              
              
              
              1,038,711298,762
              
              
              
              1,138,001
              
              
              
              1,706,083
              
              
              
              2,345,387OPERATING
      LOSS
              
              
              (239,256
              )
              
              
              (1,054,970
              )
              
              
              (1,513,760
              )
              
              
              (2,232,890
              )Provision
      for income taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -NET
      LOSS
              
              $
              (239,256
              )
              
              $
              (1,054,970
              )
              
              $
              (1,513,760
              )
              
              $
              (2,232,890
              )BASIC
      AND DILUTED LOSSPER
      COMMON SHARE
              
              $
              (0.01
              )
              
              $
              (0.03
              )
              
              $
              (0.04
              )
              
              $
              (0.08
              )Weighted
      average number of common sharesoutstanding
      - basic and fully diluted
              
              
              41,157,474
              
              
              
              34,714,191
              
              
              
              38,546,047
              
              
              
              29,114,754The
      accompanying notes are an integral part of these consolidated unaudited
      financial statements.





4




BONANZA
      OIL AND GAS, INC. AND SUBSIDIARIESSTATEMENTS
      OF CONSOLIDATED STOCKHOLDERS' EQUITY(Unaudited)TotalCommon
      Stock
              
              
              Paid-In
              
              
              Accumulated
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              EquityBALANCE
      AT DECEMBER 31, 2007
              
              
              25,649,654
              
              
              $
              25,650
              
              
              $
              2,760,950
              
              
              $
              (197,245
              )
              
              $
              2,589,355Common
      shares issued with theJanuary
      2008 Notes
              
              
              160,000
              
              
              
              160
              
              
              
              119,840
              
              
              
              -
              
              
              
              120,000Common
      shares issued forconsulting
      services - April 9, 2008
              
              
              75,000
              
              
              
              75
              
              
              
              52,425
              
              
              
              -
              
              
              
              52,500Common
      shares issued forconsulting
      services - May 7, 2008
              
              
              600,000
              
              
              
              600
              
              
              
              155,400
              
              
              
              -
              
              
              
              156,000Common
      shares issued forconsulting
      services - May 15, 2008
              
              
              800,000
              
              
              
              800
              
              
              
              359,200
              
              
              
              -
              
              
              
              360,000Common
      shares issued with theMay
      2008 Convertible Note
              
              
              375,000
              
              
              
              375
              
              
              
              99,087
              
              
              
              -
              
              
              
              99,462Fair
      value of beneficial conversion featureof
      the May 2008 Convertible Note
              
              
              -
              
              
              
              -
              
              
              
              305,576
              
              
              
              -
              
              
              
              305,576Fair
      value of warrants to acquire common sharesissued
      with the May 2008 Convertible Note
              
              
              -
              
              
              
              -
              
              
              
              278,844
              
              
              
              -
              
              
              
              278,844Fair
      value of warrants to acquire common sharesissued
      with the August 2008 Notes
              
              
              -
              
              
              
              -
              
              
              
              569,606
              
              
              
              -
              
              
              
              569,606Fair
      value of warrants to acquire common sharesissued
      with the October 2008 Note
              
              
              -
              
              
              
              -
              
              
              
              29,180
              
              
              
              -
              
              
              
              29,180Common
      shares issued in the acquisition ofBlack
      Pearl Energy, Inc.
              
              
              7,024,665
              
              
              
              7,024
              
              
              
              8,211,834
              
              
              
              -
              
              
              
              8,218,858Common
      shares retired in the acquisition ofBlack
      Pearl Energy, Inc.
              
              
              (2,709,000
              )
              
              
              (2,709
              )
              
              
              (3,164,113
              )
              
              
              -
              
              
              
              (3,166,822
              )Equity
      offerings, net
              
              
              4,124,998
              
              
              
              4,125
              
              
              
              2,184,368
              
              
              
              -
              
              
              
              2,188,493Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,865,407
              )
              
              
              (6,865,407
              )BALANCE
      AT DECEMBER 31, 2008
              
              
              36,100,317
              
              
              $
              36,100
              
              
              $
              11,962,198
              
              
              $
              (7,062,652
              )
              
              $
              4,935,646Common
      shares issued forconsulting
      services - January 21, 2009
              
              
              75,700
              
              
              
              76
              
              
              
              15,821
              
              
              
              -
              
              
              
              15,897Common
      shares issued as penalty upon defaultof
      the January 2008 Notes
              
              
              150,000
              
              
              
              150
              
              
              
              10,350
              
              
              
              -
              
              
              
              10,500Fair
      value of warrants to acquire common sharesissued
      with the August 2008 Notes
              
              
              -
              
              
              
              -
              
              
              
              89,053
              
              
              
              -
              
              
              
              89,053Fair
      value of warrants to acquire common sharesissued
      with the October 2008 Note
              
              
              -
              
              
              
              -
              
              
              
              8,903
              
              
              
              -
              
              
              
              8,903Fair
      value of warrants to acquire common sharesissued
      with the May 2009 Note
              
              
              -
              
              
              
              -
              
              
              
              33,139
              
              
              
              -
              
              
              
              33,139Stock
      Compensation
              
              
              4,882,000
              
              
              
              4,882
              
              
              
              323,038
              
              
              
              -
              
              
              
              327,920Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,513,760
              )
              
              
              (1,513,760
              )BALANCE
      AT SEPTEMBER 30, 2009
              
              
              41,208,017
              
              
              $
              41,208
              
              
              $
              12,442,502
              
              
              $
              (8,576,412
              )
              
              $
              3,907,298The
      accompanying notes are an integral part of these consolidated unaudited
      financial statements.
 5


BONANZA
      OIL AND GAS, INC. AND SUBSIDIARIESSTATEMENTS
      OF CONSOLIDATED CASH FLOWS(Unaudited)For
      the NineMonths Ended
      September 30,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (1,513,760
              )
              
              $
              (2,232,890
              )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation,
      depletion and amortization
              
              
              96,251
              
              
              
              25,942Stock-based
      compensation
              
              
              327,920
              
              
              
              -Fair
      value of shares issued for consulting services
              
              
              15,897
              
              
              
              568,500Amortization
      of deferred financing costs
              
              
              499,195
              
              
              
              894,353Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              5,068
              
              
              
              (9,424
              )Other
      current assets
              
              
              36,036
              
              
              
              (458,166
              )Accounts
      payable and accrued expenses
              
              
              389,808
              
              
              
              (17,030
              )Net
      cash used in operating activities
              
              
              (143,585
              )
              
              
              (1,228,715
              )CASH
      FLOWS FROM INVESTING ACTIVITIESOil
      and gas capital expenditures
              
              
              (105,642
              )
              
              
              (2,566,532
              )Additions
      to other property and equipment
              
              
              -
              
              
              
              (11,679
              )Issuance
      of Black Pearl Energy, Inc. note receivable
              
              
              -
              
              
              
              (500,000
              )Net
      cash used in investing activities
              
              
              (105,642
              )
              
              
              (3,078,211
              )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of notes payable
              
              
              720,000
              
              
              
              2,050,000Repayment
      of notes payable
              
              
              (418,075
              )
              
              
              -Debt
      issue costs
              
              
              (56,370
              )
              
              
              (90,000
              )Proceeds
      from equity issuances, net
              
              
              -
              
              
              
              2,203,499Net
      cash provided by financing activities
              
              
              245,555
              
              
              
              4,163,499NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (3,672
              )
              
              
              (143,427
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
              
              
              3,881
              
              
              
              154,357CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              209
              
              
              $
              10,930SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid for interest
              
              $
              15,000
              
              
              $
              139,310NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Acquisition
      of oil and gas property for common shares
              
              $
              -
              
              
              $
              5,052,036Non-cash
      exploration and development activities
              
              $
              26,486
              
              
              $
              1,631,834Foregiveness
      of Black Pearl Energy, Inc. note receivable
              
              $
              -
              
              
              $
              500,000Fair
      value of common shares and warrants to purchase commonshares
      issued with notes payable
              
              $
              141,595
              
              
              $
              1,310,703The
      accompanying notes are an integral part of these consolidated unaudited
      financial statements.





6


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)




1.  BASIS
OF PRESENTATION





Bonanza
Oil and Gas, Inc. (“Bonanza” or the “Company”) has prepared the accompanying
unaudited consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Item
310(b) of regulation S-K.  These financial statements should be read
together with the financial statements and notes in the Company’s 2008 Form 10-K
filed with the SEC.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted.  The accompanying financial statements reflect
all adjustments and disclosures, which, in the Company’s opinion, are necessary
for fair presentation.  All such adjustments are of a normal recurring
nature.  The results of operations for the interim periods are not
necessarily indicative of the results of the entire year.





Going
Concern





The
Company has incurred significant losses and had negative cash flow from
operations since Inception (August 17, 2007), and has an accumulated
deficit of $8,576,412 at September 30, 2009.  Substantial portions of
the losses are attributable to non-cash writedowns of oil and gas properties,
with the balance attributable to primarily personnel costs, legal and
professional fees, and financing costs.  The Company's operating plans
require additional funds that may take the form of debt or equity
financings.  There can be no assurance that any additional funds will
be available.  The Company's ability to continue as a going concern is
in substantial doubt and is dependent upon achieving a profitable level of
operations and obtaining additional financing.





We have
undertaken steps as part of a plan to improve operations with the goal of
sustaining our operations for the next twelve months and beyond. These steps
include (a) raising additional capital and/or obtaining financing, if available,
(b) increasing our current production (c) continuing development drilling on our
proved and undeveloped properties and (d) controlling overhead and
expenses.





There can
be no assurance that we will successfully accomplish these steps and it is
uncertain we will achieve a profitable level of operations and/or obtain
additional financing.  There can be no assurance that any additional
financings will be available to us on satisfactory terms and conditions, if at
all.  In the event we are unable to continue as a going concern, we
may elect or be required to seek protection from our creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary petition in
bankruptcy.  To date, management has not considered this alternative,
nor does management view it as a likely occurrence.





Principles of
Consolidation
 
 The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of intercompany balances and
transactions.  The Company’s interest in oil and gas exploration and
production ventures and partnerships are proportionately
consolidated.





Use
of Estimates





Preparation
of financial statements in conformity with U.S. 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.  The
Company bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about carrying values of
assets and liabilities that are not readily apparent from other
sources.  The Company evaluates its estimates and assumptions on a
regular basis.  Actual results may differ from these estimates and
assumptions used in preparation of its financial statements and changes in these
estimates are recorded when known.




7


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)


Recently
Adopted Accounting Pronouncement





In
June 2009, the FASB issued SFAS No. 168, “The FASB Accounting
Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles,” which has been
primarily codified into ASC Topic 105, “Generally Accepted Accounting
Standards.”  This guidance establishes the FASB Accounting Standards
Codification, which officially commenced July 1, 2009, to become the single
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities.  Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants.  All other accounting literature
excluded from the Codification is considered nonauthoritative.  The
subsequent issuances of new standards will be in the form of Accounting
Standards Updates that will be included in the
Codification.  Generally, the Codification does not change U.S.
GAAP.  This statement is effective for financial statements issued for
interim and annual periods ending after September 15, 2009.  The
Company has adopted this standard for the quarter ending September 30,
2009.  The standard has had a minimal effect on the Company’s
financial statement disclosures, as all references to authoritative accounting
literature are referenced in accordance with the Codification.





In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was
primarily codified into FASB Accounting Standards Codification (ASC, also known
collectively as the Codification) Topic 855, “Subsequent Events.” This guidance
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
In particular, this statement sets forth:





·
            The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial statements;
  and





·
            The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements; and





·
            The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.








ASC Topic 855 is effective for interim or annual periods ending after
June 15, 2009, and is to be applied prospectively.  The Company
adopted ASC Topic 855 as of June 30, 2009.  We evaluated all
events or transactions that occurred after September 30, 2009, up through
the date we issued the Company’s financial statements on November 20,
2009.  For further discussion about subsequent events, see Note 4 –
Subsequent Events of this Form 10-Q.




8


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)


New
Pronouncements Issued But Not Yet Adopted





In
January 2009, the SEC issued Release No. 33-8995, “Modernization of
Oil and Gas Reporting,” amending oil and gas reporting requirements under
Rule 4-10 of Regulation S-X and Industry Guide 2 in
Regulation S-K and bringing full-cost accounting rules into alignment with
the revised disclosure requirements.  The new rules include changes to
the pricing used to estimate reserves, the ability to include nontraditional
resources in reserves, the use of new technology for determining reserves and
permitting disclosure of probable and possible reserves.  In September
2009, the FASB issued Proposed Accounting Standards Update (ASU), “Extractive Industries—Oil
and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures” (Exposure
Draft No. 1730-100), to align the guidance in U.S. GAAP with the changes
the SEC made in December 2008.  The final rules are effective for
registration statements filed on or after January 1, 2010, and for annual
reports for fiscal years ending on or after December 31,
2009.  The public comment period for the Proposed ASU ended
October 15, 2009;  however, no final guidance has been issued by
the FASB. The Company is continuing to evaluate the impact of this
release.





2.  NOTES
PAYABLE





The
Company’s notes payable at September 30, 2009 and December 31, 2008, consisted
of the following:





Balance
      as ofSeptember
      30, 2009
              
              
              December
      31, 2008December
      2007 Secured Promissory Note
              
              $
              125,000
              
              
              $
              250,000January
      2008 Secured Promissory Notes
              
              
              800,000
              
              
              
              800,000May
      2008 Convertible Note
              
              
              750,000
              
              
              
              750,000August
      2008 Unsecured Promissory Notes
              
              
              500,000
              
              
              
              500,000October
      2008 Unsecured Promissory Notes
              
              
              50,000
              
              
              
              50,000May
      2009 Unsecured Promissory Note
              
              
              340,000
              
              
              
              -July
      2009 Unsecured Promissory Note
              
              
              40,000
              
              
              
              -September
      2009 Unsecured Promissory Note
              
              
              55,000
              
              
              
              -Total
              
              
              2,660,000
              
              
              
              2,350,000Unamortized
      discount
              
              
              -
              
              
              
              (250,296
              )Balance,
      net of discount
              
              $
              2,660,000
              
              
              $
              2,099,704





December 2007 Secured Promissory
Note





In
December 2007, the Company entered into a 14% Senior Asset Backed Secured
Promissory Note and Security Agreement, and a Securities Purchase Agreement,
with Phoenix Capital Opportunity Fund, L.P. ("Phoenix") in principal amount of
$250,000 (the "December 2007 Note) and the issuance of 74,999 shares (on a
post-split adjusted basis) of Common Stock of the Company.  The
December 2007 Note matured on December 17, 2008, and interest was payable on a
quarterly basis.  The Company's obligations under the December 2007
Note are secured by the Company’s interest in eight oil and gas wells located in
Gonzales County, Texas.  The shares issued in conjunction with the
December 2007 Note were valued at $22,500, based on the price of the Company’s
Common Stock issued in its then most recent private placement offering, and was
recorded as a discount to the December 2007 Note and additional paid-in
capital.  The Company also incurred $12,500 in issue costs which it
recorded as deferred financing costs as a component of prepaid and other current
expenses.  The discount and deferred financing costs were amortized
using the effective interest rate method over the term of the
indebtedness.  These balances were fully amortized as of December 31,
2008.  Under the terms of the December 2007 Note, the interest rate
increased to an annual rate of 24%, plus all enforcement costs, if in
default.





At
September 30, 2009, the Company was in default with respect to the repayment
obligation upon maturity on December 17, 2008, with respect to the December 2007
Note.  Pursuant to the terms of the December 2007 Note, the interest
rate on all amounts outstanding increased to 24% per annum, effective December
17, 2008.  On February 6, 2009, the Company made a partial
payment of $125,000 toward satisfaction of this obligation.  On June
30, 2009, Phoenix filed suit against the Company seeking repayment of the
principal balance outstanding plus all accrued interest, along with their
attorney fees and court costs.  The Company has a total of $36,389 in
accrued and unpaid interest on the December 2007 Note at
September 30, 2009.




9


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)


January
2008 Secured Promissory Notes





In
January 2008, the Company entered into three 14% Senior Secured Promissory Note
and Security Agreements, and Securities Purchase Agreements, with accredited
investors for an aggregate principal amount of $800,000 (the "January 2008
Notes") and the issuance of 160,000 shares of the Company’s Common
Stock.  The January 2008 Notes matured on January 31, 2009, with
interest payable on a monthly basis.  The Company's obligations under
the January 2008 Notes are secured by the Company’s interest in three prospect
areas located in Borden, Hidalgo and Brazoria counties of Texas.  The
shares issued in conjunction with the January 2008 Notes were valued at
$120,000, based on the market price of the Company’s Common Stock at the time of
issuance, and was recorded as a discount to the January 2008 Notes and
additional paid-in capital.  This discount was amortized using the
effective interest rate method over the term of the
indebtedness.   These balances were fully amortized as of March
31, 2009.  Under the terms of the January 2008 Notes, the interest
rate increased to an annual rate of 24%, plus all enforcement costs, if in
default.  In addition, if the Company did not repay the January 2008
Notes by July 31, 2009, the Company was obligated to issue an additional 150,000
shares of its Common Stock as an additional interest payment.  The
Company issued the additional 150,000 additional shares in August
2009.





At
September 30, 2009, the Company was in default with respect to the repayment
obligation upon maturity on January 31, 2009, with respect to the
January 2008 Notes.  Pursuant to the terms of the January 2008 Notes,
the interest rate on all amounts outstanding increased to 24% per annum,
effective January 31, 2009.  As of November 20, 2009, the Company had
not cured the default; however the lenders have not yet taken any further action
with respect to the default.  Although the Company is actively seeking
additional financing to remedy this default, and is in constant communication
with the lenders, there can be no assurances that the lenders will continue to
delay the enforcement of their remedies under the January 2008
Notes.  The Company has a total of $154,293 in accrued and unpaid
interest on the January 2008 Notes at September 30, 2009.




May 2008 Convertible Note





In May
2008, the Company entered into a Securities Purchase Agreement with an
accredited investor providing for the sale by the Company of an 8% convertible
note in the principal amount of $750,000 (the "May 2008 Convertible Note") and
the issuance of 375,000 shares of Common Stock of the Company, a Series A Common
Stock Purchase Warrant to purchase 750,000 shares of the Company’s Common Stock
(the “Series A May Warrant”) and a Series B Common Stock Purchase Warrant to
purchase 750,000 shares of the Company’s Common Stock (the “Series B May
Warrant”).   The May 2008 Convertible Note matured on May 14, 2009,
and interest is payable on a quarterly basis.  The May 2008
Convertible Note is unsecured, however, in the event that the Company grants a
secured interest in its assets in connection with any future financing, then the
holder of the May 2008 Convertible Note will be entitled to a pari passu
interest in such secured interest.  The May 2008 Convertible Note is
convertible into the Company’s Common Stock, at a conversion price of $0.3742
per common share, as adjusted, and is subject to normal and customary
anti-dilution provisions.  The Company may require that the holder of
the May 2008 Convertible Note convert all or a portion of the May 2008
Convertible Note in the event that the Company’s closing market price for any 10
consecutive trading days exceeds 300% of the then conversion
price.  However, in no event can the holder of the May 2008
Convertible Note convert the May 2008 Convertible Note into such shares which
would provide for the holder to own more than 4.9% of the then outstanding
shares of the Company’s Common Stock, including the shares for which the holder
is entitled upon exercise of the Series A May Warrant and Series B May
Warrant.




10


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)


The
Series A May Warrant and Series B May Warrant are exercisable for a period of
two years at an exercise price of $0.75 and $1.00 per share,
respectively.  In the event that the Company issues securities at a
per share price less than the conversion price, then the exercise price
associated with the Series A May Warrant and Series B May Warrant and the
conversion price for the May 2008 Convertible Note shall be adjusted to equal
such price.  However, no adjustment will be made for issuances
relating to shares of the Company’s Common Stock or options to employees,
officers, consultants or directors of the Company, securities outstanding as of
the date of the closing, securities issued in connection with acquisitions or
strategic transactions or securities issued as equity enhancements in connection
with standard non-convertible debt transactions





Pursuant
to ASC Topic 740-20, “Debt with Conversions and Other Options,” the proceeds
from the debt were allocated to the common shares issued, the warrants issued
and the debt on a relative fair value basis.





The
Company calculated the value of the beneficial conversion feature as $305,576,
and recorded such value as a discount to the May 2008 Convertible Note and to
additional paid-in capital.  Using the Black Scholes pricing model,
with volatility of 140.69%, a risk-free interest rate of 3.88% and a 0% dividend
yield, the Series A May Warrant and Series B May Warrant were determined to have
a fair value of $236,114, with such value also recorded as a  discount
to the May 2008 Convertible Note and to additional paid-in
capital.  The value of the 375,000 common shares was determined to be
$99,462, based on the market price of the Company’s Common Stock at the time of
issuance, and was also recorded as a discount to the May 2008 Convertible Note
and as Common Stock and additional paid-in capital.  The aggregate
discount of $641,152 attributable to the shares, the warrants and the beneficial
conversion feature was amortized using the effective interest rate method over
the term of the indebtedness and was fully amortized at September 30,
2009.  The Company also incurred issue costs of $90,000 associated
with the May 2008 Convertible Note which it recorded as deferred financing costs
as a component of prepaid and other current expenses.  The Company
also issued 75,000 Series A May Warrants and 75,000 Series B May Warrants,
valued at $42,730, to its investment banking firm as additional
compensation.  The deferred financing costs were also amortized using
the effective interest rate method over the term of the
indebtedness.





As of
September 30, 2009, the Company had not made the quarterly interest payment due
on March 31, 2009, June 30, 2009, or September 30, 2009, with respect
to the May 2008 Convertible Note.  Pursuant to the terms of the May
2008 Convertible Note, the interest rate on the past due quarterly interest
payment increased to 15% per annum, effective March 31, 2009.  The
Company had 90 days to make the scheduled quarterly interest payment before an
Event of Default should occur.  At September 30, 2009, the Company was
in default with respect to the March 31, 2009 quarterly interest payment in
addition to being in default with respect to the repayment obligation upon
maturity on May 14, 2009.  Pursuant to the terms of the May 2008
Convertible Note, the interest rate on all amounts outstanding increased to 15%
per annum.  As of November 20, 2009, the Company had not cured the
default; however the lender has not yet taken any further action with respect to
the default.  Although the Company is actively seeking additional
financing to remedy this default, and is in constant communication with the
lender, there can be no assurances that the lender will continue to delay the
enforcement of their remedies under the May 2008 Convertible
Note.  The Company had a total of $57,187 in accrued and unpaid
interest on the May 2008 Convertible Note at September 30, 2009.








11


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)


August 2008 Unsecured Promissory
Note





In August
2008, the Company entered into four 12% Unsecured Promissory Notes, and
Securities Purchase Agreements, with accredited investors for an aggregate
principal amount of $500,000 (the "August 2008 Notes") and the issuance of
250,000 shares of the Company’s Common Stock.  The August 2008 Notes
matured on September 28, 2008.  In the event that the August 2008
Notes were not repaid by September 28, 2008, the Company became required to
issue 125,000 shares of the Company’s Common Stock every thirty days that any
amounts remain outstanding under the August 2008 Notes (the “Additional
Shares”).  An entity controlled by the Company’s Chief Financial
Officer purchased $50,000 of the August 2008 Notes.





In
October 2008, and prior to the issuance of the either the 250,000 shares of the
Company’s Common Stock or the Additional Shares, the Company and the holders of
the August 2008 Notes elected to amend the terms of the August 2008
Notes.  In connection therewith, in exchange for the holders of the
August 2008 Notes election to forego their right to receive the 250,000 shares
of the Company’s Common Stock and the Additional Shares, the Company agreed to
issue the holders of the August 2008 Notes common stock purchase warrants to
purchase an aggregate of 500,000 common shares of the Company’s Common Stock
(the “August 2008 Warrants”).  The August 2008 Warrants are
exercisable for a period of three years at a price of $1.00 per
share.  As the August 2008 Notes were not repaid by September 28,
2008, the Company is required to issue the holders of the August 2008 Notes an
aggregate of 125,000 warrants to purchase shares of the Company’s Common Stock
every thirty days that any amounts remain outstanding under the August 2008
Notes (the “Additional Warrants”).  The Additional Warrants shall be
exercisable for a period of three years at a price equal to the greater of $1.00
or the market price as of the date of the issuance.  As of September
30, 2009, a total of 1,625,000 Additional Warrants have been
issued.





Using the
Black Scholes pricing model, with volatility ranging from 146.59% to 181.19%, a
risk-free interest rate ranging from 1.25% to 4.50% and a 0% dividend yield, the
1,000,000 August 2008 Warrants and the Additional Warrants issued during 2008
were determined to have an aggregate fair value of $569,606, with such value
recorded as a discount to the August 2008 Notes and to additional paid-in
capital.  This discount was amortized using the effective interest
rate method over the term of the indebtedness and as of December 31, 2008, was
fully amortized.  Using the Black Scholes pricing model, with
volatility ranging from 168.44% to 187.76%, a risk-free interest rate of 1.25%
and a 0% dividend yield, the 1,125,000 Additional Warrants issued during 2009
were determined to have an aggregate fair value of $89,053, with such value
recorded as additional interest expense and to additional paid-in
capital.





As of
September 30, 2009, the Company had not repaid any of the amounts due under the
August 2008 Notes.  As noted above, pursuant to the terms of the
August 2008 Notes, the Company is required to issue to the holders of the August
2008 Notes, a total of 125,000 warrants to purchase shares of the Company’s
Common Stock every 30 days that amounts remain outstanding under the August 2008
Notes. The Company has a total of $64,528 in accrued and unpaid interest on the
August 2008 Notes at September 30, 2009.





October
2008 Unsecured Promissory Note





On
October 17, 2008, the Company entered into a 12% Unsecured Promissory Note, and
Securities Purchase Agreement, with an accredited investor for an aggregate
principal amount of $50,000 (the "October 2008 Note") and the issuance of common
stock purchase warrants to purchase an aggregate of 50,000 common shares of the
Company’s Common Stock (the “October 2008 Warrants”).  The October
2008 Warrants are exercisable for a period of three years at a price of $1.00
per share.  The October 2008 Notes matured on November 17,
2008.  In the event that the October 2008 Notes were not repaid by
November 17, 2008, the Company became required to issue 12,500 warrants to
purchase shares of the Company’s Common Stock every thirty days that any amounts
remain outstanding under the October 2008 Notes (the “Additional October
Warrants”).  The Additional October Warrants shall be exercisable for
a period of three years at a price equal to the greater of $1.00 or the market
price as of the date of the issuance.  As of September 30, 2009, a
total of 137,500 Additional October Warrants have been issued.




12


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)


Using the
Black Scholes pricing model, with volatility ranging from 150.67% to 176.24%, a
risk-free interest rate ranging of 1.25% and a 0% dividend yield, the 75,000
October 2008 Warrants and the Additional October Warrants issued during 2008,
were determined to have an aggregate fair value of $29,180, with such value
recorded as a discount to the October 2008 Note and to additional paid-in
capital.  This discount was amortized using the effective interest
rate method over the term of the indebtedness and as of December 31, 2008, was
fully amortized.  Using the Black Scholes pricing model, with
volatility ranging from 168.44% to 187.76%, a risk-free interest rate of 1.25%
and a 0% dividend yield, the 112,500 Additional October Warrants issued during
2009 were determined to have an aggregate fair value of $8,903, with such value
recorded as additional interest expense and to additional paid-in
capital.





As of
September 30, 2009, the Company had not repaid any of the amounts due under the
October 2008 Notes.  As noted above, pursuant to the terms of the
October 2008 Notes, the Company is required to issue to the holders of the
October 2008 Notes, a total of 12,500 warrants to purchase shares of the
Company’s Common Stock every 30 days that amounts remain outstanding under the
October 2008 Notes. The Company has a total of $6,453 in accrued and unpaid
interest on the October 2008 Note at September 30, 2009.





February
2009 Unsecured Promissory Note





On
February 2, 2009, the Company issued an unsecured promissory note with an
accredited investor providing for a loan of $285,000 (the “February 2009
Note”).  The February 2009 Note was due on May 3, 2009, and bore
interest at 14% per annum.  The Company incurred issue costs of
$23,850 associated with the February 2009 Note which it recorded as deferred
financing costs as a component of prepaid and other current
expenses.  The deferred financing cost was amortized using the
effective interest rate method over the term of the
indebtedness.   The net proceeds were used to reduce the
principal amount due on the December 2007 Note ($125,000) and for general
corporate purposes.  The February 2009 Note and accrued interest was
repaid in May 2009.





May
2009 Unsecured Promissory Note





On May
26, 2009, the Company entered into a 16% Unsecured Promissory Note with an
accredited investor for an aggregate principal amount of $340,000 (the "May 2009
Note") and the issuance of common stock purchase warrants to purchase an
aggregate of 500,000 common shares of the Company’s Common Stock (the “May 2009
Warrants”).  The May 2009 Warrants are exercisable for a period of
three years at a price of $0.10 per share.  The May 2009 Note matured
on August 24, 2009.  In the event that the May 2009 Note was not
repaid by August 24, 2009, the interest rate increased to 18% per annum and the
lender, at its option, could convert all outstanding amounts in shares of the
Company’s Common Stock at a conversion price of $0.10 per share.  The
Company incurred $17,000 of issue costs associated with the May 2009 Note, which
was amortized using the effective interest rate method over the term of the
indebtedness and as of September 30, 2009, was fully amortized.  The
net proceeds were used to repay the principal and accrued interest due on the
February 2009 Note, the due date of which had been extended until July 24, 2009,
and for general corporate purposes.




13


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)


Using the
Black Scholes pricing model, with volatility of 231%, a risk-free interest rate
of 1.25% and a 0% dividend yield, the 500,000 May 2009 Warrants were determined
to have an aggregate fair value of $33,139, with such value recorded as a
discount to the May 2009 Note and to additional paid-in capital.  This
discount was amortized using the effective interest rate method over the term of
the indebtedness and as of September 30, 2009, was fully
amortized.  The Company has a total of $20,892 in accrued and unpaid
interest on the May 2009 Note at September 30, 2009.





July
2009 Unsecured Promissory Note





On July
16, 2009, the Company issued an unsecured promissory note with an accredited
investor providing for a loan of $40,000 (the “July 2009 Note”).  The
July 2009 Note matured on October 13, 2009, and bears interest at 14% per
annum.





September
2009 Unsecured Promissory Note





On
September 21, 2009, the Company issued an unsecured promissory note with an
accredited investor providing for a loan of $55,000 (the “September 2009
Note”).  The September 2009 Note is due on September 21, 2010, and
bears interest at 12% per annum.





3.  EQUITY
TRANSACTIONS





In
January 2009, the Company issued 75,700 of its common shares to a consultant for
prospect evaluation.  The value of these shares was determined to be
$15,897, based on the market price of the Company’s Common Stock at the time of
issuance, and was recorded as general and administrative expense, common stock
and additional paid-in capital.





On
February 6, 2009, the Company issued 500,000 restricted shares of Common Stock
to its Chief Financial Officer pursuant to the terms of an Executive Employment
Agreement entered into as of February 6, 2009, between the Company and its Chief
Financial Officer.  The value of the 500,000 common shares was
determined to be $65,000, based on the market price of the Company’s Common
Stock at the time of issuance, and was recorded as stock compensation expense,
common stock and additional paid-in capital.





On June
3, 2009, pursuant to an Employment Agreement entered on June 1, 2009, the
Company issued 2,120,500 restricted shares of Common Stock to its Chief
Executive Officer.  The value of the 2,120,500 common shares was
determined to be $127,230, based on the market price of the Company’s Common
Stock at the time of issuance, and was recorded as stock compensation expense,
common stock and additional paid-in capital.





On June
3, 2009, pursuant to an Employment Agreement entered on June 1, 2009, the
Company issued 2,261,500 restricted shares of Common Stock to its Vice
President, Operations.  The value of the 2,261,500 common shares was
determined to be $135,690, based on the market price of the Company’s Common
Stock at the time of issuance, and was recorded as stock compensation expense,
common stock and additional paid-in capital.





On July
31, 2009, pursuant to the terms of the January 2008 Notes, the Company was
required to issue 150,000 shares of its Common Stock as a penalty for not having
repaid the outstanding borrowings.  The value of the 150,000 common
shares was determined to be $10,500, based on the market price of the Company’s
Common Stock at the time of issuance, and was recorded as interest expense,
common stock and additional paid-in capital.




14


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009 (unaudited)





As of
September 30, 2009, the Company had the following dilutive securities
outstanding:


Number
              
              
              Exercise
              
              
              ExpirationCommon
      Shares issuable:
              
              of
      Shares
              
              
              Price
              
              
              DateIn
      connection with the May 2008 Convertible Note:Upon
      conversion of May 2008 Convertible Note
              
              
              2,004,276
              
              
              
              -
              
              
              
              -Upon
      exercise of the Series A May Warrants
              
              
              825,000
              
              
              $
              0.75
              
              
              May
      14, 2010Upon
      exercise of the Series B May Warrants
              
              
              825,000
              
              
              $
              1.00
              
              
              May
      14, 2010In
      connection with the June 2008 Unit Offering:Upon
      exercise of the Series A June Warrants
              
              
              2,268,749
              
              
              $
              1.00
              
              
              June
      30, 2010Upon
      exercise of the Series B June Warrants
              
              
              2,268,749
              
              
              $
              1.00
              
              
              June
      30, 2010In
      connection with the August 2008 Notes:Upon
      exercise of the August 2008 Warrants
              
              
              500,000
              
              
              $
              1.00
              
              
              August
      28, 2011Upon
      exercise of the Penalty Warrants (9/08)
              
              
              125,000
              
              
              $
              1.00
              
              
              September
      30, 2011Upon
      exercise of the Penalty Warrants (10/08)
              
              
              125,000
              
              
              $
              1.00
              
              
              October
      31, 2011Upon
      exercise of the Penalty Warrants (11/08)
              
              
              125,000
              
              
              $
              1.00
              
              
              November
      30, 2011Upon
      exercise of the Penalty Warrants (12/08)
              
              
              125,000
              
              
              $
              1.00
              
              
              December
      31, 2011Upon
      exercise of the Penalty Warrants (1/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              January
      31, 2012Upon
      exercise of the Penalty Warrants (2/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              February
      28, 2012Upon
      exercise of the Penalty Warrants (3/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              March
      31, 2012Upon
      exercise of the Penalty Warrants (4/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              April
      30, 2012Upon
      exercise of the Penalty Warrants (5/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              May
      31, 2012Upon
      exercise of the Penalty Warrants (6/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              June
      30, 2012Upon
      exercise of the Penalty Warrants (7/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              July
      31, 2012Upon
      exercise of the Penalty Warrants (8/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              August
      31, 2012Upon
      exercise of the Penalty Warrants (9/09)
              
              
              125,000
              
              
              $
              1.00
              
              
              September
      30, 2012In
      connection with the October 2008 Notes:Upon
      exercise of the October 2008 Warrants
              
              
              50,000
              
              
              $
              1.00
              
              
              October
      17, 2011Upon
      exercise of the Penalty Warrants (11/08)
              
              
              12,500
              
              
              $
              1.00
              
              
              November
      17, 2011Upon
      exercise of the Penalty Warrants (12/08)
              
              
              12,500
              
              
              $
              1.00
              
              
              December
      17, 2011Upon
      exercise of the Penalty Warrants (1/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              January
      17, 2012Upon
      exercise of the Penalty Warrants (2/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              February
      17, 2012Upon
      exercise of the Penalty Warrants (3/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              March
      17, 2012Upon
      exercise of the Penalty Warrants (4/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              April
      17, 2012Upon
      exercise of the Penalty Warrants (5/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              May
      17, 2012Upon
      exercise of the Penalty Warrants (6/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              June
      17, 2012Upon
      exercise of the Penalty Warrants (7/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              July
      17, 2012Upon
      exercise of the Penalty Warrants (8/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              August
      17, 2012Upon
      exercise of the Penalty Warrants (9/09)
              
              
              12,500
              
              
              $
              1.00
              
              
              September
      17, 2012In
      connection with the May 2009 Note:Upon
      exercise of the May 2009 Warrants
              
              
              500,000
              
              
              $
              0.10
              
              
              May
      26, 2012Total
      dilutive securities at September 30, 2009
              
              
              11,004,274






15


BONANZA
OIL AND GAS, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2009 (unaudited)




The
Company’s basic earnings per share (EPS) amounts have been computed based on the
weighted-average number of shares of Common Stock outstanding for the
period.  Diluted EPS reflects the potential dilution, using the
treasury stock method, which could occur if the above dilutive securities were
exercised.  As the Company realized a net loss for each of the three
and nine months ended September 30, 2009, and September 30, 2008, no potentially
dilutive securities were included in the calculation of diluted earnings per
share as their impact would have been anti-dilutive.





4.  SUBSEQUENT
EVENTS





On
November 10, 2009, the Company issued an unsecured promissory note with an
accredited investor providing for a loan of $50,000.  The promissory
note is due on December 31, 2009, and bears interest at 12% per
annum.




16







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




The
following information should be read in conjunction with the Company’s
consolidated unaudited financial statements and the notes thereto contained
elsewhere in this report.  The Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for forward-looking
statements.  Information in this Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Form 10-Q that does not consist of historical facts, are "forward-looking
statements."  Statements accompanied or qualified by, or containing
words such as "may," "will," "should," "believes," "expects," "intends,"
"plans," "projects," "estimates," "predicts," "potential," "outlook,"
"forecast," "anticipates," "presume," and "assume" constitute forward-looking
statements, and as such, are not a guarantee of future
performance.  The statements involve factors, risks and uncertainties
including those discussed in the “Risk Factors” section found in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008, filed with the
Securities and Exchange Commission on April 15, 2009, the impact or occurrence
of which can cause actual results to differ materially from the expected results
described in such statements.  Risks and uncertainties can include,
among others, fluctuations in general business cycles and changing economic
conditions; changing product demand and industry capacity; increased competition
and pricing pressures; advances in technology that can reduce the demand for the
Company's products, as well as other factors, many or all of which may be beyond
the Company's control.  Consequently, investors should not place undue
reliance on forward-looking statements as predictive of future
results.  The Company disclaims any obligation to update the
forward-looking statements in this report.





Overview





Bonanza
Oil & Gas, Inc. is an independent energy company engaged primarily in the
acquisition, development, production and the sale of crude oil, natural gas and
natural gas liquids.  The Company's production activities are located
in the United States of America.  The principal executive offices of
the Company are located at 3417 Mercer, Suite E, Houston, TX 77027.





The
Company has incurred significant losses and had negative cash flow from
operations since inception on August 17, 2007, and has an accumulated
deficit of $8,576,412 at September 30, 2009.  Substantial portions of
the losses are attributable to non-cash writedowns of oil and gas properties,
with the balance attributable to primarily personnel costs, legal and
professional fees, and financing costs.  The Company's operating plans
require additional funds that may take the form of debt or equity
financings.  There can be no assurance that any additional funds will
be available.  The Company's ability to continue as a going concern is
in substantial doubt and is dependent upon achieving a profitable level of
operations and obtaining additional financing.





We have
undertaken steps as part of a plan to improve operations with the goal of
sustaining our operations for the next twelve months and beyond. These steps
include (a) raising additional capital and/or obtaining financing, if available,
(b) increasing our current production (c) continuing development drilling on our
proved, undeveloped properties and (d) controlling overhead and
expenses.





There can
be no assurance that we will successfully accomplish these steps and it is
uncertain we will achieve a profitable level of operations and/or obtain
additional financing.  There can be no assurance that any additional
financings will be available to us on satisfactory terms and conditions, if at
all.  In the event we are unable to continue as a going concern, we
may elect or be required to seek protection from our creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary petition in
bankruptcy.  To date, management has not considered this alternative,
nor does management view it as a likely occurrence.




17





Results
of Operations





For
      the Three Months Ended
              
              
              For
      the Nine Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008REVENUES:Crude
      oil sales
              
              $
              59,506
              
              
              $
              83,031
              
              
              $
              192,323
              
              
              $
              112,49759,506
              
              
              
              83,031
              
              
              
              192,323
              
              
              
              112,497OPERATING
      EXPENSES:Depreciation,
      depletion and amortization
              
              
              22,976
              
              
              
              21,011
              
              
              
              96,251
              
              
              
              25,942Lease
      operating expenses
              
              
              43,668
              
              
              
              7,138
              
              
              
              113,372
              
              
              
              25,911Severance
      and other taxes
              
              
              2,578
              
              
              
              3,759
              
              
              
              8,416
              
              
              
              5,185General
      and administrative
              
              
              160,124
              
              
              
              295,618
              
              
              
              988,849
              
              
              
              1,249,638Financing
      costs, net
              
              
              69,416
              
              
              
              810,475
              
              
              
              499,195
              
              
              
              1,038,711298,762
              
              
              
              1,138,001
              
              
              
              1,706,083
              
              
              
              2,345,387OPERATING
      LOSS
              
              
              (239,256
              )
              
              
              (1,054,970
              )
              
              
              (1,513,760
              )
              
              
              (2,232,890
              )





Three
months ended September 30, 2009 compared to the three months ended September 30,
2008





During
the three months ended September 30, 2009 and 2008, the Company realized gross
revenue from its first two development wells drilled in the exploitation of the
Apclark field in the second half of 2008.  During the three months
ended September 30, 2008, the Company’s also had production from three of
its eight wells in the Plantation field, while no such production was realized
during the three months ended September 30, 2009.  During the three
months ended September 30, 2009 and 2008, the Company had total sales,
net to its interest, of 869 and 766 barrels of crude oil, respectively, and
realized average prices of $68.44 and $108.40, respectively.  During
the same periods, lease operating expenses, including severance and other taxes
and transportation costs, totaled $53.19 and $14.22 per barrel, respectively,
resulting in netbacks to the Company of $15.25 and $94.18 per barrel,
respectively.





Depreciation,
depletion and amortization expense totaled $22,976 and $21,011 for the three
months ended September 30, 2009 and 2008, respectively, most of which
is attributable to depletion on our Apclark field and Plantation field producing
properties.





For the
three months ended September 30, 2009 and 2008, general and administrative
expenses totaled $160,124 and $295,618, respectively.  For 2009, these
expenses were comprised primarily of payroll and other personnel expenses
($108,000), audit and accounting services ($10,000), legal services ($18,000)
and rent expense ($26,057).  For 2008, these expenses were comprised
primarily of payroll and other personnel expenses ($111,683) and legal expenses
($74,500).





Financing
costs, net for the three months ended September 30, 2009 and 2008, totaled
$69,416 and $810,475, respectively.  The Company capitalized $130,724
of interest associated with unproved properties during the three months ended
September 30, 2009.  No interest was capitalized during the
three months ended September 30, 2008.  The balance of financing costs
recognized was primarily attributable to the amortization of deferred financing
fees and discounts associated with the outstanding debt.




18





Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008





During
the nine months ended September 30, 2009 and 2008, the Company realized gross
revenue from its first two development wells drilled in the exploitation of the
Apclark field in the second half of 2008.  During the nine months
ended September 30, 2008, the Company also realized production from three of its
eight wells in the Plantation field, while in 2009 the Company only realized
such production during the first three months of the year.  During the
nine months ended September 30, 2009 and 2008, the Company had total
sales, net to its interest, of 3,716 and 1,055 barrels of crude oil,
respectively, and realized average prices of $51.75 and $106.63,
respectively.  During the same periods, lease operating expenses,
including severance and other taxes and transportation costs, totaled $32.61 and
$29.47 per barrel, respectively, resulting in netbacks to the Company of $19.14
and $77.16 per barrel, respectively.





Depreciation,
depletion and amortization expense totaled $96,251 and $25,942 for the nine
months ended September 30, 2009 and 2008, respectively, most of which is
attributable to depletion on our Apclark field and Plantation field producing
properties.





For the
nine months ended September 30, 2009 and 2008, general and administrative
expenses totaled $988,849 and $1,249,638, respectively.  For 2009,
these expenses were comprised primarily of payroll and other personnel expenses
($268,955), stock based compensation ($327,920), audit and accounting services
($90,500), legal services ($54,000) and rent expense ($65,804).  For
2008, these expenses were comprised primarily of payroll and other personnel
expenses ($293,673), financial consulting ($516,000), legal expenses ($153,204)
and audit and accounting services ($52,685).





Financing
costs, net for the nine months ended September 30, 2009 and 2008, totaled
$499,195 and $1,038,711, respectively.  The Company capitalized
$342,154 of interest associated with unproved properties during the nine months
ended September 30, 2009.  No interest was capitalized
during the nine months ended September 30, 2008.  The balance of
financing costs recognized was primarily attributable to the amortization of
deferred financing fees and discounts associated with the outstanding
debt.





Liquidity
and Capital Resources





At
September 30, 2009, we had a working capital deficit of $5,193,255 consisting of
$2,660,000 of short-term debt, $1,584,894 of accrued exploration and development
expenses and $949,064 of accounts payable and accrued expenses.





We have
raised net proceeds of $6,157,593  in various debt and equity
financings since our inception (August 17, 2007), and have used the majority of
the net proceeds to successfully begin the exploitation of our interest in the
Apclark field with the completion of the first two wells to be drilled, the
acquisition of our interest in the Plantation field, initial payments toward the
exercise of the option on the two drilling projects acquired in the merger with
Black Pearl Energy, Inc., as well as for general and administrative expenses and
working capital purposes.





Net cash
used in operating activities for the nine months ended September 30, 2009,
totaled $143,585 and consisted primarily of the net loss of $1,513,760, net of
non-cash charges of $499,195 related to the amortization of deferred financing
fees and discount on outstanding debt, $327,920 related to stock-based
compensation, $96,251 related to depreciation, depletion and amortization
expense and $15,897 related to the fair value of our common shares issued for
consulting services.  The Company also had $430,912 of other working
capital changes.  Net cash used in operating activities for the nine
months ended September 30, 2008, totaled $1,228,715 and consisted primarily of
the net loss of $2,232,890, net of non-cash charges of $568,500 related to the
fair value of our common share issued for consulting services, $894,353 related
to the amortization of deferred financing fees and discount on outstanding debt
and $25,942 related to depreciation, depletion and amortization
expense.  The Company also had $484,620 of other working capital
changes.





Net
cash used in investing activities for the nine months ended September 30, 2009,
totaled $105,642 and consisted of payment of amounts due related to the
Company’s activity in its Apclark field.  Net cash used in investing
activities for the nine months ended September 30, 2008, totaled $3,078,211 and
consisted primarily of payments made toward the drilling activity in the Apclark
field.




19





Net cash
provided by financing activities for the nine months ended September 30, 2009,
totaled $245,555 and consisted primarily of the issuance by the Company of the
February 2009 Note, the May 2009 Note, the July 2009 Note and the September 2009
Note, net of issuance costs, and the partial repayment of the December 2007 Note
and the complete repayment of the February 2009 Note.  Net cash
provided by financing activities for the nine months ended
September 30, 2008, totaled $4,163,499 from the issuance of our
January 2008 Secured Promissory Notes, May 2008 Convertible Note and August 2008
Notes, net of issuance costs, and the proceeds from the Company’s equity
issuances.





At
September 30, 2009, the Company was in default with respect to the repayment
obligation upon maturity on December 17, 2008, with respect to its
December 2007 Secured Promissory Note.  Pursuant to the terms of the
December 2007 Secured Promissory Note, the interest rate on all amounts
outstanding increased to 24% per annum, effective December 17,
2008.  On February 6, 2009, the Company made a partial payment of
$125,000 toward satisfaction of this obligation.  As of June 10, 2009,
the Company has not remitted the balance of amount due and on June 30, 2009, the
lender filed suit against the Company seeking repayment of the principal balance
outstanding plus all accrued interest, along with their attorney fees and court
costs.





At
September 30, 2009, the Company was in default with respect to the repayment
obligation upon maturity on January 31, 2009, with respect to its
January 2008 Secured Promissory Notes.  Pursuant to the terms of the
January 2008 Secured Promissory Notes, the interest rate on all amounts
outstanding increased to 24% per annum, effective
January 31, 2009.  In addition, as the January 2008 Secured
Promissory Notes was not repaid prior to July 31, 2009, the Company was
obligated to issue, and did issue in August 2009, an additional 150,000 shares
of its Common Stock as an additional interest payment.  As of
September 30, 2009, the Company has not cured its default; however the lenders
have not, as of September 30, 2009, taken any further action with respect
to the default.





As of
September 30, 2009, the Company had not made the quarterly interest payment due
on March 31, 2009, June 30, 2009, or September 30, 2009, with respect
to the May 2008 Convertible Note.  Pursuant to the terms of the May
2008 Convertible Note, the interest rate on the past due quarterly interest
payment increased to 15% per annum, effective March 31, 2009.  The
Company had 90 days to make the scheduled quarterly interest payment before an
Event of Default should occur.  At September 30, 2009, the Company was
in default with respect to the March 31, 2009 quarterly interest payment in
addition to being in default with respect to the repayment obligation upon
maturity on May 14, 2009.  Pursuant to the terms of the May 2008
Convertible Note, the interest rate on all amounts outstanding increased to 15%
per annum.  As of September 30, 2009, the Company had not cured the
default; however the lender has not yet taken any further action with respect to
the default.





As of September 30, 2009, the Company
had not repaid any of the amounts due under the August 2008 Unsecured Promissory
Notes or the October 2008 Unsecured Promissory Note.  Pursuant to the
terms of the August 2008 Unsecured Promissory Notes and the October 2008
Unsecured Promissory Note agreements, the Company is required to issue to the
holders of the August 2008 Unsecured Promissory Notes and the October 2008
Unsecured Promissory Note, a total of 137,500 warrants to purchase shares of the
Company’s Common Stock every 30 days that amounts remain outstanding under the
August 2008 Unsecured Promissory Notes and the October 2008 Unsecured Promissory
Note.





As of
September 30, 2009, the Company had not repaid the May 2009 Note, which matured
on August 24, 2009.  In the event that the May 2009 Note was not
repaid by August 24, 2009, the interest rate increased to 18% per annum and the
lender, at its option, can convert all outstanding amounts in shares of the
Company’s Common Stock at a conversion price of $0.10 per share.





As of
November 20, 2009, the Company had not repaid the July 2009 Note, which matured
on October 13, 2009.




20








Capital
Expenditures and 2009 Outlook





We
presently do not have any available credit, bank financing or other external
sources of liquidity.  Due to our brief history and historical
operating losses, our operations have not been a source of
liquidity.  We will need to obtain additional capital in order to
expand operations and become profitable.  In order to obtain capital,
we may need to sell additional shares of our common stock or borrow funds from
private lenders.  There can be no assurance that we will be successful
in obtaining additional funding.





We will still need additional capital
in order to continue operations until we are able to achieve positive operating
cash flow.  Additional capital is being sought, but we cannot
guarantee that we will be able to obtain such investments.  Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms.  However, the
trading price of our common stock and a downturn in the North American stock and
debt markets could make it more difficult to obtain financing through the
issuance of equity or debt securities.  Even if we are able to raise
the funds required, it is possible that we could incur unexpected costs and
expenses, or experience unexpected cash requirements that would force us to seek
alternative financing.  Furthermore, if we issue additional equity or
debt securities, stockholders may experience additional dilution or the new
equity securities may have rights, preferences or privileges senior to those of
existing holders of our common stock.  If additional financing is not
available or is not available on acceptable terms, we will have to curtail our
operations.





Contractual
Obligations





We are
subject to various financial obligations and commitments in the normal course of
operations.  These contractual obligations represent future cash
payments that we are required to make and relate primarily to notes payable and
accounts payable, all of which are due currently and which are reflected on the
Company’s Unaudited Consolidated Balance Sheet at September 30, 2009, found in
Item 1 in this Form 10-Q.  The Company does have an operating lease
obligation with annual payments totaling $67,180 in 2009, $103,790 in 2010,
$108,321 in 2011 and $36,610 in 2012.  The Company is in default of
several of these obligations, as disclosed herein, is working toward an amicable
resolution and expects to fund these contractual obligations with additional
financing, either in the form of equity or debt issuances, for which there is no
assurance that any additional financings will be available to us on satisfactory
terms and conditions, if at all.





Off-balance
Sheet Arrangements





The
Company does not currently utilize any off-balance sheet arrangements with
unconsolidated entities to enhance liquidity and capital resource
positions.





Critical
Accounting Policies and Estimates





Management's Discussion and Analysis of
Financial Condition and Results of Operations discusses our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America.  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  On an on-going basis,
management evaluates our estimates and judgments, including those related to
revenue recognition, recovery of oil and gas reserves, financing operations, and
contingencies and litigation.





21




Oil and Gas Properties





We follow the full cost method of
accounting for oil and gas producing activities. Costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells used
to find proved reserves, and to drill and equip development wells including
directly related overhead costs and related asset retirement costs are
capitalized.





Under this method, all costs, including
internal costs directly related to acquisition, exploration and development
activities are capitalizable as oil and gas property costs.  Properties not
subject to amortization consist of exploration and development costs which are
evaluated on a property-by-property basis.  Amortization of these
unproved property costs begins when the properties become proved or their values
become impaired.  Bonanza assesses the realizability of unproved
properties, if any, on at least an annual basis or when there has been an
indication that impairment in value may have occurred.  Impairment of
unproved properties is assessed based on management's intention with regard to
future exploration and development of individually significant properties and
the ability of Bonanza to obtain funds to finance such exploration and
development.  If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.





The provision for depreciation and
depletion of oil and gas properties is computed on the unit-of-production
method.  Under this method, we compute the provision by multiplying
the total unamortized costs of oil and gas properties including future
development, site restoration, and dismantlement abandonment costs, but
excluding costs of unproved properties by an overall rate determined by dividing
the physical units of oil and gas produced during the period by the total
estimated units of proved oil and gas reserves.  This calculation is
done on a country-by-country basis.  As of September 30, 2009, all of
our oil production operations are conducted in the United States of
America.  The cost of unevaluated properties not being amortized, to
the extent there is such a cost, is assessed quarterly to determine whether the
value has been impaired below the capitalized cost.  The cost of any
impaired property is transferred to the balance of oil and gas properties being
depleted.  The costs associated with unevaluated properties relate to
projects which were undergoing exploration or development activities or in which
we intend to commence such activities in the future. We will begin to amortize
these costs when proved reserves are established or impairment is
determined.




In accordance with ASC Topic 410-10,
“Asset Retirement and Environmental Obligations,” we report a liability for any
legal retirement obligations on our oil and gas properties.  The asset
retirement obligations represent the estimated present value of the amounts
expected to be incurred to plug, abandon, and remediate the producing properties
at the end of their productive lives, in accordance with state laws, as well as
the estimated costs associated with the reclamation of the property
surrounding.  The Company determines the asset retirement obligations
by calculating the present value of estimated cash flows related to the
liability.  The asset retirement obligations are recorded as a
liability at the estimated present value as of the asset's inception, with an
offsetting increase to producing properties. Periodic accretion of the discount
related to the estimated liability is recorded as an expense in the statement of
operations.  The estimated liability is determined using significant
assumptions, including current estimates of plugging and abandonment costs,
annual inflation of these costs, the productive lives of wells, and a
risk-adjusted interest rate.  Changes in any of these assumptions can
result in significant revisions to the estimated asset retirement
obligations.  Revisions to the asset retirement obligations are
recorded with an offsetting change to producing properties, resulting in
prospective changes to depletion and depreciation expense and accretion of the
discount.  Because of the subjectivity of assumptions and the
relatively long lives of most of the wells, the costs to ultimately retire the
Company's wells may vary significantly from prior estimates.  As of
September 30, 2009, the Company’s Asset Retirement Obligation was not
significant.





Reserve
Estimates


Our
estimate of proved reserves is based on the quantities of oil and gas that
geological and engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under existing economic and
operating conditions.  The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment.  For example, we must estimate the amount
and timing of future operating costs, severance taxes, development costs and
workover costs, all of which may in fact vary considerably from actual
results.  In addition, as prices and cost levels change from year to
year, the estimate of proved reserves also changes.  Any significant
variance in these assumptions could materially affect the estimated quantity and
value of our reserves.  As such, our reserve engineers review and
revise the Company’s reserve estimates at least annually.
  22





Despite
the inherent imprecision in these engineering estimates, our reserves are used
throughout our financial statements.  For example, since we use the
units-of-production method to amortize our oil and gas properties, the quantity
of reserves could significantly impact our DD&A expense.  Our oil
and gas properties are also subject to a “ceiling” limitation based in part on
the quantity of our proved reserves.





Revenue
Recognition





Bonanza
recognizes oil and natural gas revenue under the sales method of accounting for
its interests in producing wells as crude oil and natural gas is produced and
sold from those wells.  Crude oil and natural gas sold by Bonanza is
not significantly different from Bonanza’s share of production.  We
recognize revenue upon transfer of ownership of the product to the customer
which occurs when (i) the product is physically received by the customer, (ii)
an invoice is generated which evidences an arrangement between the customer and
us, (iii) a fixed sales price has been included in such invoice and (iv)
collection from such customer is probable.





Income
Taxes





The
Company uses the liability method for accounting for income
taxes.  Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to
reverse.  The realizability of deferred tax assets are evaluated
annually and a valuation allowance is provided if it is more likely than not
that the deferred tax assets will not give rise to future benefits in the
Company’s tax returns.





The
Company’s estimates are based on the information available to it at the time
that it prepares the income tax provision.  The Company generally
files its annual income tax returns several months after its fiscal
year-end.  Income tax returns are subject to audit by federal, state,
and local governments, generally years after the returns are
filed.  These returns could be subject to material adjustments or
differing interpretations of the tax laws.





At
Inception (August 17, 2007), the Company adopted ASC Topic 740-10, “Income
Taxes”, which is intended to clarify the accounting for income taxes prescribing
a minimum recognition threshold for a tax provision before being recognized in
the consolidated financial statements.  ASC Topic 740-10 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition.  As a
result, the Company has concluded that it does not have any unrecognized tax
benefits or any additional tax liabilities after applying ASC Topic
740-10.  The adoption of ASC Topic 740-10 therefore had no impact on
the Company’s consolidated financial statements.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risks





Since we are a company that qualifies
as a “smaller reporting company,” as defined under Rule 12b-2, we are not
required to provide the information required by this Item 3.








23





Item
4.  Controls and Procedures





Since we are a company that qualifies
as a “smaller reporting company,” as defined under Rule 12b-2, we are not
required to provide the information required by this Item 4.





Item
4T.  Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended the "Exchange
Act) that are designed to ensure that information required to be disclosed in
our reports filed under the Exchange Act, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and
Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.  In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.





We
carried out an evaluation under the supervision and with the participation of
management, including our Chief Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2009, the end of the period covered
by this report.  Based on that evaluation, our Chief Executive Officer
and Principal Financial Officer concluded that our disclosure controls and
procedures were effective.





There
have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended June 30, 2009, that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





PART
II – OTHER INFORMATION





Item
1.  Legal Proceedings





From time
to time, the Company may become a party to litigation or other legal proceedings
that it considers to be a part of the ordinary course of its
business.  The Company is not involved currently in legal proceedings
that could reasonably be expected to have a material adverse affect on its
business, prospects, financial condition or results of
operations.  The Company may become involved in material legal
proceedings in the future.





Item
1A.  Risk Factors.





Since we are a company that qualifies
as a “smaller reporting company,” as defined under Rule 12b-2, we are not
required to provide the information required by this Item 1A.  Refer
to the Company’s Annual Report on Form 10-K for the year ended December 31,
2008, filed with the Securities and Exchange Commission on April 15, 2009, for a
discussion of the Company’s Risk Factors.





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





None





24





Item
3.  Default upon Senior Securities





At
September 30, 2009, the Company was in default with respect to the repayment
obligation upon maturity on December 17, 2008, with respect to its
December 2007 Secured Promissory Note.  Pursuant to the terms of the
December 2007 Secured Promissory Note, the interest rate on all amounts
outstanding increased to 24% per annum, effective December 17,
2008.  On February 6, 2009, the Company made a partial payment of
$125,000 toward satisfaction of this obligation.  As of June 10, 2009,
the Company has not remitted the balance of amount due and on June 30, 2009, the
lender filed suit against the Company seeking repayment of the principal balance
outstanding plus all accrued interest, along with their attorney fees and court
costs.





At
September 30, 2009, the Company was in default with respect to the repayment
obligation upon maturity on January 31, 2009, with respect to its
January 2008 Secured Promissory Notes.  Pursuant to the terms of the
January 2008 Secured Promissory Notes, the interest rate on all amounts
outstanding increased to 24% per annum, effective
January 31, 2009.  In addition, as the January 2008 Secured
Promissory Notes was not repaid prior to July 31, 2009, the Company was
obligated to issue, and did issue in August 2009, an additional 150,000 shares
of its Common Stock as an additional interest payment.  As of
September 30, 2009, the Company has not cured its default; however the lenders
have not, as of September 30, 2009, taken any further action with respect
to the default.





As of
September 30, 2009, the Company had not made the quarterly interest payment due
on March 31, 2009, June 30, 2009, or September 30, 2009, with respect
to the May 2008 Convertible Note.  Pursuant to the terms of the May
2008 Convertible Note, the interest rate on the past due quarterly interest
payment increased to 15% per annum, effective March 31, 2009.  The
Company had 90 days to make the scheduled quarterly interest payment before an
Event of Default should occur.  At September 30, 2009, the Company was
in default with respect to the March 31, 2009 quarterly interest payment in
addition to being in default with respect to the repayment obligation upon
maturity on May 14, 2009.  Pursuant to the terms of the May 2008
Convertible Note, the interest rate on all amounts outstanding increased to 15%
per annum.  As of September 30, 2009, the Company had not cured the
default; however the lender has not yet taken any further action with respect to
the default.





As of September 30, 2009, the Company
had not repaid any of the amounts due under the August 2008 Unsecured Promissory
Notes or the October 2008 Unsecured Promissory Note.  Pursuant to the
terms of the August 2008 Unsecured Promissory Notes and the October 2008
Unsecured Promissory Note agreements, the Company is required to issue to the
holders of the August 2008 Unsecured Promissory Notes and the October 2008
Unsecured Promissory Note, a total of 137,500 warrants to purchase shares of the
Company’s Common Stock every 30 days that amounts remain outstanding under the
August 2008 Unsecured Promissory Notes and the October 2008 Unsecured Promissory
Note.





As of
September 30, 2009, the Company had not repaid the May 2009 Note, which matured
on August 24, 2009.  In the event that the May 2009 Note was not
repaid by August 24, 2009, the interest rate increased to 18% per annum and the
lender, at its option, can convert all outstanding amounts in shares of the
Company’s Common Stock at a conversion price of $0.10 per share.





As of
November 20, 2009, the Company had not repaid the July 2009 Note, which matured
on October 13, 2009.





Item
4.  Submission of Matters to a Vote of Security Holders





None





Item
5.  Other Information





None




25




Item
6.  Exhibits








Exhibit No.
            Description2.2
            Acquisition
      Agreement and Plan of Merger between National Filing Agents, Inc. and
      Plantation Working Interests, LLC dated October 23, 2007 (incorporated by
      reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on October 24, 2007)3.1
            Articles
      of Incorporation of Bonanza Oil and Gas, Inc. (incorporated by reference
      to Exhibit 3.1 to the Bonanza Oil and Gas, Inc. Form SB-2 filed December
      18, 2006)3.2
            Articles
      of Merger (incorporated by reference to the Form 8-K Current Report filed
      with the Securities and Exchange Commission on January 11,
      2008)3.3
            Bylaws
      of Bonanza Oil and Gas, Inc. (incorporated by reference to Exhibit 3.2 to
      the Bonanza Oil and Gas, Inc. Form SB-2 filed December 18,
      2006)4.1
            Securities
      Purchase Agreement (incorporated by reference to the Form 8-K Current
      Report filed with the Securities and Exchange Commission on December 21,
      2007)4.2
            14%
      Senior Asset Backed Secured Promissory Note dated December 17, 2007
      (incorporated by reference to the Form 8-K Current Report filed with the
      Securities and Exchange Commission on December 21,
2007)4.3
            Securities
      Purchase Agreement dated May 14, 2008 (incorporated by reference to the
      Form 8-K Current Report filed with the Securities and Exchange Commission
      on May 19, 2008)4.4
            8%
      Convertible Note issued May 14, 2008 (incorporated by reference to the
      Form 8-K Current Report filed with the Securities and Exchange Commission
      on May 19, 2008)4.5
            Series
      A Common Stock Purchase Warrants issued May 14, 2008 (incorporated by
      reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on May 19, 2008)4.6
            Series
      B Common Stock Purchase Warrants issued May 14, 2008 (incorporated by
      reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on May 19, 2008)4.7
            Form
      of Securities Purchase Agreement (incorporated by reference to the Form
      8-K Current Report filed with the Securities and Exchange Commission on
      July 7, 2008)4.8
            Form
      of Series A June 2008 Common Stock Purchase Warrants issued June 2008
      (incorporated by reference to the Form 8-K Current Report filed with the
      Securities and Exchange Commission on July 7, 2008)4.9
            Form
      of Series B June 2008 Common Stock Purchase Warrants issued June 2008
      (incorporated by reference to the Form 8-K Current Report filed with the
      Securities and Exchange Commission on July 7, 2008)4.10
            Form
      of Securities Purchase Agreement dated August 28, 2008 (incorporated by
      reference to the Form 8-K Current Report filed with the Securities and
      Exchange Commission on September 3, 2008)4.11
            Form
      of 12% Promissory Note dated August 28, 2008 (incorporated by reference to
      the Form 8-K Current Report filed with the Securities and Exchange
      Commission on September 3, 2008)4.12
            Amendment
      No. 1 to the Form of Securities Purchase Agreement dated August 28, 2008
      (incorporated by reference to the Form 8-K Current Report filed with the
      Securities and Exchange Commission on October 10, 2008)4.13
            Form
      of Common Stock Purchase Warrant (incorporated by reference to the Form
      8-K Current Report filed with the Securities and Exchange Commission on
      October 10, 2008)4.14
            Bridge
      Loan Letter Agreement dated February 2, 2009, (incorporated by reference
      to the Form 8-K Current Report filed with the Securities and Exchange
      Commission on March 31, 2009)4.15
            14%
      Promissory Note issued February 2, 2009, (incorporated by reference to the
      Form 8-K Current Report filed with the Securities and Exchange Commission
      on March 31, 2009)4.16
            16%
      Promissory Note issued May 26, 2009, (incorporated by reference to the
      Form 10-Q Quarterly Report filed with the Securities and Exchange
      Commission on August 14, 2009)4.17
            Bridge
      Loan Letter Agreement dated  July 8, 2009, (incorporated by
      reference to the Form 10-Q Quarterly Report filed with the Securities and
      Exchange Commission on September 21, 2009)4.18
            Bridge
      Loan Letter Agreement dated  September 18, 2009, (incorporated
      by reference to the Form 10-Q Quarterly Report filed with the Securities
      and Exchange Commission on September 21, 2009)10.1
            Asset
      Purchase Agreement between National Filing Agents, Inc. and Lucas Energy,
      Inc. dated October 23, 2007 (incorporated by reference to the Form 8-K
      Current Report filed with the Securities and Exchange Commission on
      October 24, 2007)10.2
            Agreement
      and Plan of Merger between Bonanza Oil & Gas, Inc., Borland Good
      North, Inc., Black Pearl Energy, Inc. and the shareholders holding a
      majority of the issued and outstanding shares of Black Pearl Energy, Inc.
      dated July 18, 2008 (incorporated by reference to the Form 8-K Current
      Report filed with the Securities and Exchange Commission on July 18,
      2008)10.3
            Executive
      Employment Agreement between G. Wade Stubblefield and Bonanza Oil and Gas,
      Inc. (incorporated by reference to the Form 8-K Current Report filed with
      the Securities and Exchange Commission on March 31,
  2009)10.4
            Executive
      Employment Agreement between William Wiseman and Bonanza Oil and Gas,
      Inc., (incorporated by reference to the Form 10-Q Quarterly Report filed
      with the Securities and Exchange Commission on September 21,
      2009)10.5
            Executive
      Employment Agreement between Robert L. Teague and Bonanza Oil and Gas,
      Inc., (incorporated by reference to the Form 10-Q Quarterly Report filed
      with the Securities and Exchange Commission on September 21,
      2009)14.1
            Code
      of Ethics and Business Conduct for Officers, Directors and Employees of
      Bonanza Oil & Gas, Inc. (incorporated by reference to the Amendment
      No. 1 to the Annual Report on Form 10-K/A filed with the Securities and
      Exchange Commission on April 29, 2009)31.1*
            Certification
      of Principal Executive Officer31.2*
            Certification
      of Principal Financial Officer32.1*
            Certification
      of Principal Executive Officer and Principal Financial
    Officer





*Filed
herewith





26








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 of the undersigned thereunto
duly authorized.


BONANZA
      OIL AND GAS, INC.

              (Registrant)Date: November
      20, 2009
            By:
            /s/ William
      WisemanWilliam
      WisemanPresident
      and Chief Executive Officer
              Principal
      Financial Officer





Date: 
      November 20, 2009
            By:
            /s/ Robert
      TeagueRobert
      Teague
              Principal
      Financial Officer