U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


For the
quarterly period ended September 30, 2010


OR




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


For the
transition period from ______ to ________





Commission
File Number 333-149338





MESA
ENERGY HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            98-0506246(State
      of incorporation)
            (IRS
      Employer ID Number)





5220
Spring Valley Rd


Suite
525


Dallas,
TX 75254


(972)
490-9595


(Address
and telephone number of principal executive offices)





(Former
name, former address and former fiscal year, if changed since last
report)





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 xNo 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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes oNo 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.


Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer o
            Smaller
      reporting company þ





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes oNo x





There
were 40,182,021 shares of the registrant’s common stock, par value $0.0001 per
share, outstanding as of November 8, 2010.









MESA
ENERGY HOLDINGS, INC.




TABLE
OF CONTENTS


PagePart
      I Financial InformationItem 1
            Financial
      StatementsConsolidated
      Balance Sheets as of September30, 2010 and
      December 31, 2009 (Unaudited)
            
            1Consolidated
      Statements of Operations for the three and nine months ended
      September30,
      2010 and 2009, and the period from Inception (April 25, 2003) to
      September30,
      2010 (Unaudited)
            
            2Consolidated
      Statement of Changes in Members’ and Stockholders’ Equity (Deficit) for
      the period from Inception (April 25, 2003) to September30, 2010
      (Unaudited)
            3Consolidated
      Statements of Cash Flows for the three and nine months ended
      September30,
      2010 and 2009 and the period from Inception (April 25, 2003) to
      September30,
      2010 (Unaudited)
            
            5Notes
      to the Consolidated Financial Statements (Unaudited)
            
            7Item 2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            17Item 3
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            23Item 4
            Controls
      and Procedures
            
            23Part
      II Other InformationItem
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            26Item 6
            Exhibits
            
            27Signatures
            
            28




ii




Note
Regarding Forward-Looking Statements





This
report contains forward-looking statements. All statements other than statements
of historical facts included in this Quarterly Report on Form 10-Q, including
without limitation, statements in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations regarding our financial position,
estimated working capital, business strategy, the plans and objectives of our
management for future operations and those statements preceded by, followed by
or that otherwise include the words “believe,” “expects,” “anticipates,”
“intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,”
“should” or similar expressions or variations on such expressions are
forward-looking statements. We can give no assurances that the assumptions upon
which the forward-looking statements are based will prove to be correct. Because
forward-looking statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. There are a number of risks, uncertainties and other
important factors that could cause our actual results to differ materially from
the forward-looking statements, including, but not limited to, our inability to
obtain adequate financing, insufficient cash flows and resulting illiquidity,
our inability to expand our business, government regulations, lack of
diversification, volatility in the price of oil and/or natural gas, increased
competition, results of arbitration and litigation, stock volatility and
illiquidity, and our failure to implement our business plans or strategies. A
description of some of the risks and uncertainties that could cause our actual
results to differ materially from those described by the forward-looking
statements in this Quarterly Report on Form 10-Q appears in the section
captioned “Risk Factors” in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the “SEC”) on April 15, 2010.




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




iii




PART
I – FINANCIAL INFORMATION


Item
1.  Financial Statements




MESA
      ENERGY HOLDINGS, INC.(An
      Exploration Stage Company)Consolidated
      Balance Sheets(Unaudited)




September
      30,
                  2010
                
                
                December
      31,
                  2009ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                8,437
                
                
                $
                267,141Restricted
      cash
                
                
                -
                
                
                
                20,000Accounts
      receivable – oil and gas
                
                
                3,004
                
                
                
                5,515Deferred
      financing cost, current
                
                
                146,452
                
                
                
                114,591Prepaid
      expenses
                
                
                9,127
                
                
                
                24,126TOTAL
      CURRENT ASSETS
                
                
                167,020
                
                
                
                431,373Oil
      and gas properties, using successful efforts accountingProperties not subject to
      amortization, less accumulated impairment of $27,140 and $27,140,
      respectively
                
                
                608,845
                
                
                
                264,192Properties subject to
      amortization, less accumulated depletion of $52,973 and $1,411,
      respectively
                
                
                77,652
                
                
                
                74,984Pipeline property, less
      accumulated depreciation of $20,193 and $6,213
      respectively
                
                
                359,174
                
                
                
                366,581Land
                
                
                38,345
                
                
                
                38,345Net
      oil and gas properties
                
                
                1,084,016
                
                
                
                744,102Furniture and equipment, less
      accumulated depreciation of $5,203 and $5,051,
      respectively
                
                
                -
                
                
                
                153Deferred
      financing cost, net of accumulated amortization of  $148,036 and
      $38,197, respectively
                
                
                26,333
                
                
                
                76,394Prepaid
      asset retirement cost
                
                
                40,000
                
                
                
                40,000TOTAL
      ASSETS
                
                $
                1,317,369
                
                
                $
                1,292,022LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilitiesAccounts
      payable-trade
                
                $
                60,849
                
                
                $
                86,433Accrued
      expenses
                
                
                596,524
                
                
                
                246,305Accrued
      expenses-related parties
                
                
                124,567
                
                
                
                104,458Deposits
                
                
                -
                
                
                
                8,033Notes
      payable-related parties
                
                
                15,500
                
                
                
                43,000Derivative
      liability
                
                
                54,724
                
                
                
                7,461,680Convertible
      note payable
                
                
                1,000,000
                
                
                
                -TOTAL
      CURRENT LIABILITIES
                
                
                1,852,164
                
                
                
                7,949,909Non-current
      liabilitiesConvertible
      note payable
                
                
                1,145,000
                
                
                
                1,530,000Long-term
      debt-related parties
                
                
                451,400
                
                
                
                451,400Asset
      retirement obligations
                
                
                59,141
                
                
                
                55,280TOTAL
      LIABILITIES
                
                
                3,507,705
                
                
                
                9,986,589Commitments
      and contingencies
                
                
                -
                
                
                
                -Stockholders’
      DeficitPreferred stock, par value
      $0.0001, 10,000,000 shares authorized -0- shares issued and
      outstanding
                
                
                -
                
                
                
                -Common stock, par value $0.0001,
      300,000,000 shares authorized, 40,182,021 and 39,385,700 shares
      issued and outstanding, respectively
                
                
                4,018
                
                
                
                3,939Additional
      paid-in capital (deficit)
                
                
                (6,892,873
                )
                
                
                (5,457,156
                )Accumulated
      earnings (deficit) during the exploration stage
                
                
                4,698,519
                
                
                
                (3,241,350
                )TOTAL
      STOCKHOLDERS’ DEFICIT
                
                
                (2,190,336
                )
                
                
                (8,694,567
                )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
                
                $
                1,317,369
                
                
                $
                1,292,022
 
 See
      accompanying notes to unaudited consolidated financial
      statements.
 
 1


MESA
      ENERGY HOLDINGS, INC.(An
      Exploration Stage Company)Consolidated
      Statements of OperationsFor
      the Three and Nine Months Ended September 30, 2010 and
  2009and
      the Period from Inception (April 25, 2003) to September 30,
      2010(Unaudited)




For
      the Three Months Ended
                September
      30,
              
              
              For
      the Nine Months Ended
                September
      30,
              
              
              Inception
      to September 30,2010
              
              
              2009
              
              
              2010
              
              
              2009
              
              
              2010Revenues
              
              $
              16,718
              
              
              $
              2,755
              
              
              $
              35,999
              
              
              $
              2,755
              
              
              $
              52,638Operating
      expensesExploration
      cost
              
              
              11,177
              
              
              
              6,978
              
              
              
              35,139
              
              
              
              87,040
              
              
              
              518,305Dry
      hole cost
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              466,066Depreciation,
      depletion, amortization, accretion, and impairment
              
              
              55,204
              
              
              
              (866
              )
              
              
              69,560
              
              
              
              18,813
              
              
              
              169,995General
      and administrative expenses
              
              
              415,487
              
              
              
              394,475
              
              
              
              1,738,723
              
              
              
              530,041
              
              
              
              4,431,554Loss
      on sale of Poydras Energy, LLC
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,151,997
              
              
              
              1,151,997Gain
      on sale of oil and gas properties
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,673,620
              )Total
      operating expenses
              
              
              481,868
              
              
              
              400,587
              
              
              
              1,843,422
              
              
              
              1,787,891
              
              
              
              5,064,297Loss
      from operations
              
              
              (465,150
              )
              
              
              (397,832
              )
              
              
              (1,807,423
              )
              
              
              (1,785,136
              )
              
              
              (5,011,659
              )Other
      income (expenses)Interest
      expense
              
              
              (119,133
              )
              
              
              (525,221
              )
              
              
              (975,288
              )
              
              
              (553,010
              )
              
              
              (2,975,253
              )Interest
      income
              
              
              90
              
              
              
              -
              
              
              
              3,803
              
              
              
              617
              
              
              
              27,825Gain
      on change of derivative value
              
              
              1,698,677
              
              
              
              -
              
              
              
              10,718,777
              
              
              
              -
              
              
              
              12,640,477Other
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,625
              
              
              
              17,129Total
      other income (expense)
              
              
              1,579,634
              
              
              
              (525,221
              )
              
              
              9,747,292
              
              
              
              (544,768
              )
              
              
              9,710,178Net
      income (loss)
              
              $
              1,114,484
              
              
              $
              (923,053
              )
              
              $
              7,939,869
              
              
              $
              (2,329,904
              )
              
              $
              4,698,519Net
      income (loss) per share:Basic
              
              $
              0.03
              
              
              $
              (0.03
              )
              
              $
              0.20
              
              
              $
              (0.09
              )Diluted
              
              $
              0.02
              
              
              $
              (0.03
              )
              
              $
              0.16
              
              
              $
              (0.09
              )Weighted
      average number of shares outstanding:Basic
              
              
              40,162,999
              
              
              
              30,145,590
              
              
              
              39,837,303
              
              
              
              26,738,997Diluted
              
              
              48,835,148
              
              
              
              30,145,590
              
              
              
              48,952,423
              
              
              
              26,738,997




See
      accompanying notes to unaudited consolidated financial
      statements.





2




MESA
      ENERGY HOLDINGS, INC.(An
      Exploration Stage Company)Consolidated
      Statement of Changes in Members’ and Stockholders’ Equity
      (Deficit)For
      the Period from Inception (April 25, 2003) to September 30,
      2010(Unaudited)




Members’
              
              
              Common
      Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Accumulated
                EarningsEquity
              
              
              Shares
              
              
              Par
      Value
              
              
              (Deficit)
              
              
              (Deficit)
              
              
              TotalsBalances
      at April 25, 2003 (inception)
              
              $
              -
              
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Contributions
              
              
              157,416
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              157,416Net
      loss
              
              
              (152,274
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (152,274
              )Balances
      at December 31, 2003
              
              
              5,142
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,142Contributions
              
              
              372,673
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              372,673Draws
              
              
              (70,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (70,000
              )Imputed
      interest
              
              
              11,508
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,508Net
      loss
              
              
              (166,278
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (166,278
              )Balances
      at December 31, 2004
              
              
              153,045
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              153,045Contributions
              
              
              94,766
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              94,766Imputed
      interest
              
              
              5,134
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,134Net
      loss
              
              
              (210,929
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (210,929
              )Balances
      at December 31, 2005
              
              
              42,016
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,016Contributions
              
              
              22,743
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              22,743Net
      loss from January 1, 2006 to March 3, 2006
              
              
              (50,495
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (50,495
              )Merger
      with Mesa Energy, Inc. (Co.)
              
              
              (14,264
              )
              
              
              19,286,248
              
              
              
              1,929
              
              
              
              592,311
              
              
              
              (579,976
              )
              
              
              -Fair
      value of options and warrants issued for services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              19,075
              
              
              
              -
              
              
              
              19,075Shares
      issued for cash
              
              
              -
              
              
              
              1,214,484
              
              
              
              122
              
              
              
              265,278
              
              
              
              -
              
              
              
              265,400Net
      loss from March 4, 2006 to December 31, 2006
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (338,074
              )
              
              
              (338,074
              )Balances
      at December 31, 2006
              
              
              
              
              
              
              20,500,732
              
              
              
              2,051
              
              
              
              876,664
              
              
              
              (918,050
              )
              
              
              (39,335
              )Shares
      issued for cash
              
              
              -
              
              
              
              803,079
              
              
              
              80
              
              
              
              208,120
              
              
              
              -
              
              
              
              208,200Discount
      on convertible debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              187,427
              
              
              
              -
              
              
              
              187,427Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (506,940
              )
              
              
              (506,940
              )Balances
      at December 31, 2007
              
              
              -
              
              
              
              21,303,811
              
              
              
              2,131
              
              
              
              1,272,211
              
              
              
              (1,424,990
              )
              
              
              (150,648
              )Shares
      issued for purchase of stock of Poydras Energy
              
              
              -
              
              
              
              2,892,937
              
              
              
              289
              
              
              
              749,711
              
              
              
              -
              
              
              
              750,000Warrants
      issued with sale of oil and gas property
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              31,071
              
              
              
              -
              
              
              
              31,071Shares
      issued for legal fees
              
              
              -
              
              
              
              9,643
              
              
              
              1
              
              
              
              3,749
              
              
              
              -
              
              
              
              3,750Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              115,179
              
              
              
              115,179Balances
      at December 31, 2008
              
              $
              -
              
              
              
              24,206,391
              
              
              $
              2,421
              
              
              $
              2,056,742
              
              
              $
              (1,309,811
              )
              
              $
              749,352




3




MESA
      ENERGY HOLDINGS, INC.(An
      Exploration Stage Company)Consolidated
      Statement of Changes in Members’ and Stockholders’ Equity (Deficit),
      continuedFor
      the Period from Inception (April 25, 2003) to September 30,
      2010(Unaudited)




Members’
              
              
              Common
      Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Accumulated
      EarningsEquity
              
              
              Shares
              
              
              Par
      Value
              
              
              (Deficit)
              
              
              (Deficit)
              
              
              TotalsBalances
      at December 31, 2008
              
              $
              -
              
              
              
              24,206,391
              
              
              $
              2,421
              
              
              $
              2,056,742
              
              
              $
              (1,309,811
              )
              
              $
              749,352Shares
      issued for warrants held by MEI shareholders
              
              
              -
              
              
              
              829,309
              
              
              
              83
              
              
              
              (83
              )
              
              
              -
              
              
              
              -Reverse
      merger with Mesa Energy Holdings
              
              
              -
              
              
              
              14,000,000
              
              
              
              1,400
              
              
              
              (1,400
              )
              
              
              -
              
              
              
              -Share-based
      compensation
              
              
              -
              
              
              
              350,000
              
              
              
              35
              
              
              
              340,965
              
              
              
              -
              
              
              
              341,000Discount
      on convertible debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,530,000
              
              
              
              -
              
              
              
              1,530,000Derivative
      liability on convertible debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (9,383,380
              )
              
              
              -
              
              
              
              (9,383,380
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,931,539
              )
              
              
              (1,931,539
              )Balances
      at December 31, 2009
              
              
              -
              
              
              
              39,385,700
              
              
              
              3,939
              
              
              
              (5,457,156
              )
              
              
              (3,241,350
              )
              
              
              (
      8,694,567
              )Share-based
      compensation
              
              
              -
              
              
              
              322,900
              
              
              
              32
              
              
              
              1,025,546
              
              
              
              -
              
              
              
              1,025,578Conversion
      of convertible debt and accrued interest
              
              
              -
              
              
              
              473,421
              
              
              
              48
              
              
              
              185,556
              
              
              
              -
              
              
              
              185,604Discount
      on convertible debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              665,000
              
              
              
              -
              
              
              
              665,000Derivative
      liability on convertible debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,311,820
              )
              
              
              -
              
              
              
              (3,311,820
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,939,869
              
              
              
              7,939,869Balances
      at September 30,  2010
              
              $
              -
              
              
              
              40,182,021
              
              
              $
              4,019
              
              
              $
              (6,892,874
              )
              
              $
              4,698,519
              
              
              $
              (2,190,336
              )





See
accompanying notes to unaudited consolidated financial statements.





4




MESA
      ENERGY HOLDINGS, INC.(An
      Exploration Stage Company)Consolidated
      Statements of Cash FlowsFor
      the Nine Months Ended September 30, 2010 and 2009and
      the Period from Inception (April 25, 2003) to September 30,
      2010(Unaudited)




For
      the Nine Months Ended
              September
      30, 2010
            
            
            Inception
      to
              September
      30,2010
            
            
            2009
            
            
            2010CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
            
            $
            7,939,869
            
            
            $
            (2,329,904
            )
            
            $
            4,698,519Adjustments
      to reconcile net income (loss) to net cash from
              operating
      activities:Loss
      on sale of oil and gas properties
            
            
            -
            
            
            
            1,151,997
            
            
            
            1,151,997Gain
      on change in derivative value
            
            
            (10,718,777
            )
            
            
            
            
            
            
            (12,640,477
            )Gain
      on sale of assets
            
            
            -
            
            
            
            -
            
            
            
            (1,673,620
            )Dry
      hole cost
            
            
            -
            
            
            
            -
            
            
            
            466,066Imputed
      interest
            
            
            -
            
            
            
            -
            
            
            
            16,641Amortization
      of debt discount
            
            
            665,000
            
            
            
            -
            
            
            
            2,382,427Depreciation,
      depletion, amortization, accretion and impairment expense
            
            
            69,560
            
            
            
            18,813
            
            
            
            169,995Amortization
      of deferred financing cost
            
            
            109,839
            
            
            
            5,888
            
            
            
            148,036Share-based
      compensation
            
            
            1,025,578
            
            
            
            17,500
            
            
            
            1,389,403Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            17,511
            
            
            
            (2,755
            )
            
            
            (12,133
            )Accounts
      payable and accrued expenses
            
            
            452,206
            
            
            
            1,067,768
            
            
            
            793,070Advances
      from joint interest owners
            
            
            -
            
            
            
            -
            
            
            
            300,000Accrued
      expenses – related parties
            
            
            20,109
            
            
            
            21,036
            
            
            
            124,568CASH
      USED IN OPERATING ACTIVITIES
            
            
            (419,105
            )
            
            
            (49,657
            )
            
            
            (2,685,508
            )CASH
      FLOWS FROM INVESTING ACTIVITIESRelease
      of restricted cash
            
            
            20,000
            
            
            
            -
            
            
            
            -Payments
      for oil and gas development costs
            
            
            (405,460
            )
            
            
            (532,089
            )
            
            
            (3,010,461
            )Cash
      paid for asset retirement obligations
            
            
            -
            
            
            
            (40,000
            )
            
            
            (46,494
            )Cash
      acquired from purchase of Poydras Energy, LLC
            
            
            -
            
            
            
            -
            
            
            
            1,326Proceeds
      from sale of assets
            
            
            -
            
            
            
            -
            
            
            
            2,562,500Purchases
      of fixed assets
            
            
            -
            
            
            
            -
            
            
            
            (5,203
            )CASH
      USED IN INVESTING ACTIVITIES
            
            
            (385,460
            )
            
            
            (572,089
            )
            
            
            (498,332
            )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from the sale of stock
            
            
            -
            
            
            
            -
            
            
            
            473,600Borrowings
      on debt from related parties
            
            
            15,500
            
            
            
            55,000
            
            
            
            738,900Principal
      payments on debt from related parties
            
            
            (43,000
            )
            
            
            -
            
            
            
            (472,000
            )Borrowings
      on debt from third parties, net of financing cost
            
            
            573,361
            
            
            
            358,693
            
            
            
            1,874,179Members
      contributions
            
            
            -
            
            
            
            -
            
            
            
            647,598Members
      distributions
            
            
            -
            
            
            
            -
            
            
            
            (70,000
            )CASH
      PROVIDED BY FINANCING ACTIVITIES
            
            
            545,861
            
            
            
            413,693
            
            
            
            3,192,277NET
      CHANGE IN CASH
            
            
            (258,704
            )
            
            
            (208,053
            )
            
            
            8,437CASH
      AT BEGINNING OF PERIOD
            
            
            267,141
            
            
            
            311,947
            
            
            
            -CASH
      AT END OF PERIOD
            
            $
            8,437
            
            
            $
            103,894
            
            
            $
            8,437




5





MESA
      ENERGY HOLDINGS, INC.(An
      Exploration Stage Company)Consolidated
      Statements of Cash Flows, continuedFor
      the Nine Months Ended September 30, 2010 and 2009and
      the Period from Inception (April 25, 2003) to September 30,
      2010(Unaudited)




For
      the Nine Months Ended
              September
      30, 2010
            
            
            Inception
      to
              September
      30,2010
            
            
            2009
            
            
            2010Supplemental
      disclosures of cash flow information:Cash
      paid for interest
            
            $
            3,192
            
            
            $
            2,618
            
            
            $
            89,551Cash
      paid for income taxes
            
            $
            -
            
            
            $
            -
            
            
            $
            -Non-cash
      disclosures:Accrued
      oil and gas acquisition and development cost
            
            $
            -
            
            
            $
            -
            
            
            $
            55,000Sale
      of pipeline right-of-way for payables
            
            $
            -
            
            
            $
            60,000
            
            
            $
            60,000Note
      payable issued for purchase of Poydras Energy, LLC
            
            $
            -
            
            
            $
            -
            
            
            $
            100,000Common
      stock issued for purchase of Poydras Energy, LLC
            
            $
            -
            
            
            $
            -
            
            
            $
            750,000Stock
      issued in reverse merger
            
            $
            -
            
            
            $
            -
            
            
            $
            1,400Warrants
      issued with the sale of oil and gas property
            
            $
            -
            
            
            $
            -
            
            
            $
            31,071Change
      in asset retirement obligation
            
            $
            -
            
            
            $
            266
            
            
            $
            47,976Initial
      valuation of derivative liability upon issuance of debt
            
            $
            3,311,820
            
            
            $
            -
            
            
            $
            12,695,201Common
      stock issued for conversions of notes payable and accrued
      interest
            
            $
            185,604
            
            
            $
            -
            
            
            $
            185,604





6




MESA
ENERGY HOLDINGS, INC.


(An
Exploration Stage Company)


Notes to
Consolidated Financial Statements


(Unaudited)





NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization
and nature of operations





Mesa
Energy, Inc. (“MEI”) is a company whose predecessor entity, Mesa Energy, LLC,
was formed in April 2003 to engage in the oil and gas industry.  MEI’s
primary oil and gas operations have historically been conducted through its
wholly owned subsidiary, Mesa Energy Operating, LLC, a Texas limited liability
company qualified as an operator in Texas, Oklahoma, New York and Wyoming (“Mesa
Operating”).





MEI was
originally incorporated as North American Risk Management Incorporated on
January 24, 2001, in the State of Colorado.  It was organized to
engage in the business of providing insurance to independent and fleet truck
operators.  However, operations ceased after approximately six
months.  On March 3, 2006, MEI was the surviving entity in a merger
with Mesa Energy, LLC, a Texas limited liability company, whose activities
between April 2003 and March 2006 included participation in various drilling
projects, both as operator and as a non-operator, as well as the acquisition of
the Frenchy Springs and Coal Creek acreage positions.  Subsequently,
MEI reincorporated in the State of Nevada by merging with and into Mesa Energy,
Inc., a Nevada corporation, on March 13, 2006.





The
registrant was incorporated in the State of Delaware, as “Mesquite Mining,
Inc.,” on October 23, 2007 to engage in the acquisition and exploration of
mining properties (the “Legacy Business”).  In mid 2009, the
registrant’s Board of Directors decided to redirect the registrant’s efforts
towards identifying and pursuing a new business plan and
direction.  Amid discussions with MEI regarding a potential business
combination, on June 19, 2009, the registrant changed its name to Mesa Energy
Holdings, Inc.





As used
in these notes to consolidated financial statements, references to “the Company”
for periods prior to the closing of the Merger on August 31, 2009, refer to MEI,
a Nevada corporation that was a Pink Sheets company prior to the merger and that
is now our wholly owned subsidiary, and such references for periods subsequent
to the closing of the Merger on August 31, 2009, refer to Mesa Energy Holdings,
Inc., a publicly traded Delaware corporation formerly known as Mesquite Mining,
Inc., together with its subsidiaries, including MEI.





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





Immediately
following the Merger, under the terms of a Split-Off Agreement and a General
Release Agreement, the Company transferred all of Mesa Energy Holdings’
pre-Merger operating assets and liabilities to a wholly owned
subsidiary.  Thereafter, pursuant to the Split-Off Agreement, the
Company transferred all of the outstanding shares of capital stock of such
subsidiary to Beverly Frederick, the Company’s pre-Merger majority stockholder,
in exchange for (i) the surrender and cancellation of all 21,000,000 shares of
our common stock held by that stockholder and (ii) certain representations,
covenants and indemnities.





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





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




7





On June
18, 2009, Mesa Energy Holdings’ Board of Directors authorized a 14-for-1 forward
split of its common stock, par value $0.0001 per share (the “Common Stock”), in
the form of a stock dividend (the “Stock Split”), which was paid on August 4,
2009, to holders of record on July 20, 2009.  After giving effect to
the Stock Split, but before giving effect to the Merger and other transactions
described below, there were outstanding 35,070,000 shares of Common
Stock.  All share and per share numbers in this Report relating to the
Common Stock prior to the Stock Split have been adjusted to give effect to the
Stock Split unless otherwise stated.  Furthermore, except where the
context otherwise requires, all share and per share numbers in this Report
relating to the common stock of MEI have been adjusted to give effect to the
recapitalization represented by the Merger.





Basis
of financial statement presentation





The
accompanying unaudited interim consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information.  Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.  The
information furnished in the interim consolidated financial statements includes
normal recurring adjustments and reflects all adjustments, which, in the opinion
of management, are necessary for a fair presentation of such financial
statements.  Operating results for the three and nine months ended
September 30, 2010 are not necessarily indicative of the results that may be
expected for the full year.  These interim consolidated financial
statements should be read in conjunction with the Company’s most recent audited
consolidated financial statements and notes thereto dated December 31, 2009 as
reported in Form 10K.





Reclassifications





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





Use
of estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.





Principles of
Consolidation





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





Subsequent
Events





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




8





Earnings
(Loss) Per Share





The
Company’s earnings (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share reflects the potential dilution of securities,
if any, that could share in the earnings of the Company and is calculated by
dividing net income by the diluted weighted average number of common shares. The
diluted weighted average number of common shares is computed using the treasury
stock method for common stock that may be issued for outstanding stock options.
The following is a reconciliation of basic and diluted earnings per share for
the three and nine months ended September 30, 2010 and 2009:





For
      the Three Months Ended
            
            
            For
      the Nine Months EndedSeptember
      30,
            
            
            September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Numerator:Net
      income (loss) available to common shareholders
            
            $
            1,114,484
            
            
            $
            (923,053
            )
            
            $
            7,939,869
            
            
            $
            (2,329,904
            )Effect
      of common stock equivalentsAdd:  interest
      expense on convertible debt
            
            
            75,560
            
            
            
            -
            
            
            
            181,169
            
            
            
            -Less:  tax
      effect of decrease in interest expense
            
            
            (26,446
            )
            
            
            -
            
            
            
            (63,409
            )
            
            
            -Net
      income (loss) adjusted for common stock equivalents
            
            
            1,163,598
            
            
            
            (923,053
            )
            
            
            8,057,629
            
            
            
            (2,329,904
            )Denominator:Weighted
      average shares - basic
            
            
            40,162,999
            
            
            
            30,145,590
            
            
            
            39,837,303
            
            
            
            26,738,997Net
      income (loss) per share – basic
            
            $
            0.03
            
            
            $
            (0.03
            )
            
            $
            0.20
            
            
            $
            (0.09
            )Dilutive
      effect of common stock equivalents:Options
            
            
            185,410
            
            
            
            -
            
            
            
            535,120
            
            
            
            -Convertible
      debt
            
            
            8,486,739
            
            
            
            -
            
            
            
            8,580,000
            
            
            
            -Denominator:Weighted
      average shares – diluted
            
            
            48,835,148
            
            
            
            30,145,590
            
            
            
            48,952,423
            
            
            
            26,738,997Net
      income (loss) per share – diluted
            
            $
            0.02
            
            
            $
            (0.03
            )
            
            $
            0.16
            
            
            $
            (0.09
            )





In
periods when losses are reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their inclusion would be
anti-dilutive.





Recently
issued accounting pronouncements





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





NOTE 2
– GOING
CONCERN





The
Company has incurred recurring losses from operations of $4,963,563, has a
working capital deficit at September 30, 2010 of $1,685,144 and currently has
limited sources of recurring revenue.  These conditions raise
substantial doubt as to the Company’s ability to continue as a going
concern.  To finance the Company’s net losses and to execute its
business plan, the Company has sold debt and equity securities and officers and
directors have funded the Company through the purchase of notes payable (see
Note 4).  There can be no assurance that the Company can sell stock or
debt or that the officers and directors of the Company will continue or have the
ability to make financing available to the Company in the future.  The
officers and directors are under no legal obligation to provide additional loans
to the Company.  If the officers and directors do not make such loans,
the Company cannot create a source of recurring revenues or that the Company
does not receive funds from other sources, then the Company may be unable to
continue to operate as a going concern.  The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.




9




NOTE 3 –
OIL AND GAS PROPERTIES





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





The
carrying values, net of depletion, depreciation, and impairment, at September
30, 2010 and December 31, 2009 of the Company’s oil and gas properties
were:





Prospect
            
            September 30,
              2010
            
            
            December 31,
              2009Coal
      Creek Prospect
            
            $
            225,044
            
            
            $
            223,469Java
      Field
            
            
            858,972
            
            
            
            520,633Total
            
            $
            1,084,016
            
            
            $
            744,102




Net oil
and gas properties at September 30, 2010 were:





Year Incurred
            
            Acquisition
              Costs
            
            
            Exploration
              Costs
            
            
            Dry Hole
              Cost
            
            
            Disposition of assets
            
            
            Accumulated
              Depletion, Depreciation,
              and
              Impairment
            
            
            Total2007
      and prior
            
            $
            236,963
            
            
            $
            458,958
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (27,140
            )
            
            $
            668,7812008
            
            
            -
            
            
            
            1,595,099
            
            
            
            (466,066
            )
            
            
            -
            
            
            
            -
            
            
            
            1,129,0332009
            
            
            556,260
            
            
            
            488,035
            
            
            
            -
            
            
            
            (2,090,383
            )
            
            
            (7,624
            )
            
            
            (1,053,712
            )2010
            
            
            -
            
            
            
            405,462
            
            
            
            -
            
            
            
            -
            
            
            
            (65,548
            )
            
            
            339,914Total
            
            $
            793,223
            
            
            $
            2,947,554
            
            
            $
            (466,066
            )
            
            $
            (2,090,383
            )
            
            $
            (100,312
            )
            
            $
            1,084,016




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





NOTE 4 –
DEBT - RELATED PARTIES





At
September 30, 2010, debt to related parties consisted of unsecured notes payable
to related parties for cash loaned to the Company.  These notes
totaling $451,400 are made to entities owned by the founders and bear interest
at a rate of 6% per annum with principal and interest originally to mature on
March 31, 2007, but have been amended to mature on May 31,
2012.  Also, during the nine months ended September 30, 2010, payments
were made in the amount of $43,000 and proceeds in the amount of 15,500 were
received by the company as a loan from Randy M. Griffin, the Company’s
CEO.





NOTE 5 –
CONVERTIBLE PROMISSORY NOTES





In 2009,
the Company commenced a private placement (the “2009 Private Placement”) of 10%
Secured Convertible Promissory Notes of the Company (the “Convertible Notes”),
at a purchase price of 100% of face value, which, at the option of the
respective holders, are convertible into shares of Common Stock at a conversion
price of $0.25 per share, subject to adjustment in certain circumstances as
provided therein.  Several closings of the 2009 Private
Placement were held during fiscal 2009 and the first quarter of 2010 in which
the Company sold an aggregate of $1,945,000 principal amount of Convertible
Notes (not including a Convertible Note in the principal amount of $250,000 that
was issued in exchange for a different convertible note of the Company in the
same principal amount) raising net proceeds of $1,624,262 after $320,738 of
offering costs.  The Convertible Notes issued are due 24 months from
issuance (or earlier upon certain events of default) and bear interest at 10%
per annum, payable semi-annually on December 31 and June 30 in each year.
Interest will be paid in shares of common stock valued for this purpose at 90%
of the volume weighted average price of the Common Stock for the ten trading
days preceding but not including the relevant interest payment
date.  The Company shall have the right to redeem from time to time,
upon prior notice, all or any portion of the outstanding principal amount of the
Convertible Notes, without penalty, for 100% of the principal being redeemed
plus accrued and unpaid interest.




10





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





The
Company determined that the Convertible Notes issued in the 2009 Private
Placement contained provisions that protect holders from declines in the
Company’s stock price that could result in modification of the exercise price
under the conversion feature based on a variable that is not an input to the
fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No.
815–40.  As a result, the exercise price is not indexed to the
Company’s own stock.  The fair value of the conversion feature was
recognized as an embedded derivative instrument and will be measured at fair
value at each reporting period.  The Company measured the fair value
of these instruments as of the date of issuance and recorded an initial
derivative liability of $9,383,380.  The fair values of these
instruments are re-measured each reporting period and a gain or loss is recorded
for the change in fair value.  The Company measured the fair value of
these instruments at September 30, 2010, including issuances in 2010, and
recorded a $10,718,777 unrealized gain on change in derivative value to the
statement of operations for the nine months ended September 30, 2010. The
Company determined the fair values of these securities using a binomial
valuation model that utilizes the Cox-Ross-Rubenstein method of formulating the
Black-Scholes equation for determining the theoretical value of convertible
notes that contain options of the underlying common stock of the
Company.





Activity
for derivative instrument during the nine months ended September 30, 2010 was as
follows:





Balance
      at
              January
      1,
              2010
            
            
            Initial
      valuation of derivative liability upon issuance of new debt during the
      period
            
            
            Decrease
      in fair value of derivative liability
            
            
            Balance
      at
              September
      30,
              2010Derivative
      conversion feature
            
            $
            7,461,680
            
            
            $
            3,311,820
            
            
            $
            10,718,777
            
            
            $
            54,724








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





Date
            
            Probability
      of issuance of instruments at a price lower than the conversion
      price
            
            Probable
      prices at which instruments will be issuedSeptember
      2009
            
            70%
            
            $0.20
      - $0.15November
      2009
            
            60%
            
            $0.20
      - $0.15December
      2009
            
            50%
            
            $0.24
      - $0.21Thereafter
            
            50%
            
            $0.24
      - $0.21




11


Principal
repayment provisions of long-term debt are as follows at September 30,
2010:




2010
            
            $
            1,015,5002011
            
            
            480,0002012
            
            
            1,116,400Thereafter
            
            
            -Total
            
            $
            2,611,900





NOTE 6 –
COMMITMENTS AND CONTINGENCIES





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





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





NOTE 7 –
STOCKHOLDERS’ EQUITY





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





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





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





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





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





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





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





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




12





Reverse
Merger





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





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





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





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





Investor
Relations Agreement





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





2009
Equity Incentive Plan





Before
the Merger, the Board of Directors of the Company adopted, and the
Company’s majority stockholders approved, the 2009 Equity Incentive Plan (the
“2009 Plan”), which provides for the issuance of incentive awards of up to
5,000,000 shares of Common Stock to officers, key employees, consultants and
directors of the Company and its subsidiaries.  As of September 30,
2010, options to purchase 1,048,000 shares of our common stock at an exercise
price of $0.25 per share, and awards of 24,000 shares of restricted stock had
been granted under the 2009 Plan.





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




·
            The
      former MEI stockholders held 25,035,700 shares of Common
      Stock;




13




·
            The
      stockholders of Mesquite Mining prior to the Merger held 14,000,000 shares
      of Common Stock;





·
            An
      IR Consultant held 150,000 shares of Common Stock;
  and





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





Additionally,





·
            The
      investor in the initial closing of the 2009 Private Placement held a
      $500,000 Convertible Note convertible into 2,000,000 shares of Common
      Stock, subject to adjustment in certain circumstances as provided
      therein;·
            MEI
      had an outstanding convertible promissory note (the “Old Note”), in the
      principal amount of $250,000, which was convertible into an aggregate of
      964,300 shares of Common Stock, subject to adjustment in certain
      circumstances as provided.·
            the
      2009 Plan authorized issuance of up to 5,000,000 shares of Common Stock as
      incentive awards to executive officers, key employees, consultants and
      directors of the Company and its subsidiaries; however, no awards had been
      granted under the 2009 Plan.





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





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





The
Company conducted additional closings of the 2009 Private Placement (the
“Additional 2009 Closings”) on October 19, 2009 for $250,000, on November 3,
2009 for $250,000, on November 11, 2009 for $100,000, on November 13, 2009 for
$100,000, and on November 25, 2009 for $80,000 for an aggregate principal amount
(including the initial closing, but excluding the Convertible Note issued in
exchange for the Denton Note) of $1,280,000.  The Company conducted
further additional closings of the 2009 Private Placement (the “Additional 2010
Closings”) in January 2010, for $665,000.





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





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





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





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





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




14





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





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





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





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





NOTE
8 – STOCK OPTIONS





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





A summary
of the changes in options outstanding during the nine months ended September 30,
2010, is as follows:





Number
      of
              Shares
            
            
            Weighted
      Average
              Exercise
      PriceOutstanding
      at December 31, 2009
            
            
            -Issued
            
            
            1,048,000
            
            
            $
            0.25Exercised
            
            
            -
            
            
            
            -Cancelled/Expired
            
            
            -
            
            
            
            -Outstanding
      at September 30, 2010
            
            
            1,048,000
            
            
            $
            0.25Exercisable
      at September 30, 2010
            
            
            786,000
            
            
            $
            0.25




Options
outstanding and their relative exercise price at September 30, 2010 are as
follows:





Exercise
      price
            
            
            Number
      of options
            
            Remaining
      life
            
            Aggregate
      Intrinsic Value (In-the-money) Options$0.25
            
            
            
            298,000
            
            2.26
      years
            
            $
            -$0.25
            
            
            
            500,000
            
            4.27
      years
            
            -$0.25
            
            
            
            250,000
            
            4.33
      years
            
            -




15




For the
nine months ended September 30, 2010, compensation expense related to
outstanding options of $634,884 was recognized.  As of September 30,
2010, outstanding options had no intrinsic value and a weighted average
remaining contractual term of 3.71 years.





NOTE 9 –
SUBSEQUENT EVENTS





None




16





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





The
following discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve risks, uncertainties
and assumptions.  See “Note Regarding Forward-Looking
Statements.”  Our actual results could differ materially from those
anticipated in the forward-looking statements, among other things, as a result
of certain factors discussed in this quarterly report and in our Annual Report
on Form 10-K filed with the SEC on April 15, 2010, including the “Risk Factors”
section thereof.




Overview
and Going Concern




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




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




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




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




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




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




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




17




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





On August
31, 2009, the closing date of our reverse merger, we acquired the Java Field, a
natural gas development project targeting the Marcellus Shale present in the
Appalachian basin in Wyoming County in western New York for
$440,000.  The acquisition included a 100% working interest in 17
leases held by production covering approximately 3,235 mineral acres, 19
existing natural gas wells, two tracts of land totaling approximately 36 acres
and two pipeline systems, including a 12.4 mile pipeline and gathering system
that serves the existing field as well as a separate 2.5 mile system located
east of the field.  Our average net revenue interest (NRI) in the
leases is approximately 78%.





The
current production from the Java Field is being sold to a local manufacturing
plant.  Two of the existing wells in the Java Field have never been
hooked up to the pipeline system, and the others had very little maintenance and
management attention in a number of years prior to our acquisition of the
field.  In the fourth quarter of 2009, we initiated efforts to work
over several of the existing wells, replace meters and associated equipment and
improve the operation of the pipeline system.  The local manufacturing
plant has had difficulty maintaining the consistent acquisition of gas in recent
months due to poor economic conditions in its industry, and this has handicapped
our ability to properly clean-up and test our newly re-completed wells as well
as to increase the overall production in the field.  In the fourth
quarter of 2010, we plan to commence efforts to divert the pipeline system to a
new sales point in order to solve this problem as well as to continue to upgrade
and enhance our existing wells and pipeline operations in the
field.




The first
phase of development of the Marcellus Shale was initiated in the fourth quarter
of 2009.  We initially evaluated a number of the existing wells in
order to determine the viability of the re-entry of existing wellbores for
plug-back and re-completion of the wells in the Marcellus Shale.  As a
result of this evaluation, we selected the Reisdorf Unit #1 and the Ludwig #1 as
our initial targets.  Both wells were re-completed and fracced in the
second quarter and both wells have been connected to the pipeline
system.  Different methodology was used on each well in order to
obtain the best possible information to help optimize the frac techniques in
future wells.  Based on the results of these re-completions and our
ongoing testing, a second phase of development is currently being
evaluated.  We expect to be able to fine tune the frac techniques on
subsequent wells and to proceed with the development of our existing acreage
position as well as to pursue additional acreage, either from leasing or from
joint ventures with other operators, in 2011, subject to additional financing
being obtained..





Coal
Creek Prospect, Sequoyah Co., Oklahoma





In
December 2007, we completed a “farm-out” transaction with Wentworth Operating
Company of Edmond, OK (“Wentworth”), wherein Wentworth acquired our pipeline
right-of-way and subsequently constructed a natural gas gathering system and
approximately three miles of pipeline to connect the field to an Arkansas
Oklahoma Gas Company (AOG) pipeline.  As a result of this transaction
with Wentworth, we now own 35% of the working interest in the Cook #1 and 25% of
the working interest in the Gipson #1 and the balance of the un-drilled acreage,
with Wentworth and other industry partners owning the balance.





The
Gipson #1 was subsequently drilled to a total depth of approximately 3,000 feet
to test not only the Brent Sand but also the Hunton Sand, a gas-bearing sand
widely produced in this area.  Based on the drilling reports and
testing during the drilling of the Gipson #1 well, we believe there is a
substantial quantity of gas in the Hunton Sand zone.  However, the
completion technique used in that zone proved to be ineffective and resulted in
too much water incursion for the well to be economic.  We believe that
adjustments to the completion methodology are likely to result in successful
Hunton Sand wells in the future.





The
Gipson #1 was re-completed in the Brent Sand, both it and the Cook #1 were
connected to the pipeline and initial production began in the third quarter of
2009.





Based on
the performance of the two wells we now believe that the Brent Sand in the field
may be partially depleted.  However, we expect to work with the
operator on this project to pursue further development of additional gas
reserves in the Coal Creek Field in 2011, subject to additional financing being
obtained.





18





Well
Management Services




On July
1, 2010, Mesa Energy Operating, LLC (“MEO”), our wholly owned subsidiary,
entered into a Contract Operating Agreement (the “Agreement”) with Payson
Petroleum, Inc. (“Payson”), a Dallas based oil and gas company, pursuant to
which agreement MEO will manage the drilling, completion and production of
Payson’s Auldean Brown #1 well in Grayson County, Texas.  Under the
Agreement, MEO has responsibility for all operational services relating to the
drilling and completion of the Auldean Brown #1 well.  MEO may be
given responsibility for the drilling and completion of additional Payson wells
by amendment to the Agreement.  For drilling and casing, MEO will be
paid a fee of $10,000 per well.  For completion operations, MEO will
be paid a fee of $600 per day per well.  For producing wells, Payson
will pay MEO a fixed overhead fee per month of $500 per well.  The
Agreement may be terminated by either party, with or without cause, upon 30 days
prior written notice.  We expect the drilling of the Auldean Brown #1
well to be carried out during the quarter ending December 31, 2010.





Going
Concern




We have
incurred recurring losses from operations of $4,963,563, have a working capital
deficit at September 30, 2010 of $1,685,144 and currently have limited sources
of recurring revenue.  These conditions raise substantial doubt as to our
ability to continue as a going concern.  To finance our net losses and to
execute our business plan, we have sold debt and equity securities and officers
and directors have funded us through the purchase of notes payable (see Note
4).  There can be no assurance that we can sell stock or debt or that our
officers and directors will continue or have the ability to make financing
available to us in the future.  Our officers and directors are under no
legal obligation to provide additional loans to us.  If our officers and
directors do not make such loans, we cannot create a source of recurring
revenues or we do not receive funds from other sources, then we may be unable to
continue to operate as a going concern.  Our financial statements do not
include any adjustments that might be necessary if we are unable to continue as
a going concern.




Adjusted
EBITDA as a Non-GAAP Performance Measure




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




The
following is a reconciliation of our net loss in accordance with GAAP to our
Adjusted EBITDA for the three and nine-month periods ending September 30, 2010
and 2009:




For
      the Three Months Ended
            
            
            For
      the Nine Months EndedSeptember
      30,
            
            
            September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      Income (Loss)
            
            $
            1,114,484
            
            
            $
            (923,053
            )
            
            $
            7,939,869
            
            
            $
            (2,329,904
            )Add
      Back:Interest
      expense
            
            
            81,900
            
            
            
            525,221
            
            
            
            865,449
            
            
            
            553,010Amortization
      of deferred financing costs
            
            
            37,233
            
            
            
            -
            
            
            
            109,839
            
            
            
            -Depreciation,
      depletion, accretion and impairment
            
            
            7,108
            
            
            
            (866
            )
            
            
            21,464
            
            
            
            18,813Gain
      on change in derivative value
            
            
            (1,698,677
            )
            
            
            -
            
            
            
            (10,718,777
            )
            
            
            -Stock
      based compensation
            
            
            227,649
            
            
            
            -
            
            
            
            1,025,578
            
            
            
            -Adjusted
      EBITDA
            
            $
            (230,303
            )
            
            $
            (398,698
            )
            
            $
            (756,578
            )
            
            $
            (1,758,081
            )




19


Results
of Operations





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





Comparison
of Three Months Ended September 30, 2010 and 2009





Revenues





We
generated minimal revenues of $16,718 for the three months ended September 30,
2010 while we generated revenues of $2,755 for the three months ended September
30, 2009.  This revenue represents revenue from the existing producing
wells in the Java Field in Wyoming County, New York.





Operating
Expenses





We
incurred operating expenses of $481,868 for the three months ended September 30,
2010, as compared to $400,587 for the three months ended September 30,
2009.  These expenses consisted of rent, exploration costs, legal and
professional fees, depreciation and related expenses and administrative fees
incurred in connection with the day to day operation of our
business.  Operating expenses increased approximately $33,000 due to
legal and professional fees and exploration cost.





Interest
Expense




Interest
expense was $119,133 for the three months ended September 30, 2010, as compared
to interest expense of $525,221 for the three months ended September 30, 2009, a
decrease of $406,088. The difference was due to additional interest on debt and
amortization of deferred financing costs for our 2009 Private
Placement.





Gain  on
Change in Derivative Value





The
noncash gain on change in derivative value of $1,698,677 for the three months
ended September 30, 2010 compared with zero for the comparable period of 2009
represents the change in potential liability for issuing shares with a higher
value than the conversion price upon conversion of convertible debt into common
stock.  The gain on derivative value is driven primarily by the
decrease in the trading price of our common stock during the three months ended
September 30, 2010.





Net
Income / Loss





Our net
income for the three months ended September 30, 2010 was $1,114,484, comprised
primarily of the noncash gain on change in derivative liability of
$1,698,677.  Net loss for the three months ended September 30, 2009
was $923,053.




20





Comparison
of Nine Months Ended September 30, 2010 and 2009





Revenues





We
generated minimal revenues of $35,999 for the nine months ended September 30,
2010 while we generated $2,755 for the nine months ended September 30,
2009.  This revenue represents revenue from the existing producing
wells in the Java Field in Wyoming County, New York.





Operating
Expenses





We
incurred operating expenses of $1,843,422 for the nine months ended September
30, 2010, as compared to $1,787,891 for the nine months ended September 30,
2009.  These expenses consisted of rent, exploration costs, legal and
professional fees, depreciation and related expenses and administrative fees
incurred in connection with the day to day operation of our
business.  The increase of $7,435 was due, in part, to the prior
period loss on the sale of Poydras Energy, LLC in 2009 of $1,151,997, offset by
the current period increase in legal and professional fees by approximately
$630,000 in connection with our financing efforts and a $1,008,078 increase in
non-cash stock option expense in the 2010 period.





Interest
Expense




Interest
expense was $975,288 for the nine months ended September 30, 2010, as compared
to interest expense of $553,010 for the nine months ended September 30, 2009, an
increase of $422,278. The difference was due primarily to additional debt and
the amortization of the debt discount of $665,000 arising from the initial
derivative valuation for debt issuances during the current period and $109,839
of deferred financing costs for our 2009 Private Placement.





Gain
on Change in Derivative Value





The
noncash gain on the change in derivative value of $10,718,777 for the nine
months ended September 30, 2010 compared with zero for the comparable period of
2009 represents the change in potential liability for issuing shares with a
higher value than the conversion price upon conversion of convertible debt into
common stock.  The gain on the derivative value is driven primarily by
the decrease in the trading price of our common stock during the nine months
ended September 30, 2010.





Net
Income





Our net
income for the nine months ended September, 30 2010 was $7,939,869 comprised
primarily of the noncash gain on the change in derivative liability of
$10,718,777.  Net loss for the nine months ended September 30, 2009
was $2,329,904.





Liquidity
and Capital Resources





Overview





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





Various
factors outside of our control, including the price of oil and natural gas,
overall market and economic conditions, the downturn and volatility in the US
equity markets and the trading price of our common stock may limit our ability
to raise the capital needed to execute our plan of operations. We recognize that
the US economy is currently experiencing a period of uncertainty and that the
capital markets have been depressed from recent levels. We also recognize that
the price of oil and natural gas has decreased significantly during the last 20
months and that natural gas has yet to fully recover to previous levels. If the
price of natural gas remains depressed and the markets remain volatile, we
expect that these or other factors could adversely affect our ability to raise
additional capital.  If we are unable to raise sufficient additional
capital, our short-term or long-term liquidity and our ability to execute our
plan of operations will be materially impaired.




21





During
our 2009 fiscal year, we conducted closings (the “2009 Closings”) of a private
placement (the “2009 Private Placement”) of our 10% Secured Convertible
Promissory Notes (the “Convertible Notes”), at a purchase price equal to the
principal amount thereof, for an aggregate gross amount (excluding the
Convertible Note in the principal amount of $250,000 issued in exchange for a
different convertible promissory note of equal principal amount) of
$1,280,000.  The Convertible Notes are, at the option of the holder,
convertible into shares of our common stock at a conversion price of $0.25 per
share, subject to adjustment in certain circumstances as provided in the
Convertible Notes.




During
the quarter ended March 31, 2010, we conducted further closings (the “Additional
2010 Closings”) of the 2009 Private Placement on January 15, 2010, for $615,000,
and on January 25, 2010, for $50,000.  We paid an aggregate of $24,150
cash placement fees in connection with the Additional 2010
Closings.




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





On
January 20, 2010, we repaid the $43,000 remaining balance owed to Mr. Griffin
for loans made to us after our reverse merger.  Mr. Griffin loaned the
company $15,500 in the third quarter of 2010.




We
applied the remaining proceeds from the 2009 Private Placement towards the
implementation of our plan for the development of the Java Field and for general
working capital purposes.  The initial phase of development of the
Java Field included efforts to enhance the existing production as well as
testing of the Marcellus Shale by re-entering two existing wells.




Additional
capital of approximately $1,500,000 will be required to fund the second phase of
development of the Java Field property and we expect to raise that capital
through additional sales of equity or debt securities in 2011.  There
can be no assurance, however, that such financing will be available to us or, if
it is available, that it will be available on terms acceptable to us or that it
will be sufficient to fund our needs.  If we are unable to obtain this
financing, we may not be able to proceed with the second phase of development of
the Java Field or meet our ongoing operational working capital
needs.




As of
September 30, 2010, we had a working capital deficit of $1,685,144 as compared
to a working capital deficit of $7,518,536 as of December 31,
2009.  The decrease in the working capital deficit was primarily
attributable to our gain on change in derivative value of $10,718,777 for the
nine months ended September 30, 2010 and the initial derivative liability on the
capital raised in the quarter ended September 30, 2010 of
$3,311,820.  Our current assets decreased by $240,688 for the period
ended September 30, 2010, as compared to the period ended December 31, 2009.
This decrease in current assets was due to the decrease in cash from operations
in the third quarter of 2010.




Cash
and Accounts Receivable




At
September 30, 2010, we had cash and cash equivalents of $8,437, compared to
$267,141 at December 31, 2009.  Cash decreased by $258,704 primarily
from operations in the first nine months of 2010.





Liabilities




Accounts
payable and accrued expenses increased by $324,635 to $657,373 at September 30,
2010, from $332,738 at December 31, 2009. The increase was attributable to the
additional legal and professional fees associated with the 2009 Private
Placement.




22





As of
September 30, 2010, the outstanding balance of principal on debt was $2,611,900,
a net increase of $587,500 from the outstanding balance of $2,024,400 as of
December 31, 2009. This net increase was primarily due to gross proceeds of
$665,000 that we received from the 2009 Private Placement in the first quarter
of 2010.




Notes
payable to related parties decreased $27,500 from $43,000 on December 31, 2009
to $15,500 on September 30, 2010 as a result of the repayment of a loan from our
CEO.





Derivative
liability decreased by $7,406,957 as a result of the combination of an increase
in our recorded derivative liability associated with the valuation of new debt
issuances of $3,311,820 and the gain on change in derivative value of
$10,718,777 for the nine months ended September 30, 2010.





Cash
Flows




For the
nine months ended September 30, 2010, the net cash used in operating activities
of $419,105 reflected working capital requirements to fund operating, general
and administrative activities and the completion of our 2009 Private
Placement.  The net cash used by operating activities was $49,657 for
the nine months ended September 30, 2009.





For the
nine months ended September 30, 2010, net cash used in investing activities was
$385,460 compared to net cash used in investing activities of $572,089 for the
same period in 2009. The principal investing activity in the first nine months
of 2010 related to the payment of $405,460 of oil and gas development costs in
the period. The principal investing activity in the first nine months of 2009
related to payment of $532,089 of oil and gas development costs in the
period.




For the
nine months ended September 30, 2010, net cash provided by financing activities
was $545,861, compared to net cash provided by financing activities of $413,693
for the nine months ended September 30, 2009, primarily as a result of proceeds
received from issuance of debt from the 2009 Private Placement for the nine
months ended September 30, 2010.





Off-Balance
Sheet Arrangements





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





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.





Not
applicable.





Item
4.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange
Act of 1934 as a process designed by, or under the supervision of, the company's
principal executive and principal financial officers and effected by our board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America and includes those
policies and procedures that:





-
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect transactions and dispositions of our
  assets;




23




-
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America and that our
      receipts and expenditures are being made only in accordance with
      authorizations of our management and directors;
  and





-
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on our financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.  All internal control systems,
no matter how well designed, have inherent limitations.  Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation.  Because of the inherent limitations of internal
control, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting.  However, these inherent limitations are known features of
the financial reporting process.  Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.





As of
September 30, 2010, our management assessed the effectiveness of our internal
control over financial reporting based on the criteria for effective internal
control over financial reporting established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and SEC guidance on conducting such assessments. Based on that
evaluation, they concluded that, during the fiscal quarter ended September 30,
2010, such internal controls and procedures were not effective to detect the
inappropriate application of US GAAP rules as more fully described
below.  This was due to deficiencies that existed in the design or
operation of our internal controls over financial reporting that adversely
affected our internal controls and that may be considered to be material
weaknesses.





These
matters involving internal controls and procedures that our management
considered to be material weaknesses under the standards of the Public Company
Accounting Oversight Board were:  (1) our lack of a functioning audit
committee which could result in ineffective oversight in the establishment and
monitoring of required internal controls and procedures; (2) we had not
developed and effectively communicated to our employees our accounting policies
and procedures, resulting in inconsistent application of such policies and
procedures in our financial statements in 2009; (3) inadequate segregation of
duties consistent with control objectives; and (4) ineffective controls over
period end financial disclosure and reporting processes.  The
aforementioned material weaknesses were identified by our Chief Executive
Officer in connection with the review of our financial statements as of
September 30, 2010.





Management
believes that the material weaknesses set forth above did not have an effect on
our financial results.  However, management believes that the lack of
a functioning audit committee could result in ineffective oversight in the
establishment and monitoring of required internal controls and procedures, which
could result in a material misstatement in our financial statements in future
periods.





Management's
Remediation Initiatives





Management
is evaluating the process to address the material weaknesses,
including:





(a)
            considering
      the engagement of consultants to assist in ensuring that accounting
      policies and procedures are consistent across the organization and that we
      have adequate control over financial statement
  disclosures;





(b)
            increasing
      our workforce in preparation for exiting the exploration stage and
      beginning operations; and





(c)
            hiring
      an experienced Chief Financial
Officer.




24




We
anticipate that these initiatives will be at least partially, if not fully,
implemented by December 31, 2010.  Additionally, we plan to test our
updated controls and remediate our deficiencies by December 31,
2010.





Changes
in Internal Controls over Financial Reporting





There was
no change in our internal controls over financial reporting that occurred during
the period covered by this report, which has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.




25




PART
II – OTHER INFORMATION





Item
1A. Risk Factors.





The
risk factors facing our company have not changed materially from those set forth
in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December
31, 2009, as filed with the SEC on April 15, 2010, except that we have added the
following risk factor to supplement the risk factors in our Annual
Report.





Pending
New York legislative initiatives and environmental studies of the effect of
hydraulic fracturing may limit our exploration and developmental efforts in the
Marcellus Shale in New York





The New
York Department of Environmental Conservation is currently engaged in an
environmental review of the impacts of hydraulic fracturing in the Marcellus
shale in New York.  Additionally, bills have been introduced in the New
York State legislature,that, if enacted, could result in the imposition of a
moratorium on hydraulic fracturing operations in the Marcellus shale.  The
imposition of such a moratorium or any negative outcome of an environmental
study leading to restrictions, limitations or prohibitions on hydraulic
fracturing in New York could limit our exploration and developmental efforts in
the Marcellus shale.  This could have a material adverse effect on our
business, financial condition and results of operations and our ability to
execute our business plan.





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





On March
18, 2010, we granted Nicholas A. Spano a total of 24,000 shares of restricted
common stock under the 2009 Plan in connection with his serving on our Advisory
Board.  His Restricted Stock Agreement provides that the shares shall
vest and be released from escrow over four vesting periods as services are
provided.  The second vesting period ended on September 18, 2010 and
the market value of the 6,000 shares released from escrow on that date was
$1,140.  The remaining 12,000 shares will vest, and be released from
escrow, on each of the next two six-month anniversaries of the date of grant as
services are provided.





We also
entered into a Consultant Agreement, effective as of March 18, 2010, with Mr.
Spano, pursuant to which we agreed to compensate Mr. Spano with a total of
76,000 shares of our common stock for certain consulting services by issuing him
26,000 shares on March 18, 2010, and 25,000 shares on July 31, 2010 (with a
market value of $8,000).  We will issue to Mr. Spano an additional
25,000 shares on November 30, 2010.





On April
1, 2010, we granted Robert C. Avaltroni a total of 24,000 shares of restricted
common stock under the 2009 Plan in connection with his serving on our Advisory
Board.  His Restricted Stock Agreement provides that the shares shall
vest and be released from escrow over four vesting periods as services are
provided.  The second vesting period ended on October 1, 2010 and the
market value of the 6,000 shares released from escrow on that date was
$1,140  The remaining 12,000 shares will vest, and be released from
escrow, on each of the next two six-month anniversaries of the date of grant as
services are provided.





We also
entered into a Consultant Agreement, effective as of April 1, 2010, with Mr.
Avaltroni, pursuant to which we agreed to compensate Mr. Avaltroni with a total
of 76,000 shares of our common stock for certain consulting services by issuing
him 26,000 shares on April 1, 2010, and 25,000 shares on July 31, 2010 (with a
market value of $8,000).  We will issue to Mr. Avaltroni an additional
25,000 shares on November 30, 2010.





We have
determined that the various issuances of our securities described herein are
exempt from registration under the Securities Act of 1933, as amended, in
reliance on Section 4(2) thereof and/or Regulation D or Regulation S promulgated
thereunder.  The investors represented their status as sophisticated
investors and/or as non-U.S. persons, as well as their intention to acquire the
securities (and any securities issuable upon conversion or exercise thereof) for
investment only and not with a view to or for sale in connection with any
distribution thereof.  Moreover, appropriate legends have been affixed
to the securities (or, in the case of securities issuable upon conversion or
exercise of other securities, will be affixed to the share certificates
therefore).  Moreover, each investor either received adequate
information about us or had access to such information.




Item
3.  Other Information




None.
  26


Item
6.  Exhibits




Exhibit
      No.
            Description10.1
            Mesa
      Energy Operating, LLC Contract Operating Agreement with Payson Petroleum,
      Inc., dated July 1, 2010




31.1
            Certification
      of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002




31.2
            Certification
      of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002




32.1
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*




32.2
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*







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




27




SIGNATURES





In
accordance with the requirements of the Exchange Act, the Registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




MESA
      ENERGY HOLDINGS, INC.Date:  November
      15, 2010
              By:
              /s/ Randy
      M .GriffinName:
      Randy M .GriffinTitle:  
      Chief Executive
      Officer            
      (principal executive officer)




Date:  November
      15, 2010
              By:
              /s/ Ray
      L. UnruhName:
      Ray L. UnruhTitle:  
      Acting Chief Financial
      Officer           
      (principal financial and accounting officer)





28