ZaZa Energy 10Q 2012 Q3 Quarterly report

UNITED STATES 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, 2012

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

Commission file number 001-35432

ZAZA ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		45-2986089
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification Number)

ZaZa Energy Corporation
1301 McKinney St Suite 3000
Houston, Texas 77010

(Address of principal executive office)

Registrant’s telephone number, including area code: 713-595-1900

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller Reporting company o
(Do not check if a smaller reporting company)

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

As of October 31, 2012, there were 101,769,953 shares of common stock, par value $0.01 per share, outstanding.

ZAZA ENERGY CORPORATION

TABLE OF CONTENTS


		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets — September 30, 2012 and December 31, 2011..............................................................	1

	Consolidated Statements of Operations — for the three and nine months ended September 30, 2012 and 2011	3

	Consolidated Statement of Changes in Stockholders’ Equity — for the nine months ended September 30, 2012	4

	Consolidated Statements of Cash Flows — for the nine months ended September 30, 2012 and 2011...........	5

	Notes to Consolidated Financial Statements...................................................................................................................................	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.....................................	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk...................................................................................................	51

Item 4.	Controls and Procedures............................................................................................................................................................................	51

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings.........................................................................................................................................................................................	51

Item 1A.	Risk Factors....................................................................................................................................................................................................	51

Item 5.	Other Information..........................................................................................................................................................................................	53

Item 6.	Exhibits...............................................................................................................................................................................................................	54

	SIGNATURES..................................................................................................................................................................................................	55

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

ZAZA ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS



	September 30,		December 31,
	2012		2011
	(Unaudited)
	(In thousands except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	24,623	$	10,619
Restricted cash		-		111
Accounts receivable — joint interest		2,632		37,303
Accounts receivable — revenue receivable		838		533
Accounts receivable — related party		-		164
Prepayments and other current assets		3,587		2,150
Total current assets		31,680		50,880

Property and equipment
Oil and gas properties, successful efforts method		271,888		17,410
Furniture and fixtures		3,913		2,806
Total property and equipment		275,801		20,216
Accumulated depletion, depreciation and amortization		(10,687)		(1,260)
Property and equipment, net		265,114		18,956

Goodwill		-		-
Other assets		3,232		170

Total assets	$	300,026	$	70,006

Continued on next page

ZAZA ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS



	September 30,		December 31,
	2012		2011
	(Unaudited)
	(In thousands except share and per share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade	$	9,377	$	38,209
Accounts payable — related parties		115		419
Advances from joint interest owner				112
Accrued liabilities		9,210		19,895
Revolving line of credit		-		5,000
Notes payable to members		-		3,000
Income taxes payable		4,982		123
Total current liabilities		23,684		66,758

Long-term accrued liabilities		348		-
Asset retirement obligations		4,984		309
Deferred income taxes		69,547		-
Subordinated notes		47,330		-
Senior Secured Notes, net of discount		46,752		-
Warrants associated with Senior Secured Notes		38,947		-
Total liabilities		231,592		67,067

Stockholders’ equity (deficit) (See Note 1):
Preferred stock, $0.01 par value, 25,000,000 shares authorized; zero issued or outstanding		-		-
Common stock, $0.01 par value, 250,000,000 shares authorized; 101,769,953 and 75,976,500 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		1,018		760
Additional paid-in capital		100,909		-
Accumulated (deficit) retained earnings		(31,275)		2,179
Accumulated other comprehensive income		(2,218)		-
Total stockholders’ equity (deficit)		68,434		2,939

Total liabilities and stockholders’ equity (deficit)	$	300,026	$	70,006

The accompanying notes are an integral part of these financial statements.

ZAZA ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATION



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
	(Unaudited)					(Unaudited)
	(In thousands, except per share data)					(In thousands, except per share data)
Revenues and other income:
Oil and gas revenues	$	10,211	$	801		$	26,991	$	1,277
Bonus income		-		3,560			-		15,049
Other income		196,985		-			197,027		-
Total revenues and other income		207,196		4,361			224,018		16,326
Operating costs and expenses:
Lease operating expense		3,457		596			8,894		627
Exploration expense		3,181		-			3,284		-
Depreciation, depletion and amortization		4,130		200			10,395		485
Accretion expense		54		1			411		1
Impairment of oil and gas properties		22,746		-			22,746		-
Impairment of goodwill		-		-			39,749		-
General and administrative		18,155		6,104			76,057		10,054
Total operating costs and expenses		51,723		6,901			161,536		11,167
Operating income (loss)		155,473		(2,540)			62,482		5,159
Other expense
Foreign currency exchange (gain) loss		(85)		-			138		-
Loss on extinguishment of debt		15,224		-			15,224		-
Interest expense, net		3,736		51			9,999		153
(Gain) loss on fair value of warrants		(27,106)		-			5,315		-
Total other expense		(8,231)		51			30,676		153
Income (loss) before taxes		163,704		(2,591)			31,806		5,006
Income tax provision		29,872		(29)			65,260		56
Net income (loss) available to common shareholders	$	133,832	$	(2,562)		$	(33,454)	$	4,950

Basic income (loss) available to common shareholders per share:	$	1.32	$	(0.03)		$	(0.35)	$	0.07

Diluted income (loss) available to common shareholders per share:	$	1.02	$	(0.03)		$	(0.35)	$	0.07

Weighted average shares outstanding:
Basic		101,731		75,977	(a)		96,879		75,977	(a)
Diluted		105,020		75,977	(a)		96,879		75,977	(a)

Consolidated Statement of Comprehensive Income
Net income (loss)	$	133,832	$	(2,562)		$	(33,454)	$	4,950
Foreign currency translation adjustments, net of taxes		(4,398)		-			(2,218)		-
Comprehensive income (loss)	$	129,434	$	(2,562)		$	(35,672)	$	4,950

(a) Adjusted to reflect the February 21, 2012 Merger with Toreador Resources Corporation, giving retroactive effect for the issuance of shares to former ZaZa LLC members. See Note 1 to the consolidated financial statements.

The accompanying notes are an integral part of these financial statements.

ZAZA ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2012

(UNAUDITED)

(In thousands)



								Accumulated
	Common			Additional				Other		Total
	Stock	Common		Paid-in		Accumulated		Comprehensive		Stockholders’
	(Shares)	Stock ($)		Capital		deficit		Income (loss)		Equity
Balance at December 31, 2011	75,977	$	760	$	-	$	2,179	$	-	$	2,939
Issuance of ZaZa Energy Corp shares	25,792		258		88,116		-		-		88,374
Net income (loss)	-		-		-		(33,454)		-		(33,454)
Stock-based compensation cost	-		-		12,793		-		-		12,793
Foreign currency translation adjustment	-		-		-		-		(2,218)		(2,218)

Balance at September 30, 2012	101,769	$	1,018	$	100,909	$	(31,275)	$	(2,218)	$	68,434

The accompanying notes are an integral part of these financial statements.

ZAZA ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Nine Months Ended September 30,
	2012		2011
		(Unaudited)
		(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(33,454)	$	4,950
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion and amortization		10,395		485
Loss on disposal of furniture and fixtures		27		-
Loss on impairment of oil and gas properties		22,746		-
Accretion expense		411		1
Deferred income taxes		60,671		-
Amortization of deferred debt issuance costs and discount		3,418		-
Loss on extinguishment of debt		11,724		-
Unrealized loss on value of warrants		5,315		-
Stock-based compensation expense		12,793		-
(Gain) on the Hess transaction		(196,985)		-
Impairment of goodwill		39,749		-
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash		111		4,986
(Increase) decrease in accounts receivable - joint interest		17,811		(25,192)
(Increase) decrease in accounts receivable - related party		164		(16)
(Increase) decrease in accounts receivable - revenue receivable		(1,474)		(199)
(Increase) decrease in prepayments and other current assets		2,111		(1,065)
(Increase) decrease in other assets		42		-
Increase (decrease) in accounts payable		(39,038)		15,791
Increase (decrease) in accounts payable - related parties		(305)		(2,873)
Increase (decrease) in advances from joint interest owner		21,595		(4,985)
Increase (decrease) in income taxes payable		3,934		(18)
Increase (decrease) in accrued liabilities		(13,125)		9,073
Net cash provided by (used in) operating activities		(71,364)		938
Cash flows from investing activities:
Cash acquired in connection with the merger		4,118		-
Proceeds from the Hess transaction		83,892		-
Additions to property and equipment		(30,232)		(6,909)
Additions to furniture and fixtures		(138)		(1,328)
Net cash used in investing activities		57,640		(8,237)

Continued on next page

ZAZA ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Nine Months Ended September 30,
	2012		2011
		(Unaudited)
		(In thousands)
Cash flows from financing activities:
Issuance of senior secured notes		100,000		-
Payment of senior secured notes		(33,000)		-
Payment of debt issuance costs		(4,500)		-
Payment of notes payable — members		(3,000)		-
Member withdrawals		-		(1,200)
Proceeds of notes payable — related parties		-		5,000
Payment of revolving line of credit		(5,000)		-
Payment of Toreador notes		(31,754)		-
Net cash provided by financing activities		22,746		3,800
Net increase (decrease) in cash and cash equivalents		9,022		(3,499)
Effects of foreign currency translation on cash and cash equivalents		4,982		-
Cash and cash equivalents, beginning of period		10,619		16,786
Cash and cash equivalents, end of period	$	24,623	$	13,287

Supplemental disclosures:
Cash paid during the period for interest	$	4,714	$	-
Cash paid during the period for income taxes	$	112	$	-

The accompanying notes are an integral part of these financial statements.

ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

ZaZa Energy Corporation (“ZEC”, or “ZaZa” or the “Company”) was formed on August 4, 2011 for the purpose of being a holding company of both ZaZa Energy, LLC (“ZaZa LLC”) and Toreador Resources Corporation (“Toreador”) upon completion of an Agreement and Plan of Merger and Contribution, dated August 9, 2011, as amended (the “Combination”). On February 21, 2012, upon the consummation of the transaction under the Agreement and Plan of Merger and Contribution, ZEC became the parent company of ZaZa LLC and Toreador. In this quarterly report on Form 10-Q, unless the context provides otherwise, “we”, “our”, “us” and like references refer to ZaZa, its two subsidiaries (ZaZa LLC and Toreador) and each of their respective subsidiaries.

The Combination has been treated as a reverse merger under the purchase method of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”). For accounting purposes, ZaZa LLC is considered to have acquired Toreador in the Combination. Under the purchase method of accounting, the assets and liabilities of Toreador have been recorded at their respective fair values and added to those of ZaZa LLC in our financial statements.

The accompanying consolidated balance sheets include the accounts of ZaZa Energy Corporation and all subsidiaries, including ZaZa LLC and Toreador. The results of operations include the results of our accounting predecessor, ZaZa LLC, from January 1, 2012 through February 20, 2012 and all of our subsidiaries, including ZaZa LLC and Toreador, since February 21, 2012. For the period from February 21, 2012 to September 30, 2012 Toreador contributed $19.7 million in revenue and $62.9 million net loss. All figures presented are in thousands except per share data.

The accompanying consolidated financial statements were prepared following a reverse merger and are issued under the name of the legal parent (ZaZa Energy Corporation) (the accounting acquiree) but are a continuation of the financial statements of the legal subsidiary (ZaZa Energy LLC) (accounting acquirer), with one adjustment, which is to retroactively adjust the accounting acquirer’s legal capital to reflect the legal capital of the legal parent (the accounting acquiree). Comparative information presented in those consolidated financial statements also is retroactively adjusted to reflect the legal capital of the legal parent (accounting acquiree). Accordingly, the equity structure of the legal subsidiary (the accounting acquirer) is retroactively adjusted using the exchange ratio established in the Agreement and Plan of Merger and Contribution, dated August 9, 2011, as amended, to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse merger.

The accompanying consolidated financial statements are prepared in accordance with GAAP and reflect all adjustments, consisting of only normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results for the period. All material intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements, which are normally required under accounting principles generally accepted in the United States, have been condensed or omitted; however management believes that the disclosures are adequate to make the information presented not misleading.

The preparation of these consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could be materially different from these estimates.

The consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2011, included in the Form 10-K. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Combination of ZaZa LLC and Toreador Resources Corporation

On February 21, 2012, we consummated the combination of ZaZa LLC and Toreador Resources Corporation, on the terms set forth in the Agreement and Plan of Merger and Contribution, dated August 9, 2011, and as subsequently amended by Amendment No. 1 thereto on November 10, 2011 and Amendment No. 2 thereto on February 21, 2012 (as amended, the “Merger Agreement”), by and among us, ZaZa LLC, Toreador, and Thor Merger Sub Corporation, our wholly-owned subsidiary (“Merger Sub”).

Pursuant to the Merger Agreement, (i) Merger Sub merged with and into Toreador (the “Merger”), with Toreador continuing as the surviving entity, (ii) the 3 former members of ZaZa LLC (the “ZaZa LLC Members”), holding 100% of the limited liability

company interests in ZaZa LLC, directly and indirectly contributed all of such interests to us (the “Contribution”), and (iii) the holders of certain profits interests in ZaZa LLC contributed 100% of such interests to us (the “Profits Interests Contribution”). Upon the consummation of the Combination, Toreador and ZaZa LLC became our wholly owned subsidiaries.

At the effective time of the Merger, each share of common stock, par value $0.15625 per share, of Toreador issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive one share of ZaZa common stock, par value $0.01 per share (the “Common Stock”), which in the aggregate represented 25% of the issued and outstanding shares of Common Stock immediately after the consummation of the Combination (but without giving effect to the shares of Common Stock issuable upon exercise of the Warrants as discussed below).

Immediately after the consummation of the Merger and Contribution, and pursuant to the Net Profits Interest Contribution Agreement, dated August 9, 2011, among ZaZa, ZaZa LLC and the holders of net profits interests in ZaZa LLC, the holders of certain profits interests in ZaZa LLC completed the Profits Interests Contribution in exchange for $4.8 million in cash.

The estimate of the fair value of the merger consideration was determined as follows (in thousands, except per share amounts):



Shares of Toreador outstanding as of February 21, 2012		26,047
Toreador share price as of February 21, 2012	$	5.18
Total estimated purchase price	$	134,922

The fair value of the merger consideration received by the Toreador stockholders was estimated to be approximately $134.9 million in the aggregate. This amount has been allocated to Toreador’s tangible and intangible assets and liabilities based on an estimate of the fair value of Toreador’s assets and liabilities. The following is a summary of the value of the merger consideration and the fair value of the underlying assets and liabilities of Toreador.



	(in thousands)
Consideration exchanged (value of stock)	$	134,922

Assets acquired:
Cash		4,118
Accounts receivable		3,000
Other current assets		3,380
Oil and gas properties		139,350
Furniture and fixtures		950
Other assets		533
Total assets acquired:		151,331

Liabilities assumed:
Accounts payable		10,206
Deferred lease payable		267
Income taxes payable		925
Long term liabilities		241
Asset retirement obligations		4,513
Long-term debt		31,754
Deferred tax liability		9,168
Total liabilities assumed:		57,074

Net assets acquired	$	94,257

Excess purchase price (i.e. goodwill)	$	40,665

Pro Forma Results

The following table provides pro forma results of operations as if the merger between ZaZa and Toreador had been completed at the beginning of each period presented (in thousands, except per share data):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Total revenues	$	207,196	$	12,784	$	228,779	$	44,296
Net income (loss)	$	133,832	$	(5,378)	$	(34,301)	$	(6,377)
Basic earnings (loss) per share	$	1.32	$	(0.07)	$	(0.35)	$	(0.08)
Diluted earnings (loss) per share	$	1.02	$	(0.07)	$	(0.35)	$	(0.08)

The equity structure of the legal subsidiary (the accounting acquirer) has been retroactively adjusted using the exchange ratio established in the Agreement and Plan of Merger and Contribution, dated August 9, 2011, as amended, to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse merger. For the purpose of 2011 earnings per share calculation (“EPS”), the number of weighted average shares outstanding represents assumed shares outstanding as of December 31, 2011, as there were no changes in the capital structure of ZaZa LLC during the three and nine months ended September 30, 2011. The shares outstanding were calculated based on the Toreador shares outstanding and the exchange ratio.

Subsidiaries of ZaZa Energy Corporation

ZaZa Energy, LLC

ZaZa LLC was a privately-held independent exploration and production company focused on the exploration and development of unconventional onshore oil and gas resources in the United States of America, until February 21, 2012, when it was contributed to ZaZa as part of the Combination. ZaZa LLC was controlled by the ZaZa Founders who each beneficially owned one-third of the outstanding limited liability company interests of ZaZa LLC. ZaZa LLC’s operations are concentrated in south Texas, including its largest exploration area in the core area of the Eagle Ford shale formation and in the eastern extension of the Eagle Ford/Woodbine formation, which we refer to as the “Eaglebine.”

Toreador Resources Corporation

Toreador was a publicly held independent energy company engaged in the exploration and production of crude oil with interests in developed and undeveloped oil properties in the Paris Basin, France. Toreador currently operates solely in the Paris Basin, which covers approximately 170,000 km² of northeastern France, centered 50 to 100 km east and south of Paris. As of September 30, 2012 and 2011, production from the Neocomian Complex and Charmottes oil fields represented a majority of Toreador’s total revenue and substantially all of Toreador’s sales and other operating revenue.

NOTE 2 — AGREEMENTS WITH HESS CORPORATION

ZaZa LLC

In April 2010, ZaZa LLC entered into an agreement with Hess Corporation (“Hess”) in which ZaZa LLC was to identify certain geographical areas in the Eagle Ford Shale trend that were available for leasing and subsequently conduct exploration and production activities thereon. Hess was to pay all acquisition costs including ZaZa LLC’s interest until production up to $500 million. As of September 30, 2012, approximately $366 million in leases had been acquired pursuant to this agreement. After production, Hess was to retain a 90% working interest and ZaZa LLC, the operator, a 10% working interest. Hess also was to pay ZaZa LLC a 10% cash bonus per net acre for each lease purchased. The 10% cash bonus was recognized as revenue after the leases were obtained, title was cured and transferred to Hess, and recorded with the appropriate county.

In connection with the Exploration and Development Agreement (“EDA”), Hess periodically advanced non-interest bearing funds to ZaZa LLC to fund lease acquisitions, exploration and development activities, and reimbursed ZaZa LLC for certain general and administrative expenses incurred in performing these activities. The funds received related to lease acquisitions were deemed restricted as to use pursuant to the EDA until the lease was acquired. Hess also approved all exploration and development activities based on the underlying approved authorization for expenditures (“AFE”) and advanced funds to ZaZa LLC for such activities, usually 30 days in advance of actual expenditures being incurred. The funds, once received, were commingled with ZaZa LLC’s own cash and were not restricted as to use. The amounts received by ZaZa LLC for lease acquisitions and exploration and development

activities in excess of the amounts incurred to date were recorded as advances from joint interest owner in the accompanying consolidated balance sheets. Given the nature of the EDA arrangement to ZaZa LLC’s overall business activities, the cash flows from each of the above activities have been presented as operating cash flows in the accompanying statements of cash flows.

Toreador

On May 10, 2010, Toreador Energy France S.A.S, (“TEF”), a company organized under the laws of France and an indirect subsidiary of the Company, entered into the Hess Investment Agreement (“the Investment Agreement”) Hess Oil France S.A.S., a company organized under the laws of France and a wholly owned subsidiary of Hess Corporation, a Delaware corporation, pursuant to which (x) Hess became a 50% holder of TEF’s working interests in its awarded and pending exploration permits in the Paris Basin, France (the “Permits”) subject to fulfillment of Work Program (as described in (y) (2) hereafter) and (y) (1) Hess was required to make a $15 million upfront payment to TEF, (2) Hess had the right to invest up to $120 million in fulfillment of a two-phase work program (the “Work Program”) and (3) TEF would be entitled to receive up to a maximum of $130 million of success fees based on reserves and upon the achievement of an oil production threshold, each as described more fully below.

The Ministère de l’Ecologie, de l’Energie, du Développement Durable et de la Mer (Ministry of Ecology, Energy, Sustainable Development and the Sea) in France granted first-stage approval on June 25, 2010. An application for the grant to Hess of title (together with TEF) on each of the pending exploration permits in the Paris Basin was also filed with the French Government.

Under the terms of the Investment Agreement, Phase 1 of the Work Program was expected to consist of an evaluation of the acreage underlying the Permits and the drilling of six wells (“Phase 1”). If Hess did not spend $50 million in fulfillment of the Work Program within 30 months of receipt of government approval, Hess was required to promptly transfer back to TEF the transfer working interests. In light of the political situation in France and our voluntary agreement with the French government to delay drilling in our permits, TEF entered into an Amendment Agreement to the Investment Agreement that extended the deadline to complete Phase 1 by 18 months for a total of 48 months after receipt of government approval.

Under the terms of the Investment Agreement, if Hess spent $50 million in Phase 1, Hess would have had the option to proceed to Phase 2 of the Work Program. If Hess elected not to proceed to Phase 2 of the Work Program, Hess was required to promptly transfer back to TEF a percentage of the transfer working interests determined with reference to the amount of money spent by Hess in fulfillment of the Work Program during Phase 1.

Under the terms of the Investment Agreement, if Hess elected to proceed, Phase 2 of the Work Program was expected to consist of appraisal and development activities, depending on the results of the work in Phase 1. If Hess did not spend $70 million (less money spent by Hess in fulfillment of the Work Program in excess of $50 million in Phase 1) in fulfillment of the Work Program within 36 months (“Phase 2”), Hess was required to promptly transfer back to TEF a percentage of the transfer working interests determined with reference to the amount of money spent by Hess in fulfillment of the Work Program during Phase 1. Following Phase 2, TEF and Hess were to bear the costs of subsequent exploration, appraisal and development activities in accordance with individual participation agreements governing the joint operations on each Permit.

Under the terms of the Investment Agreement, Hess agreed to pay TEF: (x) a success fee based on proved developed oil reserves (as defined by Rule 4-10(a) of Regulation S-X), up to a maximum of $80 million and (y) a success fee if oil production exceeded an agreed threshold, up to a maximum of $50 million, each of which was subject to reduction under certain circumstances.

Under the terms of the Investment Agreement, TEF and Hess designated an area of mutual interest within the Paris Basin (the “AMI”). If either party acquired or applied for a working interest in an exploration permit or exploitation concession within the AMI, such party would be required to offer to the other party 50% of such interest on the same terms and conditions.

Under the terms of the Investment Agreement, TEF was entitled to invoice Hess for all exploration, salary and general and administrative expenses that are associated with its activities as operator of the Permits. There was no activity under this agreement in the three and nine months ended September 30, 2012.

Termination of the Agreements with Hess

Rationale for Hess Joint Venture Dissolution

delivery of lease assignments and net acreage shortfalls (some of which disagreements are the subject of our claim against FLMK/Emerald Leasing discussed in “Note 11 - Commitments and Contingencies”), timing and amounts of payments, drilling obligations and drilling schedules, obligations to transfer undrilled acreage to ZaZa prior to lease expiration, and the interpretation of the other rights and obligations of the parties. Accordingly, the parties entered into a Heads of Agreement on June 8, 2012 outlining the terms of a division of assets to dissolve the joint venture, and the parties entered into definitive agreements regarding such division of assets and dissolution of the joint venture on July 25, 2012.

The EDAs for the Hess joint venture required ZaZa LLC to operate the Hess joint venture properties during the first year of drilling, after which Hess had an election to take over operatorship. This provision enabled ZaZa LLC to build an operating track record during this first year of drilling. As operator of the Hess joint venture, ZaZa LLC successfully drilled and completed 18 Eagle Ford wells. Hess elected to take over operatorship, and the transition from ZaZa LLC to Hess commenced in November 2011 and was expected to be completed in July 2012. In conjunction with the operatorship transition, Hess also made public announcements in the first quarter of 2012 that indicated that they intended to pursue a drilling program in 2012-2013 that was slower than ZaZa LLC had anticipated. The combination of Hess taking over operatorship and the expectation that Hess would slow the drilling program led ZaZa LLC to negotiate an exit from the EDA in July 2012. As a result of this exit, ZaZa LLC relinquished the Cotulla Area and regained operational control of approximately 60% of the venture’s former acreage (totaling 72,000 net acres). TEF also exited the Investment Agreement (subject to French regulatory approval), which had stalled due to French governmental regulations. This resulted in the Company converting its 50% working interest to a 5% non-cost bearing revenue interest for up to $130 million in cash receipts. In addition to the aforementioned land transitions, the Company also received $69 million in cash.

Hess Joint Venture Dissolution Agreement

In order to resolve our disagreements with Hess relating to our joint venture, on June 8, 2012, ZaZa, ZaZa LLC, ZaZa Energy France S.A.S. (formerly known as Toreador Energy France S.A.S.)(“ZEF”), Hess and Hess Oil France S.A.S. (“Hess France”) entered into a Heads of Agreement (“HoA”), that provided for the termination of the ongoing obligations of the parties under the EDAs and the agreements between ZEF and Hess France, including that certain Investment Agreement dated May 10, 2010, as amended, and that certain agreement dated July 21, 2011 with Vermillion REP, S.A.S., (the “French Agreements”), and the division of the assets covered by the EDAs and the French Agreements.

In connection with the execution of the HoA, ZaZa LLC and Hess entered into an amendment to the Exploration and Development Agreement Eagleford Shale Area dated April 28, 2010, as amended, and the applicable joint operating agreements, to eliminate Hess’s obligation to carry the cost of the wells under those agreements in the Cotulla Prospect Area, in exchange for a cash payment by Hess to ZaZa LLC of $15 million. This $15 million was paid to ZaZa on June 8, 2012. ZaZa LLC had the right under the amendment to reinstate Hess’s well-carry obligations at any time prior to September 28, 2012, if the Exploration and Development Agreement was still in effect, by paying Hess $15 million.�� Given the uncertainty surrounding the EDA, the proceeds received were recognized as a deferred gain in the second quarter financial statements, contingent on the signing of definitive documentation. The gain was recognized in the third quarter in connection with the termination of the EDA.

On July 25, 2012, the Company and its subsidiaries entered into the definitive documentation to carry out the transactions contemplated by the HoA and consummated the transactions contemplated by the HoA (and such definitive documentation). The definitive documentation included the following:

 A Texas Division of Assets Agreement, by and among the Company, ZaZa LLC and Hess, pursuant to which the ongoing obligations of ZaZa LLC and Hess under the Eagle Ford Agreements, including funding for additional leases, well carry or carry for expenses, were terminated and the assets covered by the Eagle Ford Agreements were divided; and

 A Paris Basin Purchase and Sale Agreement, by and among Hess France and ZEF, pursuant to which, following governmental approval, the ongoing obligations of the parties thereto under the French Agreements, including funding for additional leases, well carry or carry for expenses, were terminated and the assets covered by the French Agreements were divided, in each case following regulatory approval which was obtained on September 19, 2012.

Pursuant to the Texas Division of Assets Agreement and the Paris Basin Purchase and Sale Agreement (collectively, the “Hess Agreements”), ZaZa received the following:

 Approximately $69 million in cash, in addition to the $15 million in the second quarter of 2012;

 Approximately 60,500 additional net acres in the Eagle Ford core area;

 The right to receive five percent of any net sales proceeds in excess of $1 billion and ten percent of any net sales proceeds in excess of $1.2 billion if Hess sells any of its retained working interest in the Cotulla Prospect Area by May 1, 2013; and

 A five percent overriding royalty interest (“ORRI”) in certain of Hess’s exploration licenses in the Paris Basin capped at $130 million.

As a result of consummation of the transactions set forth in the Hess Settlement Agreements, ZaZa’s net acreage holdings in the Eagle Ford core increased from a total of 11,500 acres to approximately 72,000 acres. The acreage by area comprises approximately 1,970 acres in the Cotulla Prospect Area in the proved, productive region of southern Frio County, 23,120 acres in the Hackberry Prospect Area (Lavaca and Colorado Counties), 10,810 acres in the Moulton Prospect Area (Fayette, Gonzalez and Lavaca Counties) and 35,650 acres in the Sweet Home Prospect Area (DeWitt and Lavaca Counties). Following the receipt of the necessary governmental approvals, ZaZa transferred its 50% working interest in the Paris Basin exploration licenses as provided for in the Investment Agreement between Hess France and ZEF retained a 5% ORRI in such licenses, in which the total proceeds relating thereto to ZaZa are capped at $130 million.

Pursuant to the Hess Agreements, Hess received the following:

 Approximately 4,490 net acres in LaSalle, Frio, Zavala, and Dimmit Counties (the “Cotulla Prospect Area”);

 A two percent ORRI on the Moulton Prospect Area and a one percent ORRI in the Hackberry and Sweet Home Prospect Areas; and

·	All rights and title to the exploration permits and pending permits in France (ZaZa retains all current production in France from its operating concessions).

As described above, in connection with the entry into the Hess Agreements, ZaZa LLC and Hess terminated the Eagle Ford Agreements. Pursuant to the Eagle Ford Agreements, ZaZa LLC retained a 10% working interest in all acreage acquired on behalf of the joint venture in the Eagle Ford shale and also earned a cash bonus of 10% on all acreage acquired on behalf of the joint venture. Under the terms of the joint venture, Hess had a right to participate in all leases acquired by ZaZa LLC in the Eagle Ford shale. If Hess elected to participate in a lease, the lease became part of the joint venture and Hess paid all of the acquisition costs up to a cap, and paid all of the exploration and development costs for a specified number of approved wells on the leased acreage until production. ZaZa LLC also received a partial reimbursement of general and administrative expenses while it was the operator of wells under the joint venture. ZaZa LLC’s 10% working interest in each well (subject to a cap) in the joint venture was “carried” by Hess pursuant to the Eagle Ford Agreements.

Pursuant to the Hess Agreements, Hess has assigned to ZaZa certain claims that the joint venture had against various leasing contractors and brokers who had been paid for acreage but had neither delivered the acreage nor refunded the payments. Hess is entitled to 50% of any cash proceeds received by ZaZa in its prosecution of these claims, however, ZaZa is entitled to all of the acreage delivered in kind by the leasing contractors/brokers. ZaZa LLC filed a lawsuit against certain lease brokers, consultants and law firms who were involved in the leasing of acreage for the company in DeWitt and Lavaca Counties, including Emerald Leasing LLC, FLMK Acquisition, LLC, John T. Lewis, Billy Marcum, Brad Massey, Max Smith, Randy Parsley, Timothy E. Malone, Heroux & Helton PLLC, and Whitaker Chalk Swindle & Schwartz PLLC.

In connection with the division of assets, Hess France and ZEF also agreed to terminate the French Agreements. The French Agreements provided the framework for a proof of concept program in the Paris Basin and the sharing on a 50-50 basis of the permits in certain areas in the Paris Basin. As a result of recent legislation in France banning hydraulic fracturing, ZaZa’s plan to drill on the land had been adversely affected and the value of the French Agreements had declined. The French Agreements were terminated as of October 1, 2012, following the receipt of the necessary governmental approvals to the transfer and division of the French assets contemplated by the Hess Agreement.

The termination of agreements with Hess and the division of assets resulted in a gain of $197 million consisting of oil and gas property fair valued at $117 million, a write off of $4 million working capital and cash proceeds of $84 million. Property received consisted of producing wells and unproved acreage. All receivables and payables related to Hess were written off.

In addition, on July 25, 2012, ZaZa entered into a Waiver and Amendment No. 2 (“Amendment No. 2”) to the Securities Purchase Agreement dated February 21, 2012 (the “SPA”), relating to our 8% senior secured notes due 2017 (the “Senior Secured Notes”). Amendment No. 2 was a condition to obtaining the requisite consent of the holders of our Senior Secured Notes to the transactions contemplated by the Hess Agreements, and provides the following:

 Consent rights for the holders of a majority of the Senior Secured Notes on all sales or joint venture transactions involving oil and gas properties, with certain carveouts and requirements to apply a portion of net sales proceeds to pay down the Senior Secured Notes, until such time as the Senior Secured Notes have an outstanding principal amount of $25 million or less;

 A provision that if the Senior Secured Notes have not been paid down to $35 million by February 21, 2013, the interest rate will increase from 8% to 10% per annum;

 A limit on additional debt incurrence of ZaZa to $50 million in reserve-based lending; and

 A requirement that the Company engage an investment banker to assist the Company in securing a joint venture partner or partners for its Eagle Ford and Woodbine/Eaglebine assets, as well as to evaluate other strategic opportunities available to the Company which has been satisfied by our engaging Jefferies & Company, Inc. as our financial advisor.

In addition, immediately following the closing of the transactions contemplated by the Hess Agreement, and as contemplated by Amendment No. 2, the Company paid down the outstanding principal amount of the Senior Secured Notes by $33.0 million and paid a $3.5 million associated fee. We also recorded a charge of $11.7 million due to the write off of issuance costs and discount amount. Total loss on the extinguishment of debt was $15.2 million.

NOTE 3 — GOING CONCERN

Our independent registered public accounting firm issued their report dated June 14, 2012, in connection with the audit of our financial statements for the year ended December 31, 2011 and 2010 that included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern due to our disagreement with our joint venture partner and overall impact on our liquidity. We believe that the uncertainties giving rise to this going concern qualification were substantially resolved upon finalization of the termination of our joint venture with Hess. However, our independent registered public accounting firm will provide a new opinion based on facts and circumstances at December 31, 2012 for the year then ended.

We had $48.7 million of cash and equivalents at November 1, 2012 after giving effect to the receipt of net proceeds of the convertible notes described in Note 15 – Subsequent Events, and funding of overhead, operating and capital expenditures.

Management anticipates capital expenditure of approximately $23.8 million for the fourth quarter of 2012. Our capital expenditures will be used to drill two exploration wells in the Eaglebine, reenter a Sweet Home well, and fund lease extensions and options in the Eaglebine and Eagle Ford.

We anticipate that our activities for the remainder of 2012 will result in a positive working capital of $29.0 million to $33.0 million at December 31, 2012, including net cash flows of $18.9 million expected from the potential sale of the French subsidiaries as described in Note 13 – Impairment of Assets which is expected to close in the fourth quarter of 2012. This analysis reflects management’s best estimates and is dependent on a variety of factors outside our control, including litigation, production forecasts for new and existing wells and commodity prices. We believe that we will be able to provide tax shelter for substantially all of the $85 million consideration received from Hess through use of our current year losses.

Going forward, we will utilize cash flow from operations, alternative sources of equity or debt capital, joint venture partnerships and possible asset divestitures to finance additional drilling operations in the Eaglebine and or Eagle Ford. The Company has engaged Jefferies & Company, Inc. as its financial advisor to assist in securing a joint venture partner or partners for its Eagle Ford and Woodbine/Eaglebine assets, as well as to evaluate all strategic opportunities available to the Company, including asset and corporate transactions and financing arrangements. However, there is no assurance that the Company will secure a joint venture partner or partners. Absent additional sources of financing or the securing of a joint venture partner, we will have to substantially reduce our expenditures in 2013.

NOTE 4 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers investments in all highly liquid instruments with original maturities of three months or less at date of purchase to be cash equivalents.

Revenue Recognition

The Company derives its oil and gas revenue primarily from the sale of produced oil and gas. As of September 30, 2012 and December 31, 2011, substantially all of our oil production in France had been marketed by TOTAL. The Company uses the sales method of accounting for the recognition of gas revenue whereby revenues, net of royalties are recognized as the production is sold to the purchaser. The amount of gas sold may differ from the amount to which the Company is entitled based on its working interest or net revenue interest in the properties. Revenue is recorded when title is transferred based on our nominations and net revenue interests. Pipeline imbalances occur when production delivered into the pipeline varies from the gas we nominated for sale. Pipeline imbalances are settled with cash approximately 30 days from date of production and are recorded as a reduction of revenue or increase of revenue depending upon whether we are over-delivered or under-delivered. Settlements of oil and gas sales occur after the month in which the product was produced. We estimate and accrue for the value of these sales using information available at the time financial statements are generated. Differences are reflected in the accounting period during which payments are received from the purchaser.

The Company also derives its bonus income revenue from a bonus on leasehold amounts that Hess agrees to participate in. The bonus amount is equal to 10% of the sum of all direct costs associated with acquiring the net mineral acres as defined in the EDA and is recognized after the leases are obtained, title is cured and transferred to Hess, and recorded with the appropriate county.

Accounts Receivable

Accounts receivable include oil and gas revenues, joint interest billing, and related parties receivables. Management periodically assesses the Company’s accounts receivable and establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company usually does not require collateral.

Concentration of Credit Risk

The Company maintains its cash balances at several financial institutions, which are insured by the Federal Deposit Insurance Corporation. The Company’s cash balances typically are in excess of the insured limit. A significant portion of our French accounts receivable is from a single entity. This concentration may impact the Company’s overall credit risk, either positively or negatively, in that this entity may be similarly affected by changes in economic or other conditions. The Company has incurred no losses related to these accounts.

Successful Efforts Method of Accounting for Oil and Gas Activities

The Company accounts for its natural gas and crude oil exploration and production activities under the successful efforts method of accounting. Oil and gas lease acquisition costs are capitalized when incurred. Lease rentals are expensed as incurred. Oil and gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved commercial reserves. Exploratory drilling costs are capitalized when drilling is complete if it is determined that there is economic producibility supported by either actual production or a conclusive formation test. If proved commercial reserves are not discovered, such drilling costs are expensed. In some circumstances, it may be uncertain whether proved commercial reserves have been found when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of natural gas and crude oil, are capitalized. Unproved properties with individually significant acquisition costs are analyzed on a property-by-property basis for any impairment in value. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and gas properties.

complex requiring significant subjective decisions in the evaluation of all available geological, engineering, and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving producing history, and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time.

Depreciation, depletion, and amortization of the cost of proved oil and gas properties are calculated using the unit-of-production method. The reserve base used to calculate depreciation, depletion, and amortization for leasehold acquisition costs is the sum of proved developed reserves and proved undeveloped reserves. With respect to lease and well equipment costs, which include development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. Estimated future dismantlement, restoration, and abandonment costs, net of salvage values are taken into account.

Amortization rates are updated quarterly to reflect: (1) the addition of capital costs, (2) reserve revisions (upwards or downwards) and additions, (3) property acquisitions and/or property dispositions, and (4) impairments. When circumstances indicate that an asset may be impaired, the Company compares expected undiscounted future cash flows at a producing field level to the unamortized capitalized cost of the asset. If the future undiscounted cash flows, based on the Company’s estimate of future natural gas and crude oil prices, operating costs, anticipated production from proved reserves, and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is calculated by discounting the future cash flows at an appropriate risk-adjusted discount rate.

Asset Retirement Obligations

We follow ASC 410-20 which applies to obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction and development of the assets. ASC 410-20 requires that we record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset.

The following table summarizes the changes in our asset retirement liability during the nine months ended September 30, 2012 and 2011.



	Nine Months Ended September 30,
	2012		2011
Asset retirement obligations at January 1	$	309	$	-
Obligations assumed in the Combination		4,513		-
Obligations incurred		313		130
Obligations extinguished		(355)		-
Accretion expense		411		1
Foreign currency exchange (gain)		(207)		-
Asset retirement obligations at the end of the period	$	4,984	$	131

Furniture and fixtures

Furniture and fixtures are stated at cost. Depreciation is calculated using the straight-line method over the assets’ estimated useful lives as follows:



Office furniture and fixtures	2 - 5
Computing equipment	2 - 5
Vehicles	5 - 7

Other Assets

Other assets consist of long term restricted deposits related to letters of credit with the Railroad Commission and other vendors as well as debt issuance costs. At September 30, 2012 debt issuance costs were $4.5 million and accumulated amortization was $1.8 million, which includes $1.4 million in debt issuance costs was expensed as part of debt extinguishment loss during the three and nine months ended September 30, 2012. The costs are being amortized over 5 years.

Income Taxes

For financial reporting purposes, we generally provide taxes at the rate applicable for the appropriate tax jurisdiction. Management periodically assesses the need to utilize any unremitted earnings to finance our operations. This assessment is based on cash flow projections that are the result of estimates of future production, commodity prices and expenditures by tax jurisdiction for our operations. Such estimates are inherently imprecise since many assumptions utilized in the cash flow projections are subject to revision in the future.

Management also periodically assesses, by tax jurisdiction, the probability of recovery of recorded deferred tax assets based on its assessment of future earnings estimates. Such estimates are inherently imprecise since many assumptions utilized in the assessments are subject to revision in the future.

Earnings (loss) Per Common Share

Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the periods. Diluted net income per share is computed based upon the weighted-average number of common shares outstanding during the periods plus the assumed issuance of common shares for all potentially dilutive securities (see Note 6). The equity structure of the legal subsidiary (the accounting acquirer) has been retroactively adjusted using the exchange ratio established in the Agreement and Plan of Merger and Contribution, dated August 9, 2011, as amended, to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse merger. For the purpose of 2011 earnings per share calculation (“EPS”) the number of weighted average shares outstanding represents assumed shares outstanding as of December 31, 2011, as there were no changes in the capital structure of ZaZa LLC during the three and nine months ended September 30, 2011. The shares outstanding were calculated based on the Toreador shares outstanding and the exchange ratio.

Foreign Currency Translation

The United States dollar is the functional currency for all of ZaZa’s consolidated subsidiaries except for certain of its French subsidiaries, for which the functional currency is the Euro. For subsidiaries whose functional currency is deemed to be other than the United States dollar, asset and liability accounts are translated using the period-end exchange rates and revenues and expenses are translated at average exchange rates prevailing during the period. Translation adjustments are included in Accumulated Other Comprehensive Income (“AOCI”) on the Consolidated Balance Sheets. Any gains or losses on transactions or monetary assets or liabilities in currencies other than the functional currency are included in net income (loss) in the current period.

Stock-based Compensation

Stock-based compensation cost is measured at the date of grant, based on the fair value of the award, and is recognized as expense, generally on a straight line basis over the vesting period of the award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Awards subject to vesting requirements for non-employees are fair valued each reporting period, final fair value being determined at the vesting date.

Recent Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that further addresses fair value measurement accounting and related disclosure requirements. The guidance clarifies the FASB’s intent regarding the application of existing fair value measurement and disclosure requirements, changes the fair value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair value measurements. The guidance is to be applied prospectively and is effective for periods beginning after December 15, 2011. We adopted this guidance effective January 1, 2012. The adoption of this guidance did not have an impact on our consolidated financial position, results of operations or cash flows, as it only expanded disclosures.

In June 2011, the FASB amended current comprehensive income guidance. The amended guidance eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. Also, in December 2011, FASB issued an accounting standard update to abrogate the requirement for presentation in the income statement of the effect on net income of reclassification adjustments out of AOCI as required in FASB’s June 2011 amendment. We adopted this guidance effective January 1, 2012. The adoption of this guidance did not have an impact on our consolidated financial position, results of operations or cash flows as it only required a change in the format of the current presentation.

NOTE 5 — RELATED PARTY TRANSACTIONS

Each of the three original managing partners of ZaZa LLC has a direct or indirect interest in an overriding royalty interest generally equal to one percent (1%) (for a total of three percent (3%)) in:

 Each leasehold estate located within the boundaries of the “area of mutual interest” map that was attached to the Exploration and Development Agreement between ZaZa and Hess (the “EDA”) that has been or may be acquired by ZaZa prior to April 2016 including the Eagle Ford shale trend and the Eaglebine trend; and

 Each leasehold estate located within the boundaries of an “expansion area” covering certain counties in Alabama, Florida, Louisiana and Mississippi that may be acquired by ZaZa prior to April 2016, unless a longer period of time is stated in any area of mutual interest agreement that may be entered into between ZaZa and a third party.

In March 2010, ZaZa LLC entered into an agreement with the ZaZa LLC Members and Eli Smith & Associates, which we refer to as Smith, to acquire 100% working interests in any unproved acreage identified in a defined area of mutual interest located in the Colorado and Lavaca counties of Texas. During the year ended December 31, 2011, ZaZa acquired acreage for a total of approximately $6.1 million pursuant to this agreement. During the year ended December 31, 2010, ZaZa acquired acreage totaling approximately $28.9 million pursuant to this agreement; $6.2 million of the purchase price was in the form of $3 million notes payable due to the ZaZa LLC Members and $3.2 million in accounts payable due to ZaZa LLC Members, which was paid in January 2011. The ZaZa LLC managing partners and Smith retain a direct or indirect reserved overriding royalty interest generally equal to three percent (3%) in each property sold to ZaZa, which is divided pro-rata among the four sellers in the transactions. Simultaneously with each purchase, ZaZa pursuant to a separate agreement sold 90% of the acquired working interests to Hess, and retained a 10% working interest in each property. No gain or loss was recognized on the sales to Hess.

Effective May 1, 2010, ZaZa and its members entered into a compensation agreement in which base salary, discretionary bonus and incentive compensation were defined. Incentive compensation was based on the fulfillment of certain performance metrics and the occurrence of a “Company liquidity event,” defined therein as an initial public offering, merger, reverse merger, financing or other availability of capital deemed financially beneficial to ZaZa. During the year ended December 31, 2011, no discretionary bonuses were approved by ZaZa. For the nine months ended September 30, 2012, ZaZa paid $17.5 million in discretionary bonuses and incentive compensation. These compensation agreements were terminated in connection with the Combination.

ZaZa has entered into a management agreement (the “Management Agreement”) with Sequent Petroleum Management, LLC (“SPM”) pursuant to which SPM provides ZaZa with contractors and consultants and their related benefits programs in exchange for a monthly fee for managing such personnel in March 2011. Scott Gaille, who was appointed ZaZa Energy Corporation’s Chief Compliance Officer as of March 2012 was a principal of SPM until September 6, 2012, when he disposed of all of his interests in SPM. ZaZa reimburses SPM for the costs of the personnel under the Management Agreement, including for the costs of their insurance and other benefits. SPM handles all payroll, tax, accounting and benefit services for the contractors and consultants provided under the Management Agreement. For the three months ended September 30, 2012 and 2011, ZaZa paid SPM $2.4 million (including $16 thousand in management fees) and $1.8 million (including $15 thousand in management fees), respectively, under this agreement. For the nine months ended September 30, 2012 and 2011, ZaZa paid SPM $17.7 million (including $47 thousand in management fees) and $3.2 million (including $35 thousand in management fees), respectively, under this agreement. At September 30, 2012, ZaZa did not have a receivable from SPM, at December 31, 2011, the receivable was $84 thousand and related to the estimated period end payroll. Effective November 1, 2012, 100% of the units and ownership in SPM will be assigned to ZaZa LLC.

Lot-A-Go 5 (“LG5”) is an airplane rental company in which Todd A. Brooks and Gaston Kearby hold partnership interest. From time to time, ZaZa will rent the plane for business travel reasons. ZaZa is charged for the pilots’ time, hanger fees and fuel, and at September 30, 2012, had a related payable of $115 thousand. In addition, at December 31, 2011, ZaZa had a payable to LG5 for $80 thousand related to the remainder of a short term working capital loan that bears no interest, which was repaid in September 2012.

Entry into Reimbursement Agreements

In connection with but following consummation of the combination of Toreador Resources Corporation and ZaZa LLC, the three former members of ZaZa LLC, Todd A. Brooks, Gaston L. Kearby, and John E. Hearn Jr. (together, the “ZaZa Founders”), each determined to transfer to certain service providers approximately 1.7 million shares of restricted common stock of the Company, par value $0.01 per share (the “Restricted Stock”), held by entities controlled by the ZaZa Founders. Because such transfers are expected to give rise to a compensation expense deduction to the Company upon vesting of the grants, as opposed to giving rise to a deduction to the ZaZa Founders, the Company has agreed to pay in cash to the ZaZa Founders the economic value of any tax deduction the Company receives as a result of these grants by the ZaZa Founders.

On September 11, 2012, the Company entered into separate Reimbursement Agreements with each of Blackstone Oil & Gas, LLC (“Blackstone”), Omega Energy Corp. (“Omega”), and Lara Energy, Inc. (“Lara”) (together, the “Reimbursement Agreements”). Blackstone, Omega, and Lara are respectively controlled by Todd A. Brooks, who serves as the Company’s President and Chief Executive Officer and also as a Director, Gaston L. Kearby, who is the former Executive Director-Operations and currently serves as a Director of the Company, and John E. Hearn Jr., who serves as the Chief Operating Officer and a Director of the Company. Pursuant to the Reimbursement Agreements, the Company will reimburse each of Blackstone, Lara, and Omega for the value of the tax benefit(s) received by the Company due to the transfers of Restricted Stock within thirty (30) days of such time(s) when the Company is able to make use of the expense(s) relating thereto to reduce its federal income tax withholding or payments (the “Reimbursements”). If Blackstone, Lara, and Omega together cease to control a majority of the common stock of the Company prior to the time that the Company is able to make use of any or all of such expenses to reduce its federal income tax withholding or payments, then the Company will pay to each of Blackstone, Lara, and Omega an amount equal to thirty-five percent (35%) of the value of the shares of the Restricted Stock (determined at the time of vesting) transferred by each such grantor.

The Company estimates that the Reimbursements could be as much as $2.5 million for each of Blackstone, Lara, and Omega. The tax characterization of the Reimbursements and their reporting shall be determined by a third party tax advisor to the Company. Each of Blackstone, Lara, and Omega will be responsible and liable for any tax consequences (including, but not limited to, any interest or penalties) as a result of the Reimbursements.

Assignment of Stadium Suite Lease

On September 28, 2011, ZaZa LLC entered into that certain Reliant Stadium Suite Lease Agreement (the “Original Suite Lease”) with Houston NFL Holdings, L.P. (the “Landlord”), whereby ZaZa LLC leased a luxury suite at Reliant Stadium for Houston Texans professional football games and certain other events. On February 23, 2012, ZaZa LLC entered into that certain Houston Texans Reliant Stadium Suite Lease Agreement (the “Amended Suite Lease”) with Landlord, which amended and restated the Original Suite Lease. In order to reduce overhead costs, the Company’s Board of Directors has approved the assignment and assumption of the Amended Suite Lease, and, subject to Landlord approval, ZaZa LLC will assign the Amended Suite Lease to Blackstone Oil & Gas, LLC (“Blackstone”), and Blackstone will agree to assume from ZaZa LLC, ZaZa LLC’s obligations under the Amended Suite Lease. Todd A. Brooks, President and Chief Executive Officer of the Company, holds all outstanding equity interests in Blackstone and is its President. The Landlord has not yet consented to such assignment and assumption, but is expected to do so. To the extent the assignment and assumption are approved by the Landlord, and the Amended Suite Lease is assigned to Blackstone and then subsequently assigned by Blackstone to a third party for a profit, Blackstone will reimburse the Company for the value of the benefit, if any, which it receives. The term of the Amended Suite Lease commenced at the start of the 2012 National Football League (“NFL”) season and will terminate at the conclusion of the 2018 NFL season. The base rate (including additional rent) of rent for the Amended Suite Lease is $248,000 for the first year of the term, and thereafter is subject to increases of up to five percent (5%) per year in each subsequent year. Blackstone previously paid for the first year’s rent for and on behalf of ZaZa LLC, for which Blackstone will not be reimbursed. The additional rent payments for the remaining six years of the Amended Suite Lease will total no less than $1,488,000.

NOTE 6 — STOCK-BASED COMPENSATION

Long Term Incentive Plan (the “Plan”)

We currently have 7.0 million shares authorized for issuance under the Plan adopted in March 2012. As of September 30, 2012, approximately 6.5 million shares were available for future grants under the Plan. Our policy is to issue new shares for exercises of stock options, when restricted stock awards are granted, and at vesting of restricted stock units. To date only restricted stock awards have been granted under the Plan.

Stock-based compensation cost is measured at the date of grant, based on the fair value of the award, and is recognized as expense, generally on straight line basis over the vesting period as defined in the individual grant agreement. Compensation cost is recognized based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Awards subject to vesting requirements for non-employees are fair valued each reporting period, final fair value being determined at the vesting date.

Officers, directors and key employees may be granted restricted stock awards (“RSA”) under the Plan, which is an award of common stock with no exercise price. RSAs are subject to cliff or graded vesting, generally ranging over a three to five year period. We determine the fair value of restricted stock awards based on the market price of our common stock on the date of grant. Compensation cost for RSAs is primarily recognized on a straight-line basis over the vesting period and is net of forfeitures.

Founders’ Shares

Our financing agreements and stockholders’ agreement permitted the significant ZaZa owners to make grants of up to 6.0 million shares of restricted stock to current and former employees, contractors and service providers of the Company. For accounting purposes, these grants are treated as a capital contribution by the significant ZaZa owners of the shares of restricted stock to ZaZa and a subsequent grant of such shares by ZaZa to the recipients, outside of the Plan. The restricted stock subject to vesting requirements for contractors and service providers will be treated as equity awards with variable accounting. The final fair value will be determined at the vesting date.

Stock-based compensation cost for the three and nine months ended September 30, 2012 was $8.0 million and $12.8 million, respectively. We did not have stock-based compensation cost prior to the second quarter of 2012.

The following table presents the changes in restricted stock awards pursuant to the plan and the owner grants, and related information:



	RSA Number	Weighted Average
	of Shares	Grant Date
	(in thousand)	Fair Value Per Share
Unvested balance at December 31, 2011	-	$	-
Granted	5,842	$	4.25
Vested	(1,589)	$	4.17
Unvested balance at September 30, 2012	4,253	$	4.27

The total vest date fair value of awards vested in 2012 was $6.6 million. As of September 30, 2012, there was $6.8 million of total unrecognized compensation cost related to unvested awards which is expected to be recognized over a weighted average period of 0.44 years.

NOTE 7 — EARNINGS (LOSS) PER COMMON SHARE

The following table reconciles the numerators and denominators of the basic and diluted income (loss) per common share computation:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012			2011
Basic income (loss) per share:
Numerator:
Net income (loss) available to common shareholders	$	133,832	$	(2,562)	$	(33,454)		$	4,950

Denominator:
Weighted average common shares outstanding		101,731		75,977		96,879			75,977

Basic income (loss) available to common shareholders per share	$	1.32	$	(0.03)	$	(0.35)		$	0.07

Diluted income (loss) per share:
Numerator:
Net income (loss)		133,832		(2,562)		(33,454)			4,950
Less: gain on fair value of warrants		27,106		-		-			-
Net income (loss) available to common shareholders	$	106,726	$	(2,562)	$	(33,454)		$	4,950

Denominator:
Weighted average common shares outstanding		101,731		75,977		96,879			75,977
Warrants associated with long term debt		3,289		-		-	(a)		-
Weighted average diluted shares outstanding		105,020		75,977		96,879			75,977

Diluted income (loss) available to common shareholders per share	$	1.02	$	(0.03)	$	(0.35)		$	0.07

(a)	For the nine months ended September 30, 2012, the number of shares used in the calculation of diluted income per share did not include 5.1 million common equivalent shares from the Warrants associated with the Senior Secured Notes due to their anti-dilutive effect.

The equity structure of the legal subsidiary (the accounting acquirer) has been retroactively adjusted using the exchange ratio established in the Agreement and Plan of Merger and Contribution, dated August 9, 2011, as amended, to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse merger. For the purpose of 2011 earnings per share calculation (“EPS”) the number of weighted average shares outstanding represents assumed shares outstanding as of December 31, 2011, as there were no changes in the capital structure of ZaZa LLC during the three and nine months ended September 30, 2011. The shares outstanding were calculated based on the Toreador shares outstanding and the exchange ratio.

NOTE 8 — LONG-TERM DEBT

Sale of 8.00% Senior Secured Notes due 2017 and Warrants

On February 21, 2012, we entered into the SPA with the purchasers thereunder, including MSDC ZEC Investments, LLC and Senator Sidecar Master Fund LP (collectively, the “Purchasers”), pursuant to which we issued senior secured notes in the aggregate principal amount of $100,000,000 and warrants (the “Warrants”) to purchase 26,315,789 shares of our Common Stock. The proceeds of the sale of the Senior Secured Notes and the Warrants were used for the (i) repayment of the outstanding convertible notes of Toreador, and (ii) payment of fees and expenses incurred in connection with the Combination, with the balance to be used for general working capital purposes.

greater of 3% per annum in excess of the non-default interest rate and 8% over the yield to maturity for 10-Year United States treasury securities. In addition, the annual interest rate payable on the Senior Secured Notes will increase by 0.5% per annum, beginning 181 days after the date of the SPA, if a shelf registration statement with respect to the shares of Common Stock that are issuable upon exercise of the Warrants has not been filed and declared effective by the SEC, and ending on the date such shelf registration statement is declared effective by the SEC, as well as for certain periods thereafter if the shelf registration statement is no longer effective or otherwise becomes unavailable to holders of the Warrants. In addition, if, prior to the third anniversary of the date of the SPA, we authorize the issuance and sale of any equity interests in the Company, we will use our commercially reasonable efforts to offer each Purchaser an opportunity to purchase up to such Purchaser’s pro rata portion of the offered securities on the terms set forth in the SPA.

The Senior Secured Notes are guaranteed by all of our subsidiaries and secured by a first-priority lien on substantially all of our assets and of our domestic subsidiaries. To the extent such assets include stock of our foreign subsidiaries, only 65% of such foreign subsidiary stock is to be pledged as security for the Senior Secured Notes. The Senior Secured Notes will rank senior to all of our other debt and obligations. We are permitted to have up to $50 million in additional reserves-based secured lending (including, but not limited to, pre-paid swaps); such borrowings may be secured by liens that come ahead of the liens securing the Senior Secured Notes.

Beginning on February 21, 2015, the Purchasers may require us to purchase all or a portion of the Senior Secured Notes at a price equal to the principal amount of the Senior Secured Notes to be purchased, plus any accrued and unpaid interest on such notes. In addition, if a fundamental change (as defined in the SPA) occurs at any time prior to maturity of the Senior Secured Notes, noteholders may require us to purchase all or a portion of the Senior Secured Notes at a price equal to 101% of the principal amount of the Senior Secured Notes to be purchased, plus any accrued and unpaid interest on such notes.

On or prior to February 21, 2015, we may purchase at any time or from time to time any or all of the Senior Secured Notes at 100% of the principal amount of the Senior Secured Notes to be purchased, plus accrued and unpaid interest on such notes, plus a make-whole premium on the principal amount of such notes. After February 21, 2015 and ending on February 21, 2016, we may purchase at any time or from time to time any or all of the Senior Secured Notes at a price equal to 105% of the principal amount of the Senior Secured Notes to be purchased, plus accrued and unpaid interest on such notes. After February 21, 2016, we may purchase at any time or from time to time any or all of the Senior Secured Notes at 100% of the principal amount of the Senior Secured Notes to be purchased, plus accrued and unpaid interest on such notes.

We are subject to certain affirmative and negative covenants pursuant to the Senior Secured Notes, including, without limitation, restrictions on our and our subsidiaries’ abilities to incur additional debt, pay dividends or make other distributions, redeem stock, make investments, incur liens, enter into transactions with affiliates, merge or consolidate and transfer or sell assets, in each case subject to certain baskets and carve-outs.

After giving effect to the shares issued to the ZaZa LLC Members and the former stockholders of Toreador in the Combination, the Warrants represent approximately 20.6% of the outstanding shares of Common Stock on an as-converted and fully-diluted basis. The Warrants contain a cashless exercise provision and became exercisable at the option of the holder at any time beginning August 17, 2012. We can force exercise of the Warrants at any time beginning February 21, 2015 if the daily volume weighted average price (the “VWAP”) of Common Stock is, at the time of such conversion, greater than or equal to $10.00 per share for the prior 45 consecutive trading day period. The Warrants expire on February 21, 2017. The exercise price of the Warrants was initially $3.15 per share, subject to certain anti-dilution protections, including, but not limited to, stock splits and stock dividends, and issuances below the strike price or below 90% of the market price of our Common Stock. The Warrants also prohibit the payment of cash dividends for as long as the Warrants remain outstanding. As a result of the anti-dilution adjustments in the Warrants, the number of outstanding shares of our common stock represented by the Warrants was increased from 26,315,789 to 27,226,223 and the exercise price per share was reduced to $3.10 per share on October 22, 2012 following the issuance of our convertible notes.

Until January 21, 2017, a holder of Warrants will not be entitled to receive shares of Common Stock upon exercise of such warrants to the extent that such receipt would result in the holder becoming a “beneficial owner” (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder) of a number of shares of Common Stock exceeding a maximum percentage of the total number of shares of Common Stock then outstanding, unless such limitation has been terminated with 61 days’ notice from the holder. The maximum percentage of Common Stock that a holder of a Warrant may beneficially own is initially 5% but may be increased to 10% under certain circumstances. Upon the occurrence of a fundamental change as set forth in the Warrants, we must make an offer to repurchase all Warrants at the option value of the Warrant using Black-Scholes calculation methods and making certain assumptions described in the Black-Scholes methodology as set forth in the Warrants.

The Purchasers have entered into lock-up agreements with respect to sales (including hedging) of the Warrants for a period of 180 days from the date of the Purchase Agreement. The ZaZa LLC Members and the ZaZa Principals have similarly entered into a

lock-up agreement with us, dated February 21, 2012 (the “Lock-Up Agreement”), pursuant to which the ZaZa LLC Members and the ZaZa Principals have agreed not to sell shares of Common Stock for a period of 180 days from the date of the Purchase Agreement. The ZaZa LLC Members and the ZaZa Principals have also agreed, pursuant to the Lock-Up Agreement, to limit their aggregate sales of shares of Common Stock (including hedging) until February 21, 2017 to an amount not to exceed annually a maximum percentage of the aggregate amount of Common Stock then outstanding. The maximum percentage will be determined based on the VWAP of Common Stock for the 10 trading days prior to such determination.

Note Amendments

On June 8, 2012, ZaZa entered into an amendment and waiver (“Amendment”) to the Securities Purchase Agreement dated February 21, 2012 (the “SPA”), relating to our 8% senior secured notes due 2017 (the “Senior Secured Notes”). The Amendment No. 1:

 permitted certain intercompany loans;

 required the consent of the holders of a majority of the Senior Secured Notes to any amendment or termination of the Eagle Ford Agreements or the French Agreements and to dispositions of oil and gas properties (which consent was obtained in connection with the entry into the waiver and Amendment No. 2 to the SPA described below); and

 required certain further amendments to the SPA, which were provided for in the Waiver and Amendment No. 2 to the SPA described below; and

 waives all existing defaults arising under the SPA, including the Company’s failure to timely provide financial statements with an unqualified opinion to the holders of the Senior Secured Notes.

The Amendment No.1 was subject to certain conditions, including providing December 31, 2011 annual and March 31, 2012 quarterly financial statements by August 31, 2012 and finalizing and executing definitive documentation related to the HoA by July 31, 2012. These conditions have been satisfied.

The parties also entered into an Amended and Restated Subordination Agreement with Todd A. Brooks, a director, President and Chief Executive Officer of the Company, John Hearn, a director and Chief Operating Officer of the Company, Gaston Kearby, a director of the Company, Omega Energy, LLC, Blackstone Oil & Gas, LLC, and Lara Energy, Inc., entities controlled by Messrs. Brooks, Hearn and Kearby, specifying that payments may not be made by the Company under the relevant subordinated promissory notes described below until after the consummation of the transactions outlined in the HoA and the related $33.0 million pay down of the principal amount of the Senior Secured Notes, which conditions have now been satisfied.

On July 25, 2012, in connection with entry into the definitive documents with Hess contemplated under the HoA, we entered into a Waiver and Amendment No. 2 to the SPA (“Amendment No. 2). Under Amendment No. 2, we paid down the outstanding principal amount of the Senior Secured Notes by $33.0 million and paid a $3.5 million associated fee. We also recorded a loss of $11.7 million on the extinguishment of debt due to the write off of issuance costs and discount amount. Amendment No. 2 also provided waivers of certain technical defaults under the SPA. Amendment No. 2 also provides for:

(a) consent rights for the holders of a majority of the Senior Secured Notes on all sale or joint venture transactions involving oil and gas properties, with certain carveouts and requirements to apply a portion of net sales proceeds to pay down the Senior Secured Notes, until such time as the Senior Secured Notes have an outstanding principal amount of $25 million or less;

(b) a provision that if the Senior Secured Notes have not been paid down to $35 million by February 21, 2013, the interest rate will increase from 8% to 10% per annum;

(d) a requirement that the Company engage an investment banker to assist the Company in securing a joint venture partner or partners for its Eagle Ford and Woodbine/Eaglebine assets, as well as to evaluate other strategic opportunities available to the Company, which has been satisfied by our engaging Jefferies & Company, Inc. as our financial advisors, as described above.

Effective October 16, 2012, the Company and the Senior Secured Notes holders entered into a third amendment to the Securities Purchase Agreement (the “Third Amendment”), pursuant to which the Securities Purchase Agreement was amended to permit the incurrence of the debt arising under the Convertible Notes described in Note 15 – Subsequent Events, revise certain defined terms in the Securities Purchase Agreement and in the warrants issued in connection therewith (the "Amended Warrants"), and make certain other changes.

Subordinated Notes

Simultaneously with the consummation of the Merger, and pursuant to the Contribution Agreement dated August 9, 2011 among the ZaZa LLC Members and ZaZa (the “Contribution Agreement”), the ZaZa LLC Members contributed all of the direct or indirect limited liability company interests in ZaZa LLC to us in exchange for (i) a number of shares of Common Stock that, in the aggregate, represented 75% of the issued and outstanding shares of Common Stock immediately after the consummation of the Combination (but without giving effect to the shares of Common Stock issuable upon exercise of the Warrants as discussed above), and (ii) subordinated notes in an aggregate amount of $38.25 million issued to the ZaZa LLC Members as partial consideration for the Combination (the “Seller Notes”). In addition, as required under the terms of the Merger Agreement and the Contribution Agreement, we issued subordinated notes in an aggregate amount of $9.08 million to the individuals that own and control the ZaZa LLC Members, Todd Alan Brooks, Gaston L. Kearby and John E. Hearn Jr., in respect of certain unpaid compensation amounts owing to the ZaZa Founders by ZaZa LLC (the “Compensation Notes”) for back salary, bonuses, incentive compensation or other compensation payable to them by ZaZa LLC in connection with or in respect of periods prior to the consummation of the Combination. The Seller Notes and Compensation Notes accrue interest at a rate of 8% per annum, are payable monthly in cash, and mature on August 17, 2017. Subject to certain conditions, we may make regularly scheduled interest payments to the ZaZa LLC Members and the ZaZa Founders on these notes and may prepay these notes at any time. We are required to repay these notes, pro rata, with 20% of the proceeds of any subordinated debt financing and 20% of the proceeds of any equity financing completed on or after the third anniversary of the issuance of the Senior Secured Notes, which are described above. We have not been making regular interest payments on these notes. On September 11, 2012, we made a partial interest payment on the notes and the holders of the notes agreed, subject to board approval, to defer the payment of any further accrued interest, as well as the payment of any interest that accrues after such date, until the earlier of (i) the occurrence of an event providing us with liquidity sufficient to make such payments and (ii) February 21, 2013. On October 22, 2012, we completed the issuance of $40 million 9% Convertible Senior Notes due 2017 which allowed us to pay $1.6 million in back interest on the Subordinated Notes. Interest will now be due and paid on the last day of each month.

Our Long-term debt consisted of the following:



		September 30,		December 31,
		2012		2011
Revolving line of credit	$	-	$	5
Notes payable to members		-		3
Subordinated notes		47,330		-
Senior Secured Notes		46,752		-
Subtotal		94,082		8
Less: current portion		-		(8)
Total long-term debt	$	94,082	$	-

(1) The Senior Secured Notes original issuance discount is amortized to the principal amount through the date of the first put right on February 21, 2017 using the effective interest rate method. For the three and nine months ended September 30, 2012, $1.1 million and $3.1 million, respectively, was recorded in interest expense related to the discount. Additionally $10.3 million of the original issuance discount was expensed as part of debt extinguishment loss in the three and nine month ended September 30, 2012.

For the three and nine months ended September 30 2012 and 2011, interest expense consisted of the following:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Amortization loan fees of the Senior Secured Notes	$	122	$	-	$	346	$	-
Amortization original issuance discount on Senior Secured Notes		1,077		-		3,072		-
Interest expense on Senior Secured Notes		1,523		-		4,412		-
Interest expense on Subordinated Notes		994		-		2,361		-
Interest expense on revolving credit line		-		-		45		-
Interest expense on Members’ Notes		-		65		50		190
Other interest (income) expense		20		(14)		(287)		(37)
Interest expense at the end of the period	$	3,736	$	51	$	9,999	$	153

NOTE 9 — GEOGRAPHIC OPERATING SEGMENT INFORMATION

We have operations in only one industry segment, the oil exploration and production industry. We are structured along geographic operating segments or regions, and currently have operations in the United States and France. For each of the three and nine months ended September 30, 2012 and 2011 all capital expenditures were in the United States.

The following tables provide the geographic operating segment data required by “ASC 280 - Segment Reporting”.

Three Months Ended September 30, 2012



		United States		France		Total
Revenues and other income	$	199,183	$	8,013	$	207,196
Depreciation, depletion and amortization		1,983		2,147		4,130
Operating costs and expenses		22,304		29,419		51,723
Operating income (loss)		176,879		(21,406)		155,473
Interest expense		3,802		(66)		3,736
Income tax expense (benefit)		37,634		(7,762)		29,872

Three Months Ended September 30, 2011



		United States		France		Total
Revenues and other income	$	4,361	$	-	$	4,361
Depreciation, depletion and amortization		200		-		200
Operating costs and expenses		6,901		-		6,901
Operating income (loss)		(2,540)		-		(2,540)
Interest expense		51		-		51
Income tax expense		(29)		-		(29)

Nine months Ended September 30, 2012



		United States		France		Total
Revenues and other income	$	204,380	$	19,638	$	224,018
Depreciation, depletion and amortization		5,232		5,163		10,395
Operating costs and expenses		81,444		80,092		161,536
Operating income (loss)		122,936		(60,454)		62,482
Interest expense		10,767		(768)		9,999
Income tax expense		71,362		(6,102)		65,260

Nine months Ended September 30, 2011



		United States		France		Total
Revenues and other income	$	16,326	$	-	$	16,326
Depreciation, depletion and amortization		485		-		485
Operating costs and expenses		11,167		-		11,167
Operating income (loss)		5,159		-		5,159
Interest expense		153		-		153
Income tax expense		56		-		56

Total Assets



		United States		France		Total
September 30, 2012	$	216,677	$	83,349	$	300,026

December 31, 2011	$	70,006	$	-	$	70,006

NOTE 10 —INCOME TAXES

We are subject to income taxes in the United States and France. The current provision for taxes on income consists primarily of income taxes based on the tax laws and rates of the countries in which operations were conducted during the periods presented. All interest and penalties related to income tax is charged to general and administrative expense. We compute our provision for deferred income taxes using the liability method. Under the liability method, deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax basis of assets and liabilities and are measured using the enacted tax rates and laws. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to reduce the future tax benefits to the amount, based on available evidence it is more likely than not deferred tax assets will be realized.

We assumed a net deferred tax liability of $9.2 million which consisted of deferred tax assets of $35.0 million due to Toreador NOL’s offset by deferred tax liabilities of $44 million due to historical deferred tax liability of $17 million and $27 million due to the step up of property, at the time of the Combination. As a result of events subsequent to the merger and based on the lack of positive evidence at the consolidated level, we recorded an allowance to offset a portion of the deferred tax assets.

Prior to the merger, ZaZa LLC, a limited liability Company, was only subject to Texas Margin Tax, which has been determined to be an income tax, as income of the Company for federal tax purposes was reported on the tax returns of the individual partners.

The Company’s provision for income taxes consists of the following for the three and nine months ended September 30, 2012 and 2011.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Current:
U.S. Federal	$	88	$	-	$	-	$	-
U.S. State		639		(29)		639		56
Foreign		3,337		-		3,620		-
Deferred:
U.S. Federal		35,530		-		70,723		-
Foreign		(9,722)		-		(9,722)		-
	$	29,872	$	(29)	$	65,260	$	56

The primary reasons for the difference between tax expense at the statutory federal income tax rate and our provision for income taxes for the three and nine months ended September 30, 2012 and 2011 were:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011

Statutory tax at 34%	$	55,659	$	-	$	10,814	$	-
(Gain) Loss on Warrants		(9,216)		-		1,807		-
Impairment of Goodwill		-		-		13,515		-
Adjustments to valuation allowance		(17,054)		-		38,547		-
Other		483		(29)		577		56
	$	29,872	$	(29)	$	65,260	$	56

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of September 30, 2012 is as follows:



	September 30,
	2012

Net operating loss carryforward — United States	$	33,677
Net operating loss carryforward — Foreign		588
Merger costs		2,958
Restricted stock awards		4,350
Deferred tax assets		41,573
Valuation allowance		(38,547)
Net deferred tax assets	$	3,026

Oil and gas properties		72,573
Deferred tax liabilities		72,573
Net deferred tax liabilities	$	69,547

At September 30, 2012, the Company had the following carryforwards available to reduce future taxable income:



Jurisdiction	Expiry	Amount
United States	2020 — 2032	$	99,050
Hungary	unlimited	$	78

Realization of our deferred tax assets, specifically our net operating loss carryforwards depends on our ability to generate taxable income within the carryforward period. Due to uncertainty related to the Company’s ability to generate taxable income in the respective countries sufficient to realize all of our deferred tax assets we have recorded the following valuation allowances:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011

United States	$	(17,054)	$	-	$	38,547	$	-
	$	(17,054)	$	-	$	38,547	$	-

ZaZa Energy Corporation and its subsidiaries file income tax returns in the United States and various local and foreign jurisdictions. We are subject to income tax examinations in the United States for taxable years 2008 — 2011. We have no uncertain tax positions at September 30, 2012.

NOTE 11 — COMMITMENTS AND CONTINGENCIES

Tiway Arbitration

Toreador entered into a Share Purchase Agreement (“SPA”) between Tiway Oil BC (“Tiway”), Tiway Oil AS and the Company on September 30, 2009 for the purchase by Tiway of the entire issued share capital of Tiway Turkey Limited, f/k/a Toreador Turkey Limited (“TTL”). Tiway alleges in its request for arbitration that the Company breached representations and warranties in the SPA as to five matters:

1.Petrol Ofisi. Tiway alleges that the Company breached its representations and warranties under the SPA in respect of a third-party claim asserted by Petrol Ofisi against Toreador Turkey Ltd. in the amount of TRY 7.6 million ($5.1 million), for which Tiway alleges Toreador is liable for an estimated TRY 2.07 million (approximately $1.38 million), plus estimated interest of TRY 390 thousand ($260 thousand), together with a fine of 40% of the amount claimed (i.e. an estimated further $0.5 million). At the September 13, 2012 hearing, the Tribunal decided to complete its examination of two separate expert reports and then decide if it’s necessary to send the case-file to a third expert for the elimination of any conflicts between the first two expert reports. The next hearing is scheduled for November 15, 2012.

2.TPAO. Tiway alleges that the Company breached its representations and warranties under the SPA in respect of arbitration proceedings commenced by Turkiye Petrolleri Anonim Ortakligi (“TPAO”) against TTL before the International Court of Arbitration. Two claims were heard within the same arbitration in late 2011 relating to alleged damages and losses suffered by TPAO of approximately $3.7 million plus TRY 1,167,246 (approximately $780 thousand), plus interest (currently unquantified) in connection with certain construction efforts in the South Akcakoca Sub-Basin (“SASB”) gas project that were undertaken while TTL was the official operator of the SASB project. The SASB project was governed by a joint operating agreement (the “JOA”) between TPAO and TTL. In both the first and the second claims, TPAO alleges that TTL breached its obligations under the JOA. Tiway is asserting its right to indemnification as to any amounts awarded to TPAO with respect to the arbitration.

Tiway assumed the defense of this matter and its legal representatives in Turkey provided a detailed defense in which Tiway rejected each of the damages and losses alleged by the TPAO. The Tribunal issued its award in favor of Tiway and dismissed TPAO’s claims in their entirety.

3.Momentum. In 2006, TTL entered into an agreement with Momentum Engineering LLC (“Momentum”). The agreement was an EPIC contract relating to the SASB project. Momentum completed and delivered major installation works, leaving some work outstanding, namely the removal of several flotation tanks from the Ayazli tripod. The Settlement and Release Agreement for the works, signed by Momentum, TTL and the Company on August 13, 2008 specifically included a statement that Momentum would undertake to remove the fallen tanks by September 30, 2008; however it did not do so. In September 2009, TPAO, the current operator for the SASB project, sought the removal of the flotation tanks. Tiway contends that since TTL had been the operator in 2006, TTL was responsible for asking Momentum to remove the tanks, failing which TPAO would arrange for an independent contractor to do so, whereupon TTL would be responsible for claiming the cost from Momentum. In Momentum’s operation to remove the tanks in October 2009, one of the tanks fell to the seabed. Momentum stated it had no intention of removing the fallen tank and TPAO thus arranged for a third party contractor to remove the tank and invoiced $118 thousand plus VAT (estimated total amount of cost is $250 thousand) to TTL for its share of the costs in removing the tank. Tiway alleges that the Company breached its representations and warranties under the SPA with respect to the Momentum matter and has demanded indemnification for any losses or costs suffered by it in connection with such matter.

4.GDPA Training Obligations. Tiway alleges that the Company breached its representations and warranties under the SPA in respect of an alleged liability to the General Directorate of Petroleum Affairs and the Ministry of Energy of Republic of Turkey relating to the payment of training costs pursuant to the petroleum laws of Turkey. Tiway alleges that these training costs were incurred prior to the sale of TTL to Tiway. TTL has made an estimate of its potential liability if required to meet these training obligations of approximately $0.5 million.

5.Insurance Premiums. Tiway alleges that the Company breached its representations and warranties under the SPA in connection with the partial rebates of two insurance premiums. Two policies were issued in the name of TTL, but when the policies were cancelled (as agreed upon the conclusion of the SPA), the rebates were paid to the Company. While Tiway claims estimated damages of approximately $300 thousand, the Company only received credits and rebates for approximately $108 thousand. In addition, the credits and rebates may at least in part have related to policies that were not included in the scheduled policies of the SPA.

In addition, Tiway seeks to recover the “significant” costs it has incurred in defending the above claims as damages under the SPA. The Company views any liability at the levels stated in claims 1.- 4. above to be remote because such claims may be deemed withdrawn or are, in the Company’s opinion, otherwise unsupported by the provisions in the SPA.

On December 12, 2011, Tiway Oil BV (“Tiway”) commenced arbitration against the Company by submitting a formal Request for Arbitration to the London Court of International Arbitration (“the LCIA”) pursuant to the SPA. An arbitrator was selected in the first quarter of 2012, but no further actions have been made. On August 9, 2012, Tiway agreed a stay of the arbitration against the Company pending the arbitrators’ award in the International Chamber of Commerce arbitration between TPAO and Tiway. Despite the receipt of an award in the arbitration between TPAO and Tiway, the stay between Tiway and the Company remains in place.

Fallen Structures

In 2005, two separate incidents occurred offshore Turkey in the Black Sea, which resulted in the sinking of two caissons (the “Fallen Structures”) and the loss of three natural gas wells. The Company has not been requested to or ordered by any governmental or regulatory body to remove the caissons. Therefore, the Company believes that the likelihood of receiving such a request or order is remote and no liability has been recorded. In connection with the Company’s sale of its 26.75% interest in the SASB project to Petrol

Ofisi in March 2009 and its sale of TTL to Tiway in October 2009, the Company agreed to indemnify Petrol Ofisi and Tiway, respectively, against and in respect of any claims, liabilities and losses arising from the Fallen Structures. The Company has also agreed to indemnify a third-party vendor for any claims made related to these incidents. To date, no claims have been made or are currently anticipated.

Lundin Indemnification

TEF executed on August 6, 2010, an indemnification and guarantee agreement (“IGA”) for a maximum aggregate amount of €50 million to cover Lundin International (“Lundin”) against any claim by a third party arising from drilling works executed by TEF as operator on the Mairy permit. The title to the Mairy permit was awarded to Lundin, TEF and EnCore (E&P) Ltd jointly in August 2007. In March 2010, Lundin communicated its desire to withdraw from the permit on which no drilling works had been performed and consequently assigned its working interest of 40% in equal parts to TEF and EnCore (E&P) Ltd. TEF subsequently assigned half of its now 50% working interest to Hess by virtue of the Investment Agreement. Under French mining law, all titleholders are held jointly and severally responsible for all damages and claims relating to works on a permit. Therefore, under the IGA, TEF agreed to indemnify Lundin upon notice of any liability or claim for damages by a third party against Lundin in connection with works performed by TEF on the Mairy permit from February 15, 2010 until the transfer of title of such permit is formally accepted by the French government, which is expected to occur over the next nine months. No drilling works are expected to begin on the permit, if at all, until the second half of 2012, therefore no claims have been made or are currently anticipated under the IGA.

FLMK/Emerald Leasing Claims

ZaZa LLC filed a lawsuit against certain lease brokers, consultants and law firms who were involved in the leasing of acreage for the company in DeWitt and Lavaca Counties, including Emerald Leasing LLC, FLMK Acquisition, LLC, John T. Lewis, Billy Marcum, Brad Massey, Max Smith, Randy Parsley, Timothy E. Malone, Heroux & Helton PLLC, and Whitaker Chalk Swindle & Schwartz PLLC. ZaZa paid certain of these brokers for approximately 3,924 acres of leases for which the brokers have not delivered to the company. Additionally, there are net lease acreage shortages for which ZaZa has made a claim. To the extent that the Company receives any cash settlement from these persons, it is required to share one-half of the cash settlement with Hess.

MRC Claims

ZaZa, LLC filed a lawsuit against McJunkin Red Man Corporation (“MRC”) on August 20, 2012 seeking declaratory relief in respect of certain invoices from MRC that ZaZa viewed as in excess of what it agreed to pay for production facilitiesrelated to three wells in Lavaca and Gonzalez Counties, Texas. In response to the lawsuit, on August 24, 2012, MRC filed and did place liens (“MRC Liens”) against certain properties belonging to ZaZa, LLC in Lavaca and Gonzalez Counties, Texas. On October 29, 2012 MRC and ZaZa, LLC entered into a settlement agreement resolving their differences to the satisfaction of each party, including the release of the MRC liens and the dismissal of ZaZa's lawsuit.

Other

From time to time, we are named as a defendant in other legal proceedings arising in the normal course of business. In our opinion, the final judgment or settlement, if any, which may be awarded with any suit or claim would not have a material adverse effect on our financial position, results of operations or cash flows.

Range Transaction

On March 29, 2012, ZaZa LLC entered into a transaction with Range Texas Production, LLC (“Range”), a subsidiary of Range Resources Corporation, to expand ZaZa’s position in the Eaglebine to a total holding of approximately 143,400 gross acres (90,000 net acres). Under the terms of the transaction, ZaZa LLC: obtained a 75% working interest in the acquired acreage; was designated as operator; committed to drill one well (estimated cost between $8-10 million); was obligated and satisfied its obligation to commence operations on the commitment well on or before August 1, 2012; and committed to and made two cash payments to Range. ZaZa LLC is on schedule to satisfy all its obligations relative to the commitment well.

NOTE 12 — FAIR VALUE MEASUREMENTS

The carrying amounts of financial instruments including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate fair value at September 30, 2012 and December 31, 2011, due to the short-term nature or maturity of the instruments.

The warrants were valued as written call options using a Monte Carlo stock option pricing simulation. Exercise behavior prior to maturity was simulated using a Least-Squares approach based on the Longstaff-Schwartz Least Squares Monte Carlo (LSM) option pricing model. Key inputs into this valuation model are our current stock price, LIBOR zero coupon yield curve, and the underlying stock price volatility. The debt was valued under the income approach using discounted cash flows. The discounting utilized the LIBOR zero coupon yield curve and our implied credit spread. The current stock price and LIBOR yield curve are based on observable market data and are considered Level 2 inputs while the stock price volatility and implied credit spread are unobservable and thus require management’s judgment and are considered Level 3 inputs. We used average stock price volatility of 5% and credit spread of S&P B- rated companies. The fair value measurements are considered a Level 3 measurement within the fair value hierarchy. An increase the volatility by 5% results in a $0.5 million increase in the warrants. An increase the credit spread by 500 basis points results in $15.5 million decrease in value on the notes and a $19.0 million increase in the warrants. On September 30, 2012, the Senior Secured Notes, which had a book value of $46.8 million, and had a fair market value of approximately $60.8 million.

“ASC 820 - Fair value measurements and disclosures”, establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority to quoted market prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs are inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly.

Effective January 1, 2012, we adopted the authoritative guidance that applies to all financial assets and liabilities required to be measured and reported on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The guidance requires disclosure that establishes a framework for measuring fair value expands disclosure about fair value measurements and requires that fair value measurements be classified and disclosed in one of the following categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or supported by observable levels at which transactions are executed in the market place. Instruments in this category include non-exchange traded derivatives such as over-the-counter commodity price swaps, certain investments and interest rate swaps.

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our valuation models for derivative contracts are primarily industry-standard models (i.e., Black-Scholes) that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, (c) volatility factors, (d) counterparty credit risk and (e) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Level 3 instruments primarily include derivative instruments, such as basis swaps, commodity price collars and floors and accrued liabilities. Although we utilize third -party broker quotes to assess the reasonableness of our prices and valuation techniques, we do not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2.

Certain assets and liabilities are reported at fair value on a nonrecurring basis in our consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:

Asset Impairments — The Company reviews a proved oil property for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such property as well as an annual assessment. We estimate the undiscounted future cash flows expected in connection with the property at a field level and compare such undiscounted future cash flows to the carrying amount of the property to determine if the carrying amount is recoverable. If the carrying amount of the property exceeds its estimated undiscounted future cash flows, the carrying amount of the property is reduced to its estimated fair value. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil production, commodity prices based on commodity futures price strips as of the date of the estimate, operating and development costs, and a credit risk-adjusted discount rate.

Goodwill — We account for goodwill in accordance with “ASC 350 - Intangibles-Goodwill and Other” Under ASC 350, goodwill and indefinite-lived intangible assets are not amortized but are reviewed annually (or more frequently if impairment

indicators arise) for impairment. Goodwill fair value is estimated using a discounted cash flow method. We perform our annual impairment test during the month of December. Because of the decline in oil forward pricing at June 30, 2012, goodwill was tested at June 30, 2012 and an impairment loss of $39.7 million was recorded. After the recognition of the loss, no value in goodwill remains.

The following table summarizes the valuation of our liabilities measured on a recurring basis at levels of fair value:



	Fair Value Measurement Using
	(Level 1)		(Level 2)		(Level 3)		Total

As September 30, 2012:
Warrants		-		-		38,947		38,947
Total	$	-	$	-	$	38,947	$	38,947

We did not have any liabilities subject to fair value measurement prior to 2012.

The following is a reconciliation of changes in fair value of warrants classified as Level 3:



	September 30,
	2012
Balance at beginning of period	$	-
Issuance of warrants at February 21, 2012		(33,632)
Unrealized gains (loss) included in earnings		(5,315)
Balance at end of period	$	(38,947)

NOTE 13 — IMPAIRMENT OF ASSETS

We evaluate producing property costs for impairment and reduce such costs to fair value if the sum of expected undiscounted future cash flows is less than net book value pursuant to FASB ASC 360 “Property, Plant and Equipment”, formerly Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“ASC 360”). We assess impairment of non-producing leasehold costs and undeveloped mineral and royalty interests periodically on a field-by-field basis. We charge any impairment in value to expense in the period incurred. Proved oil and gas properties with a carrying value of $3.2 million were written down to their fair value of $1.4 million, resulting in a pretax impairment charge of $1.8 million for the three and nine months ended September 30, 2012. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the impairment analysis include management's estimate of future natural gas and crude oil prices, production costs, development expenditures, anticipated production of proved reserves, appropriate risk-adjusted discount rates and other relevant data. We used PV15 discount rate and the September 30, 2012 NYMEX future strip pricing.

ZaZa’s Board of Directors met on October 2, 2012 and gave management the authorization to negotiate the sale of the French subsidiaries. The Company has received an unsolicited offer and have signed an exclusivity agreement to begin the due diligence project. Pursuant to ASC 360, we assessed the carrying value of the French assets compared to the preliminary negotiations on the purchase price, less costs to sell. Based on the analysis we recorded an impairment to oil and gas properties of $20.6 million for the three and nine months ended September 30, 2012.The carrying amounts of the assets and liabilities of the French subsidiaries after giving effect to the impairment, were $11.6 million in current assets, $107.8 million in net property, plant and equipment, offset by $8.9 million in current liabilities and $38.7 million of long term liabilities at September 30, 2012.

NOTE 14 — PENSION, POST-RETIREMENT, AND POST-EMPLOYMENT OBLIGATIONS

As of September 30, 2012 and December 31, 2011, the employee retirement obligations amounted to $348 thousand and $0, respectively, and are included in Long Term Accrued Liabilities. Pension benefits, which only consist in retirement indemnities, have been defined only for the Company’s French subsidiaries. Pension benefits, which only consist in retirement indemnities, exist only for the Company’s French subsidiaries.

NOTE 15 — SUBSEQUENT EVENTS

The Company evaluated its September 30, 2012 financial statements for subsequent events. Other than noted herein, the Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements.

Sale of Convertible Senior Notes

On October 22, 2012, the Company successfully completed the issuance and sale of $40,000,000 aggregate principal amount of 9% Convertible Senior Notes due 2017 (the “Convertible Notes”). The Convertible Notes were sold in a private placement to investors that are qualified institutional buyers and accredited investors (as such terms are defined under the Securities Act), in reliance upon applicable exemptions from registration under Section 4(a)(2) of and Regulation D under the Securities Act of 1933, as amended, pursuant to Note Purchase Agreements, dated October 16, 2012 (collectively, the “Note Purchase Agreement”) among the Company and the several purchasers that are signatories thereto (collectively, the “Purchasers”). The Notes were issued to the Purchasers pursuant to an Indenture, dated October 22, 2012 (the “Indenture”), among the Company, certain subsidiary guarantors party thereto (the “Guarantors”), and Wilmington Trust, National Association, as trustee thereunder. The Convertible Notes were sold to the Purchasers at a price of $950 for each $1,000 original principal amount thereof, for aggregate gross proceeds of $38.0 million. The Company intends to use the net proceeds from the offering of the Convertible Notes, after discounts and offering expenses, of approximately $35.2 million to fund drilling capital expenditures and leasehold transactions and for general corporate purposes.

The Convertible Notes accrue interest from October 22, 2012 and mature August 1, 2017. The Convertible Notes are the senior, unsecured obligations of the Company, bear interest at a fixed rate of 9.0% per year, payable semiannually in arrears on February 1 and August 1 of each year beginning February 1, 2013, and mature on August 1, 2017 unless earlier converted, redeemed or repurchased.

The Convertible Notes are convertible, at the option of the holder, at any time prior to the third trading day immediately preceding the maturity date, into shares of the Company's common stock, par value $0.01 per share (the “Conversion Shares”), and cash in lieu of fractional shares of common stock. The initial conversion rate will be 400 shares per $1,000 Convertible Note, reflecting a conversion premium of approximately 32.28% of the closing price of the Company's common stock on the pricing date of the offering, which equates to an initial conversion price of $2.50 per share. In certain circumstances, after the occurrence of a fundamental change (as defined in the Indenture), the conversion rate shall be increased (according to the date of such fundamental change) for holders who convert their Convertible Notes on or after the effective date of such fundamental change. In addition, upon the occurrence of a fundamental change, holders may require the Company to repurchase for cash of all or a portion of such holder's Convertible Notes at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

If a holder converts some or all of its Convertible Notes on or after May 1, 2013 but prior to August 1, 2017, in addition to the Conversion Shares, such holder will receive a coupon make-whole payment for the Convertible Notes being converted. The coupon make-whole payment will be equal to the sum of the present values of the lesser of five semi-annual interest payments or the number of semi-annual interest payments that would have been payable on such converted Convertible Notes from the last day through which interest was paid on the Convertible Notes through July 31, 2017. The Company may elect to pay such make-whole payment in either cash or, subject to shareholder approval if required under applicable stock exchange rules, shares of common stock, and if paid in shares of common stock, then the stock will be valued at 95% of the simple average of the daily volume weighted average prices for the common stock for the 10 trading days ending on and including the trading day immediately preceding the conversion date.

The Company may not redeem the Convertible Notes prior to August 1, 2015. Beginning August 1, 2015, the Company may redeem for cash all or part of the Convertible Notes if the last reported sale price of its common stock equals or exceeds 150% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date on which the Company delivers the notice of the redemption. The redemption price will equal 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.

required by SEC rules and provide information to permit the trading of the Convertible Notes pursuant to SEC Rule 144A, and that all current and future domestic restricted subsidiaries (as defined in the Indenture) of the Company, except for immaterial subsidiaries, jointly and severally guarantee the Convertible Notes on a senior unsecured basis. The Company will be able to designate a restricted subsidiary as an unrestricted subsidiary under specified conditions.

The Indenture contains customary events of default, including failure to pay interest after a 30 day grace period, failure to pay principal when due, failure to comply with certain covenants, such as the offer to repurchase upon a fundamental change, failure to comply with other covenants after a customary grace period, cross-defaults, judgment defaults and certain bankruptcy events. If an event of default on the Convertible Notes has occurred and is continuing, the principal amount of the Convertible Notes, plus any accrued and unpaid interest, may become immediately due and payable. Upon the occurrence of certain events of default, these amounts automatically become due and payable.

In addition, if the Company elects, the sole remedy for an event of default relating to the Company's failure to comply with the SEC reporting requirements under the Indenture will, for the first 90 days after the occurrence of such an event of default, consist exclusively of the right to receive special interest on the Convertible Notes at a rate equal to 0.50% per annum of the principal amount of the Convertible Notes. If the Company elects, such special interest will be payable in the same manner and on the same dates as the stated interest payable on the Convertible Notes.

The Convertible Notes and Conversion Shares have not been registered under the Securities Act or applicable state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the business and results of operations together with our present financial condition. This section should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on June 15, 2012.

Certain previously recorded amounts have been reclassified to conform to this period presentation.

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and, as such, may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “anticipates,” “estimates,” “plans,” “believes,” “continues,” “expects,” “projections,” “forecasts,” “intends,” “may,” “might,” “will,” “would,” “could,” “should,” and similar expressions are intended to be among the statements that identify forward-looking statements. The factors that may affect our expectations regarding our operations include, among others, the following:

 our registered public accounting firm has expressed doubt about our ability to continue as a going concern;

 our ability to raise necessary capital in the future;

 the effect of our indebtedness on our financial health and business strategy;

 our ability to maintain or renew our existing exploration permits or exploitation concessions or obtain new ones;

 currency fluctuation risk;

 political, legal and economic risks associated with having international operations;

 possible title impairments to our properties;

 our ability to obtain equipment and personnel;

 reserves estimates turning out to be inaccurate;

 our ability to replace oil reserves;

 the loss of the current purchaser of our oil production;

 our ability to market and transport our production;

 our ability to compete in a highly competitive oil industry;

 the loss of senior management or key employees;

 assessing and integrating acquisitions;

 hurricanes, natural disasters or terrorist activities;

 change in legal rules applicable to our activities or permits and concessions;

 extensive regulation, including environmental regulation, to which we are subject;

 declines in prices for crude oil; and

 our ability to execute our business strategy and be profitable.

In addition to these factors, important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed under “Risk Factors” included under Item 1A of this quarterly report and under Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on June 15, 2012, as updated in Item 1A of Part II in our quarterly report on Form 10-Q for the period ended June 30, 2012, filed with the SEC on September 13, 2012, which are incorporated by reference herein.

All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the Cautionary Statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise unless required by law.

EXECUTIVE OVERVIEW

ZaZa Energy Corporation (“ZaZa”) is a Delaware corporation formed for the purpose of being a holding company of both Toreador Resources Corporation, a Delaware corporation (“Toreador”), and ZaZa Energy LLC, a Texas limited liability company (“ZaZa LLC”), from and after completion of the Combination, as described below. Prior to the Combination on February 21, 2012, ZaZa had no assets and had not conducted any material activities other than those incident to its formation. However, upon the consummation of the Combination, ZaZa became the parent company of ZaZa LLC and Toreador. In this Quarterly Report on Form 10-Q, unless the context provides otherwise, “we”, “our”, “us” and like references refer to ZaZa, its two subsidiaries (ZaZa LLC and Toreador) and each of their respective subsidiaries.

Combination with ZaZa LLC and Toreador Resources Corporation

On February 21, 2012, we consummated the combination (the “Combination”) of ZaZa LLC and Toreador, on the terms set forth in the Agreement and Plan of Merger and Contribution, dated August 9, 2011 and as subsequently amended by Amendment No. 1 thereto on November 10, 2011 and Amendment No. 2 thereto on February 21, 2012 (as amended, the “Merger Agreement”), by and among us, ZaZa LLC, Toreador, and Thor Merger Sub Corporation, our wholly owned subsidiary (“Merger Sub”), as previously described in our Current Report on Form 8-K filed on February 22, 2012.

Pursuant to the Merger Agreement, (i) Merger Sub merged with and into Toreador (the “Merger”), with Toreador continuing as the surviving entity, (ii) the three former members of ZaZa LLC (the “ZaZa LLC Members”), holding 100% of the limited liability company interests in ZaZa LLC, directly and indirectly contributed all of such interests to us (the “Contribution”), and (iii) the holders of certain profits interests in ZaZa LLC contributed 100% of such interests to us (the “Profits Interests Contribution”). Upon the consummation of the Combination, Toreador and ZaZa LLC became our wholly owned subsidiaries.

The Combination has been treated as a reverse merger under the purchase method of accounting in accordance with GAAP. For accounting purposes, ZaZa LLC is considered to have acquired Toreador in the Combination. Under the purchase method of accounting, the assets and liabilities of Toreador have been recorded at their respective fair values and added to those of ZaZa LLC in our financial statements.

Simultaneously with the consummation of the Merger, and pursuant to the Contribution Agreement dated August 9, 2011 among the ZaZa LLC Members and ZaZa (the “Contribution Agreement”), the ZaZa LLC Members contributed all of the direct or indirect limited liability company interests in ZaZa LLC to us in exchange for (i) a number of shares of Common Stock that, in the aggregate, represented 75% of the issued and outstanding shares of Common Stock immediately after the consummation of the Combination (but without giving effect to the shares of Common Stock issuable upon exercise of the Warrants as discussed below), and (ii) subordinated notes in an aggregate amount of $38.25 million issued to the ZaZa LLC Members as partial consideration for the Combination (the “Seller Notes”). In addition, as required under the terms of the Merger Agreement and the Contribution Agreement, we issued subordinated notes in an aggregate amount of $9.08 million to the individuals that own and control the ZaZa LLC Members, Todd Alan Brooks, Gaston L. Kearby and John E. Hearn Jr. (together, the “ZaZa Founders”), in respect of certain unpaid compensation amounts owing to the ZaZa Founders by ZaZa LLC (the “Compensation Notes”) for back salary, bonuses, incentive compensation or other compensation payable to them by ZaZa LLC in connection with or in respect of periods prior to the consummation of the Combination. The Seller Notes and Compensation Notes accrue interest at a rate of 8% per annum, are payable monthly in cash, and mature on August 17, 2017. Subject to certain conditions, we may make regularly scheduled interest payments to the ZaZa LLC Members and the ZaZa Founders on these notes and may prepay these notes at any time. We are required to repay these notes, pro rata, with 20% of the proceeds of any subordinated debt financing and 20% of the proceeds of any equity financing completed on or after the third anniversary of the issuance of the Senior Secured Notes, which are described below. We have not been making regular interest payments on these notes. On September 11, 2012, we made a partial interest payment on the notes and the holders of the notes agreed, subject to board approval, to defer any further accrued interest, as well as any interest that accrues after such date, until the earlier of (i) the occurrence of an event providing us with liquidity sufficient to make such payments and (ii) February 21, 2013. On October 22, 2012, we completed the issuance of $40 million 9% Convertible Senior Notes due 2017 which allowed us to pay $1.6 million in back interest on the Subordinated Notes. Interest will now be due and paid on the last day of each month.

Immediately after the consummation of the Merger and Contribution, and pursuant to the Net Profits Interest Contribution Agreement, dated August 9, 2011, among ZaZa, ZaZa LLC and the holders of net profits interests in ZaZa LLC the holders of certain profits interests in ZaZa LLC completed the Profits Interests Contribution in exchange for $4.8 million in cash.

Additionally, in connection with the Combination, we issued senior secured notes with a principal amount of $100 million maturing in 2017 (the “Senior Secured Notes”) in a private placement to a group of investors led by MSD Energy Partners, L.P. and Senator Investment Group LP. The Notes bear interest at a rate of 8% per annum, payable quarterly. In connection with the issuance of the Senior Secured Notes, ZaZa also issued to the investors warrants to purchase an aggregate of approximately 26.3 million shares of our common stock at $3.15 per share (the “Warrants”) representing 20.6% of the outstanding shares of our common stock at the Closing of the Combination, on a fully diluted and on an as-converted basis. The Warrants expire in five years and are exercisable at any time after the six month anniversary of the issuance date. As a result of the anti-dilution adjustments in the Warrants, the number of outstanding shares of our common stock represented by the Warrants was increased from 26,315,789 to 27,226,223 and the exercise price per share was reduced to $3.10 per share on October 22, 2012 following the issuance of our convertible notes.

Subsidiaries of ZaZa Energy Corporation

ZaZa Energy, LLC

ZaZa LLC is a privately-held independent exploration and production company focused on the exploration and development of unconventional onshore oil and gas resources in the United States of America, until February 21, 2012 when it was contributed to ZaZa as part of the Combination. ZaZa LLC was controlled by the ZaZa Founders who each beneficially owned one-third of the outstanding limited liability company interests of ZaZa LLC. ZaZa LLC’s operations are concentrated in south Texas, including its largest exploration area in the core area of the Eagle Ford shale formation and in the eastern extension of the Eagle Ford/Woodbine formation, which we refer to as the “Eaglebine.”

Toreador Resources Corporation

Toreador was a publicly held independent energy company engaged in the exploration and production of crude oil with interests in developed and undeveloped oil properties in the Paris Basin, France. Toreador currently operates solely in the Paris Basin, which covers approximately 170,000 km² of northeastern France, centered 50 to 100 km east and south of Paris. As of September 30, 2012 and 2011, production from the Neocomian Complex and Charmottes fields oil fields represented a majority of Toreador’s total revenue and substantially all of Toreador’s sales and other operating revenue.

Recent Developments

Range Transaction

Rationale for Hess Joint Venture Dissolution

Based on public communications from Hess, it became obvious that Hess and ZaZa had different understandings about Hess’s obligations under the EDAs relating to our joint venture. Correspondence and communications between the parties relating to the disagreements between the parties led to the conclusion that it would be in the best interest of both parties to dissolve the joint venture and divide the combined assets. These disagreements included overhead allocations and reimbursements, timing of the delivery of lease assignments and net acreage shortfalls (some of which disagreements are the subject of our claim against FLMK/Emerald Leasing discussed in “Note 11 - Commitments and Contingencies”), timing and amounts of payments, drilling obligations and drilling schedules, obligations to transfer undrilled acreage to ZaZa prior to lease expiration, and the interpretation of the other rights and obligations of the parties. Accordingly, the parties entered into a Heads of Agreement on June 8, 2012 outlining the terms of a division of assets to dissolve the joint venture, and the parties entered into definitive agreements regarding such division of assets and dissolution of the joint venture on July 25, 2012.

record during this first year of drilling. As operator of the Hess joint venture, ZaZa LLC successfully drilled and completed 18 Eagle Ford wells. Hess elected to take over operatorship, and the transition from ZaZa LLC to Hess commenced in November 2011 and was expected to be completed in July 2012. In conjunction with the operatorship transition, Hess also made public announcements in the first quarter of 2012 that indicated that they intended to pursue a drilling program in 2012-2013 that was slower than ZaZa LLC had anticipated. The combination of Hess taking over operatorship and the expectation that Hess would slow the drilling program led ZaZa LLC to negotiate an exit from the EDA in July 2012. As a result of this exit, ZaZa LLC relinquished the Cotulla Area and regained operational control of approximately 60% of the venture’s former acreage (totaling 72,000 net acres). TEF also exited the Investment Agreement (subject to French regulatory approval), which had stalled due to French governmental regulations. This resulted in the Company converting its 50% working interest to a 5% non-cost bearing revenue interest for up to $130 million in cash receipts. In addition to the aforementioned land transitions, the Company also received $69 million in cash.

Hess Joint Venture Dissolution Agreement

In connection with the execution of the HoA, ZaZa LLC and Hess entered into an amendment to the Exploration and Development Agreement Eagleford Shale Area dated April 28, 2010, as amended, and the applicable joint operating agreements, to eliminate Hess’s obligation to carry the cost of the wells under those agreements in the Cotulla Prospect Area, in exchange for a cash payment by Hess to ZaZa LLC of $15 million. This $15 million was paid to ZaZa on June 8, 2012. ZaZa LLC had the right under the amendment to reinstate Hess’s well-carry obligations at any time prior to September 28, 2012, if the Exploration and Development Agreement was still in effect, by paying Hess $15 million. Given the uncertainty surrounding the EDA, the proceeds received were recognized as a deferred gain in the second quarter financial statements, contingent on the signing of definitive documentation. The gain was recognized in the third quarter in connection with the termination of the EDA.

Pursuant to the Texas Division of Assets Agreement and the Paris Basin Purchase and Sale Agreement (collectively, the “Hess Agreements”), ZaZa received the following:

 Approximately $69 million in cash, in addition to the $15 million in the second quarter of 2012;

 Approximately 60,500 additional net acres in the Eagle Ford core area;

 A five percent overriding royalty interest (“ORRI”) in certain of Hess’s exploration licenses in the Paris Basin capped at $130 million.

Investment Agreement between Hess France and ZEF retained a 5% ORRI in such licenses, in which the total proceeds relating thereto to ZaZa are capped at $130 million.

Pursuant to the Hess Agreements, Hess received the following:

 Approximately 4,490 net acres in LaSalle, Frio, Zavala, and Dimmit Counties (the “Cotulla Prospect Area”);

 A two percent ORRI on the Moulton Prospect Area and a one percent ORRI in the Hackberry and Sweet Home Prospect Areas; and

·	All rights and title to the exploration permits and pending permits in France (ZaZa retains all current production in France from its operating concessions).

Note Amendments

 permitted certain intercompany loans;

 required certain further amendments to the SPA, which were provided for in the Waiver and Amendment No. 2 to the SPA described below; and

The parties also entered into an Amended and Restated Subordination Agreement with Todd A. Brooks, a director and President and Chief Executive Officer of the Company, John Hearn, a director and Chief Operating Officer of the Company, Gaston Kearby, a director of the Company, Omega Energy, LLC, Blackstone Oil & Gas, LLC, and Lara Energy, Inc., entities controlled by Messrs. Brooks, Hearn and Kearby, specifying that payments may not be made by the Company under the relevant subordinated promissory notes until after the consummation of the transactions outlined in the HoA and the related $33.0 million pay down of the principal amount of the Senior Secured Notes, which conditions have now been satisfied.

On July 25, 2012, in connection with entry into the definitive documents with Hess contemplated under the HoA, we entered into a Waiver and Amendment No. 2 to the SPA (“Amendment No. 2). Under Amendment No. 2, we paid down the outstanding principal amount of the Senior Secured Notes by $33.0 million and paid a $3.5 million associated fee. Amendment No. 2 also provided waivers of certain technical defaults under the SPA. Amendment No. 2 also provides for:

(b) a provision that if the Senior Secured Notes have not been paid down to $35 million by February 21, 2013, the interest rate will increase from 8% to 10% per annum;

Effective October 16, 2012, the Company and the Senior Secured Notes holders entered into a third amendment to the Securities Purchase Agreement (the “Third Amendment”), pursuant to which the Securities Purchase Agreement was amended to permit the incurrence of the debt arising under the Convertible Notes, revise certain defined terms in the Securities Purchase Agreement and in the warrants issued in connection therewith (the "Amended Warrants"), and make certain other changes.

Sale of Convertible Senior Notes

the occurrence of a fundamental change, holders may require the Company to repurchase for cash of all or a portion of such holder's Convertible Notes at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Indenture contains covenants that, among other things, limit the Company's ability and the ability of certain of its subsidiaries to, with certain exceptions, incur additional indebtedness or guarantees of indebtedness, and to dispose of assets, except under certain conditions and with certain exceptions, including contributions of assets to specified joint venture transactions. In addition, the terms of the Indenture require that the Company file all reports customarily filed with the SEC within the time frames required by SEC rules and provide information to permit the trading of the Convertible Notes pursuant to SEC Rule 144A, and that all current and future domestic restricted subsidiaries (as defined in the Indenture) of the Company, except for immaterial subsidiaries, jointly and severally guarantee the Convertible Notes on a senior unsecured basis. The Company will be able to designate a restricted subsidiary as an unrestricted subsidiary under specified conditions.

Financial Summary

For the nine months ended September 30, 2012:

 Revenues and other income from continuing operations were $224.0 million.

 Operating costs from continuing operations were $161.5 million.

 Net loss available to common shareholders was $33.5 million.

 Production was 279 MBOE.

At September 30, 2012, we had:

 Cash, cash equivalents and restricted cash of $24.6 million.

 Current ratio (current assets/current liabilities) of 1.34 to 1.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

The results of operations include the results of our accounting predecessor, ZaZa LLC, from January 1, 2012 through February 20, 2012 and all of our subsidiaries, including ZaZa LLC and Toreador, since February 21, 2012.

The discussion below relates to our corporate activities and oil and gas exploration and production operations in the United States and France.



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2012		2011		2012		2011
Production:
Oil (Bbls):
United States		24,263		8,422		74,051		13,499
France		76,742		-		185,982		-
Total		101,005		8,422		260,033		13,499

Gas (Mcf):
United States		38,547		14,627		114,323		15,715
France		-		-		-		-
Total		38,547		14,627		114,323		15,715

BOE:
United States		30,688		10,860		93,104		16,118
France		76,742		-		185,982		-
Total		107,430		10,860		279,086		16,118

Average Price:
Oil ($/Bbl):
United States	$	86.61	$	87.00	$	95.15	$	89.15
France	$	104.41		-	$	105.59		-

Gas($/Mcf):
United States	$	2.50	$	4.64	$	2.69	$	4.68

The following table sets forth our interest in undeveloped acreage, developed acreage and productive well count as of September 30, 2012:



	Acres				Productive Wells
	Undeveloped		Developed		Gross		Net
	Gross	Net	Gross	Net	Gas	Oil	Gas	Oil
Eagle Ford:
Cotulla (1)	2,270	1,973	-	-	-	-	-	-
Moulton (2)	11,432	8,699	2,924	2,924	-	7	-	1.6
Sweet Home (3)	36,679	34,858	-	-	-	-	-	-
Hackberry (4)	23,334	20,761	1,324	1,324	2	-	2	-
Eaglebine	134,844	88,312	-	-	-	-	-	-
Other Onshore U.S.	640	426	2,424	59	-	4	-	0.1
Paris Basin	-	-	24,260	24,260	-	133	-	133

The following table presents our production data for the referenced geographic areas for the periods ended September 30, 2012:



	For the Three Months Ended September 30, 2012
	Gas	Oil	Equivalent
	(Mcf)	(Bbls)	(BOE)
Eagle Ford:
Cotulla (1)	12,617	8,289	10,392
Moulton (2)	1,437	11,393	11,633
Sweet Home (3)	-	-	-
Hackberry (4)	24,249	2,763	6,804
Eaglebine	-	-	-
Other Onshore	244	1,819	1,859
Paris Basin	-	76,742	76,742
Total	38,547	101,005	107,430



	For the Nine Months Ended September 30, 2012
	Gas	Oil	Equivalent
	(Mcf)	(Bbls)	(BOE)
Eagle Ford:
Cotulla (1)	40,324	49,132	55,853
Moulton (2)	2,662	16,005	16,449
Sweet Home (3)	-	-	-
Hackberry (4)	70,914	6,285	18,104
Eaglebine	-	-	-
Other Onshore	423	2,628	2,699
Paris Basin	-	185,982	185,982
Total	114,323	260,033	279,086

(1) As of July 24, 2012 we had an average working interest in the Cotulla properties of 9.75% and a net revenue interest of 7%. We did not retain any interests in the Cotulla properties after the Hess separation, although we retained undeveloped acres.

(2) As of July 24, 2012 we had an average working interest in the Moulton properties of 10% and a net revenue interest of 7.4%. Our average interest increased to 100% working interest and 74% net revenue interest after the Hess separation.

(3) As of July 24, 2012 we had an average working interest in the Sweet Home properties of 10% and a net revenue interest of 7.4%. Our average interest increased to 100% working interest and 74% net revenue interest after the Hess separation.

(4) As of July 24, 2012 we had an average working interest in the Hackberry properties of 10% and a net revenue interest of 7.4%. Our average interest increased to 100% working interest and 74% net revenue interest after the Hess separation.

Revenue and other income

Oil and gas revenue

Oil and gas revenue for the three months ended September 30, 2012 was $10.2 million, compared to $0.8 million for the three months ended September 30, 2011. This increase is primarily due to increased production in the United States due to the revised net revenue interests received in the termination of agreements with Hess and production from the French assets acquired in the Combination coupled with an overall increase in global oil prices period over period.

Oil and gas revenue for the nine months ended September 30, 2012 was $27.0 million, compared to $1.3 million for the nine months ended September 30, 2011. This increase is primarily due to increased production in the United States due to additional wells coming online along with the increased net revenue interests received in the termination agreements with Hess and production from the French assets acquired in the Combination coupled with an overall increase in global oil prices period over period.

The above table compares both volumes and prices received for oil for the three and nine months ended September 30, 2012 and 2011. The results of our operations are highly dependent upon the prices received from our oil production, which are dependent on numerous factors beyond our control. Accordingly, significant changes to oil prices are likely to have a material impact on our financial condition, results of operation, cash flows and revenue.

Bonus income

Revenue generated from the bonus paid to ZaZa under the Hess joint venture was $3.6 million and $15.0 million for three and nine months ended September 30, 2011, respectively. We did not generate any such bonus income in 2012. The bonus is based on completed lease acquisitions during the period, represents 10% of the total lease acquisition cost and is recognized as revenue after all leases are obtained, title is cured and transferred to Hess, and recorded with the appropriate county. We do not expect to generate any further bonus income as described in “Note 1 — Basis of Presentation, Termination of the EDAs” to the consolidated financial statements.

Other income

Other income consists of the gain on the termination of the agreements with Hess and the division of assets. The gain of $197 million consisted of a step up to oil and gas property to fair value of $117 million, a write off of $4 million working capital and cash of $84 million.

Operating costs and expenses

The following table presents our lease operating expense for the referenced geographical areas for the three and nine months ended September 30, 2012:



	Three Months Ended	Nine Months Ended
	September 30, 2012
Eagle Ford:
Cotulla (1)	353	1,533
Moulton (2)	168	411
Sweet Home	-	-
Hackberry (3)	276	999
Eaglebine	-	-
Other Onshore U.S.	48	49
Paris Basin	2,612	5,902
Total	3,457	8,894

(3) As of July 24, 2012 we had an average working interest in the Hackberry properties of 10% and a net revenue interest of 7.4%. Our average interest increased to 100% working interest and 74% net revenue interest after the Hess separation.

Lease operating expense

Lease operating expense was $3.5 million, or $32.18 per BOE produced, for the three months ended September 30, 2012, as compared to $0.6 million, or $54.88 per BOE produced, for the three months ended September 30, 2011. This increase is due to the revised working interests received in the termination of agreements with Hess and the associated production taxes and ad valorem ($130 thousand in 2012) as well as from the French assets acquired in the Combination.

Lease operating expense was $8.9 million, or $31.87 per BOE produced, for the nine months ended September 30, 2012, as compared to $0.6 million, or $38.90 per BOE produced, for the nine months ended September 30, 2011. This increase is due to the revised working interests received in the termination of agreements with Hess and the associated production taxes and ad valorem ($464 thousand in 2012) as well as from the French assets acquired in the Combination.

Exploration expense

Exploration expense for the three and nine months ended September 30, 2012 was $3.2 million and $3.3 million, respectively, compared to $0 for the same periods in 2011. This increase is due primarily to geological and technical studies in connection with our proof of concept project in the Paris Basin.

Depreciation, depletion and amortization

Depreciation, depletion and amortization for the three months ended September 30, 2012 was $4.1 million ($230 thousand related to furniture and fixtures) or $36.30 per BOE produced, compared to $200 thousand ($168 thousand related to furniture and fixtures) or $2.95 per BOE produced for the three months ended September 30, 2011.

Depreciation, depletion and amortization for the nine months ended September 30, 2012 was $10.4 million ($734 thousand related to furniture and fixtures) or $34.62 per BOE produced, compared to $485 thousand ($381 thousand related to furniture and fixtures) or $6.45 per BOE produced for the nine months ended September 30, 2011. These increases are primarily due to the step up of oil properties associated with the Combination, and the step up of properties associated with the termination of agreements with Hess. The Texas wells incur higher depletion expense in the early months which tapers off as the well ages and the French wells have very low depletion rates.

Accretion Expense

The accretion expense is composed of our asset retirement obligation expense. Accretion expense was $54 thousand and $411 thousand for the three and nine months ended September 30, 2012, respectively, compared to $1 thousand for the same periods in 2011. These increases in expense is due to Texas wells coming online in late 2011 and 2012 as well as the accretion on the obligations in France.

General and administrative

General and administrative expense for the three months ended September 30, 2012 totaled $18.2 million, compared to $6.1 million for the same period in 2011. This increase is due to stock compensation expense of $8.0 million due to restricted stock granted in the second quarter of 2012. The French operations also contributed $2.0 million of general and administrative costs. Additionally, in the three months ended September 30, 2012 and 2011, G&A expense was offset by $0 million and $2.2 million, respectively, for reimbursements made under the terms of the Hess joint venture for expenses related to lease acquisition costs.

General and administrative expense for the nine months ended September 30, 2012 totaled $76.1 million, compared to $10.1 million for the same period in 2011. This increase is due to legal and advisory fees incurred in connection with the Combination of $9.7 million, payment of $4.8 million to four executives of ZaZa LLC pursuant to net profit agreements between ZaZa LLC and each such executive; and bonuses to ZaZa LLC Members of $17.5 million triggered by the Combination. Also included is stock compensation expense of $13.0 million due to stock granted in the second quarter of 2012. The French operations also contributed $13.2 million of general and administrative costs. Additionally, in the nine months ended September 30, 2012 and 2011, G&A expense was offset by $3.2 million and $6.6 million, respectively, for reimbursements made under the terms of the Hess joint venture for expenses related to lease acquisition costs.

Impairment of oil properties and goodwill

Proved oil and gas properties with a carrying value of $3.2 million were written down to their fair value of $1.4 million, resulting in a pretax impairment charge of $1.8 million for the three and nine months ended September 30, 2012. Additionally expiring leases with book value of $0.4 million were written off.

Because of the decline in oil forward pricing at June 30, 2012, goodwill was tested at June 30, 2012 and an impairment loss of $39.7 million was recorded in the nine month ended September 30, 2012. After the recognition of the loss, no value in goodwill remains.

Foreign currency exchange gain (loss)

We recorded a gain on foreign currency exchange of $85 thousand and a loss of $138 thousand for the three and nine months ended September 30, 2012, respectively, compared to $0 for the same periods in 2011. The foreign exchange differences are primarily a result of Toreador Energy France entering into transactions using the US dollar as opposed to their functional currency of the Euro.

Loss on extinguishment of debt

We recorded a loss on the extinguishment of debt associated with our $33.0 million principal payment. The loss consisted of a $3.5 million fee paid in connection with the prepayment, and $11.7 million due to the write off of issuance costs and original issuance discount.

Interest expense, net

Net interest expense was $3.7 million and $10.0 million, respectively, for the three and nine months ended September 30, 2012 compared to $51 thousand and $153 thousand, respectively, for the three and nine months ended September 30, 2011.

The interest expense primarily relates to interest on the Senior Secured Notes and Subordinated Notes issued in February 2012. Interest expense related to the Senior Secured Notes was $1.5 million and $4.4 million, respectively, for the three and nine months ended September 30, 2012 compared to $65 thousand (offset by $14 thousand interest income) and $190 thousand (offset by $37 thousand interest income), respectively, related to the member notes for the three and nine months ended September 30, 2011. Also included in interest expense for the three and nine months ended September 30, 2012 are the amortization of original discount and debt issuance costs associated to the Senior Secured Notes of $1.1 million and $3.1 million, respectively. Interest expense related to the subordinated notes was $1.0 million and $2.4 million for the three and nine months ended September 30, 2012, respectively.

Gain (loss) on valuation of warrants

We recorded the change in fair value of our warrants, issued in February 2012, of $27.1 million gain and $5.3 million loss for the three and nine months ended September 30, 2012. The variance is mainly a result of fluctuations in our stock price.

Income tax provision

The tax provision for the three and nine months ended September 30, 2012 was $29.9 million and $65.3 million, respectively. At the time of the Combination we assumed a net deferred tax liability of $9.2 million which primarily consisted of deferred tax assets of $35 million due to Toreador NOL’s offset by deferred tax liabilities of $27 million due to the step up of property and $17 million of deferred taxes on historical property. Based on the lack of positive evidence at the consolidated level, we recorded a valuation allowance of $38.5 million. We recorded a tax benefit of $29 thousand and a tax provision of $56 thousand for the three and nine months ended September 30, 2011 which primarily related to Texas margin tax and adjustments.

LIQUIDITY AND CAPITAL RESOURCES

This section should be read in conjunction with “Note 1 — Basis of Presentation”, “Note 2 — Agreement with Hess Corporation”, “Note 3 — Going Concern”, “Note 8 — Long Term Debt”, and “Note 15 — Subsequent Events” in the Notes to the consolidated financial statements included in this filing.

Liquidity

We had $48.7 million of cash and equivalents at November 1, 2012 after giving effect to the receipt of net proceeds of the convertible notes described below and funding of overhead, operating and capital expenditures.

We anticipate that our activities for the remainder of 2012 will result in a positive working capital of $29.0 million to $33.0 million at December 31, 2012, including net cash flows of $18.9 million expected from the potential sale of the French subsidiaries as described in “Note 13 – Impairment of Assets” which is expected to close in the fourth quarter of 2012. This analysis reflects management’s best estimates and is dependent on a variety of factors outside our control, including litigation, production forecasts for new and existing wells and commodity prices. We believe that we will be able to provide tax shelter for substantially all of the $85 million consideration received from Hess through use of our current year losses.

Sale of 8.00% Senior Secured Notes due 2017 and Warrants

The Senior Secured Notes will mature on February 21, 2017. Subject to certain adjustments set forth in the SPA, interest on the Senior Secured Notes accrues at 8% per annum, payable quarterly in cash. With respect to overdue interest payments or during periods in which an event of default under the SPA has occurred and is continuing, the annual rate of interest will increase to the greater of 3% per annum in excess of the non-default interest rate and 8% over the yield to maturity for 10-Year United States treasury securities. In addition, the annual interest rate payable on the Senior Secured Notes will increase by 0.5% per annum, beginning 181 days after the date of the SPA, if a shelf registration statement with respect to the shares of Common Stock that are issuable upon exercise of the Warrants has not been filed and declared effective by the SEC, and ending on the date such shelf registration statement is declared effective by the SEC, as well as for certain periods thereafter if the shelf registration statement is no longer effective or otherwise becomes unavailable to holders of the Warrants. In addition, if, prior to the third anniversary of the date of the SPA, we authorize the issuance and sale of any equity interests in the Company, we will use our commercially reasonable efforts to offer each Purchaser an opportunity to purchase up to such Purchaser’s pro rata portion of the offered securities on the terms set forth in the SPA.

After giving effect to the shares issued to the ZaZa LLC Members and the former stockholders of Toreador in the Combination, the Warrants represent approximately 20.6% of the outstanding shares of Common Stock on an as-converted and fully-diluted basis. The Warrants contain a cashless exercise provision and became exercisable at the option of the holder at any time beginning August 17, 2012. We can force exercise of the Warrants at any time beginning February 21, 2015 if the daily volume weighted average price (the “VWAP”) of Common Stock is, at the time of such conversion, greater than or equal to $10.00 per share for the prior 45 consecutive trading day period. The Warrants expire on February 21, 2017. The exercise price of the Warrants is $3.15 per share, subject to certain anti-dilution protections, including, but not limited to, stock splits and stock dividends, and issuances below the strike price or below 90% of the market price of our Common Stock. The Warrants also prohibit the payment of cash dividends for as long as the Warrants remain outstanding. As a result of the anti-dilution adjustments in the Warrants, the number of outstanding shares of our common stock represented by the Warrants was increased from 26,315,789 to 27,226,223 and the exercise price per share was reduced to $3.10 per share on October 22, 2012 following the issuance of our convertible notes.

The Purchasers entered into lock-up agreements with respect to sales (including hedging) of the Warrants for a period of 180 days from the date of the Purchase Agreement. The ZaZa LLC Members and the ZaZa Principals similarly entered into a lock-up agreement with us, dated February 21, 2012 (the “Lock-Up Agreement”), pursuant to which the ZaZa LLC Members and the ZaZa Principals have agreed not to sell shares of Common Stock for a period of 180 days from the date of the Purchase Agreement. The ZaZa LLC Members and the ZaZa Principals have also agreed, pursuant to the Lock-Up Agreement, to limit their aggregate sales of shares of Common Stock (including hedging) until February 21, 2017 to an amount not to exceed annually a maximum percentage of the aggregate amount of Common Stock then outstanding. The maximum percentage will be determined based on the VWAP of Common Stock for the 10 trading days prior to such determination.

Note Amendments

 permitted certain intercompany loans;

 required certain further amendments to the SPA, which were provided for in the Waiver and Amendment No. 2 to the SPA described below; and

(b) a provision that if the Senior Secured Notes have not been paid down to $35 million by February 21, 2013, the interest rate will increase from 8% to 10% per annum;

Subordinated Notes

Founders by ZaZa LLC (the “Compensation Notes”) for back salary, bonuses, incentive compensation or other compensation payable to them by ZaZa LLC in connection with or in respect of periods prior to the consummation of the Combination. The Seller Notes and Compensation Notes accrue interest at a rate of 8% per annum, are payable monthly in cash, and mature on August 17, 2017. Subject to certain conditions, we may make regularly scheduled interest payments to the ZaZa LLC Members and the ZaZa Founders on these notes and may prepay these notes at any time. We are required to repay these notes, pro rata, with 20% of the proceeds of any subordinated debt financing and 20% of the proceeds of any equity financing completed on or after the third anniversary of the issuance of the Senior Secured Notes, which are described above. We have not been making regular interest payments on these notes. On September 11, 2012, we made a partial interest payment on the notes and the holders of the notes agreed, subject to board approval, to defer the payment of any further accrued interest, as well as the payment of any interest that accrues after such date, until the earlier of (i) the occurrence of an event providing us with liquidity sufficient to make such payments and (ii) February 21, 2013. On October 22, 2012, we completed the issuance of $40 million 9% Convertible Senior Notes due 2017 which allowed us to pay $1.6 million in back interest on the Subordinated Notes. Interest will now be due and paid on the last day of each month.

On October 22, 2012, the Company successfully completed the issuance and sale of $40,000,000 aggregate principal amount of 9% Convertible Senior Notes due 2017 (the “Convertible Notes”). The Convertible Notes were sold in a private placement to investors that are qualified institutional buyers' and accredited investors' (as such terms are defined under the Securities Act), in reliance upon applicable exemptions from registration under Section 4(a)(2) of and Regulation D under the Securities Act of 1933, as amended, pursuant to Note Purchase Agreements, dated October 16, 2012 (collectively, the “Note Purchase Agreement') among the Company and the several purchasers that are signatories thereto (collectively, the “Purchasers”). The Notes were issued to the Purchasers pursuant to an Indenture, dated October 22, 2012 (the “Indenture”), among the Company, certain subsidiary guarantors party thereto (the “Guarantors”), and Wilmington Trust, National Association, as trustee thereunder. The Convertible Notes were sold to the Purchasers at a price of $950 for each $1,000 original principal amount thereof, for aggregate gross proceeds of $38.0 million. The Company intends to use the net proceeds from the offering of the Convertible Notes, after discounts and offering expenses, of approximately $35.2 million to fund drilling capital expenditures and leasehold transactions and for general corporate purposes. For further information refer to “Note 15 – Subsequent Events”.

Dividends

Dividends on our common stock may be declared and paid out of funds legally available when and as determined by our Board of Directors, subject to certain loan covenants. Our policy is to hold and invest corporate funds on a conservative basis, and, thus, we do not anticipate paying cash dividends on our common stock in the foreseeable future.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. The following represents those policies that management believes are particularly important to the financial statements and that require the use of estimates and assumptions to describe matters that are inherently uncertain.

Revenue Recognition and Imbalances

Successful Efforts Method of Accounting for Oil and Gas Activities

ZaZa’s engineers estimate proved oil and gas reserves, which directly impact financial accounting estimates, including depreciation, depletion, and amortization. Our proved reserves represent estimated quantities of oil and condensate, natural gas liquids and gas that geological and engineering data demonstrate, with reasonable certainty, to be recovered in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. As it relates to our reserves in the Paris Basin, evidence indicates that the renewal of the contracts providing the right to operate is reasonably certain and our proved reserves have been computed using this assumption. The process of estimating quantities of proved oil and gas reserves is very complex requiring significant subjective decisions in the evaluation of all available geological, engineering, and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving producing history, and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time.

Reserves Estimate

Proved reserves are estimated quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward recoverable in future years from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well and through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well. Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Proved undeveloped reserves on undrilled acreage are limited (i) to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances and (ii) to other undrilled locations if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time.

Income Taxes

For financial reporting purposes, we generally provide taxes at the rate applicable for the appropriate tax jurisdiction. Management periodically assesses the need to utilize these unremitted earnings to finance our foreign operations. This assessment is based on cash flow projections that are the result of estimates of future production, commodity prices and expenditures by tax jurisdiction for our operations. Such estimates are inherently imprecise since many assumptions utilized in the cash flow projections are subject to revision in the future.

Foreign Currency Translation

Stock-based Compensation

Stock-based compensation cost is measured at the date of grant, based on the fair value of the award, and is recognized as expense over the vesting period of the award. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Awards subject to vesting requirements for non-employees will be fair valued each reporting period, final fair value being determined at the vesting date.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s market risk during the three and nine months ended September 30, 2012. For additional information, refer to the market risk disclosure in Item 7A as presented in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2011, which was filed with the SEC on June 15, 2012.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2012 because of a material weakness in our internal controls over financial reporting. The SEC has defined a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

Our management identified an error in the calculation of certain deferred tax liabilities for the period ended March 31, 2012. This error was corrected prior to our filing the financial statements for such period with the SEC. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. Notwithstanding the correct presentation in our financial statements, our management believes that this error was a result of the failure of coordination between our personnel that calculate our tax liabilities and our personnel that prepare the financial statements. Management is reviewing remediation steps necessary to address the material weakness and to improve our internal control over financial reporting. We intend to correct this material weakness promptly.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See “Note 11— Commitments and Contingencies”, which is incorporated into this “Item 1. Legal Proceedings” by reference.

ITEM 1A. RISK FACTORS

The risk factors below update the risk factors previously discussed in our 2012 Annual Report on Form 10-K under the heading “Risk Factors — Risks Relating to Our Company.”

Risks Related to Our Company

Our ability to use net operating loss carryforwards to offset future taxable income may be limited or such net operating loss carryforwards may expire before utilization.

As of September 30, 2012, we had U.S. federal tax net operating loss carryforwards (“NOLs”) of approximately $33.7 million, which expire at various dates from fiscal year 2020 through fiscal year 2036. These net operating loss carryforwards, subject to certain requirements and restrictions, including limitations on their use as a result of an “ownership change” may be used to offset future taxable income and thereby reduce our U.S. federal income taxes otherwise payable. We are required to evaluate the likelihood of utilizing the NOLs according to a “more likely than not” standard in accordance with GAAP and, if as a result of such evaluation we determine we may not be able to meet such standard, we may be required to recognize a valuation allowance for this deferred tax asset. The recognition of a valuation allowance would reduce earnings and would also result in a corresponding reduction of stockholders’ equity. Recognition of a valuation allowance is a non-cash charge to earnings and it does not preclude us from using the NOLs to reduce future taxable income otherwise payable. Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its net operating loss carry forwards to reduce its tax liability. The amount of taxable income in each tax year after the ownership change that may be offset

by pre-change NOLs and certain other pre-change tax attributes is generally equal to the product of (a) the fair market value of the corporation’s outstanding stock immediately prior to the ownership change and (b) the long-term tax exempt rate (i.e., a rate of interest established by the Internal Revenue Service that fluctuates from month to month). An “ownership change” would occur if stockholders, deemed under Section 382 to own 5% or more of our capital stock by value, increase their collective ownership of the aggregate amount of our capital stock to more than 50 percentage points over a defined period of time. In the event of certain changes in our stockholder base, we may at some point in the future experience an “ownership change” as defined in Section 382 of the Code. Accordingly, our use of the net operating loss carryforwards and credit carryforwards may be limited at some point in the future by the annual limitations described in Sections 382 and 383 of the Code.

Our indebtedness and near term obligations could materially adversely affect our financial health, limit our ability to finance capital expenditures and future acquisitions and prevent us from executing our business strategy.

We have $67 million outstanding in aggregate principal under our Senior Secured Notes and $40 million outstanding in aggregate principal under our 9% Convertible Senior Notes due 2017 (the “Convertible Notes”) and we expect to incur additional indebtedness in the future. Our level of indebtedness has, or could have, important consequences to our business, because:

·	a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;

·	it may impair our ability to obtain additional financing in the future for acquisitions, capital expenditures or general corporate purposes;

·	it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and

·	we may be substantially more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to downturns in our business, our industry or the economy in general.

In addition, the terms of our Senior Secured Notes and our Convertible Notes restrict, and the terms of any future indebtedness, including any future credit facility, may restrict our ability to incur additional indebtedness and grant liens because of debt or financial covenants we are, or may be, required to meet. Thus, we may not be able to obtain sufficient capital to grow our business or implement our business strategy and may lose opportunities to acquire interests in oil properties or related businesses because of our inability to fund such growth.

Our ability to comply with restrictions and covenants, including those in our Senior Secured Notes, Convertible Notes or in any future debt agreement, is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our Senior Secured Notes also contain restrictions on the operation of our business, such as limitations on the sale and acquisition of assets, limitations on restricted payments, limitations on mergers and consolidations, limitations on loans and investments, and limitations on the lines of business in which we may engage, which may limit our activities. Our Convertible Notes contain certain of the foregoing restrictions as well. We must obtain consent from the holders of a majority of the Senior Secured Notes for all transactions involving oil and gas properties, with certain carveouts and requirements to apply a portion of net sales proceeds to pay down the Senior Secured Notes, until such time as the Senior Secured Notes have an outstanding principal amount of $25 million. If the Senior Secured Notes have not been paid down to $35 million by their one-year anniversary (February 21, 2013), the interest rate will increase from 8% to 10% per annum. Thus, we may not be able to manage our cash flow in a manner that maximizes our business opportunities. Our failure to comply with any of the restrictions and covenants could result in a default, which could permit the holders of our Senior Secured Notes and our Convertible Notes to accelerate repayments and foreclose on the collateral securing the indebtedness.

We may not have the ability to raise the funds necessary to purchase the Senior Secured Notes and the Convertible Notes upon a fundamental change, and our future debt may contain limitations on our ability to purchase the Senior Secured Notes and the Convertible Notes.

Holders of the Senior Secured Notes and the Convertible Notes will have the right to require us to purchase the notes upon the occurrence of a fundamental change at 101% and 100%, respectively, of their principal amount plus accrued and unpaid interest. However, we may not have enough available cash or be able to obtain financing at the time we are required to make purchases of tendered Senior Secured Notes and Convertible Notes. In addition, our ability to purchase the Senior Secured Notes and Convertible Notes may be limited by law, by regulatory authority or by the agreements governing our then current and future indebtedness. Our failure to purchase tendered Senior Secured Notes and Convertible Notes at a time when the purchase is required by the terms of the Senior Secured Notes or Convertible Notes would constitute a default under those notes. A default under those notes or the fundamental change itself could also lead to a default or require a prepayment under, or result in the acceleration of the maturity or purchase of, our existing or future other indebtedness. The requirement that we offer to purchase the Senior Secured Notes and Convertible Notes upon a fundamental change is limited to the transactions specified in the definition of a “fundamental change,”

which definition may differ from the definition of a “fundamental change” or “change of control” in the agreements governing our existing or future other indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Senior Secured Notes and the Convertible Notes.

Conversion of the Convertible Notes and exercise of the Warrants may dilute the ownership interest of existing shareholders, or may otherwise depress the market price of our Common Stock.

The conversion of some or all of the Convertible Notes and the exercise of some or all of the Warrants may dilute the ownership interests of existing shareholders of our Common Stock. Any sales in the public market of the shares of our Common Stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our Common Stock. In addition, the existence of the Convertible Notes and the Warrants may encourage short selling by market participants because the conversion of the Convertible Notes or exercise of the Warrants could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of our Common Stock or exercise of the Warrants could depress the market price of our Common Stock.

Provisions of Delaware law, our charter documents and the agreements governing the Convertible Notes and the Senior Secured Notes may impede or discourage a takeover, which could cause the market price of our Common Stock to decline.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a fundamental change or a change in control would be beneficial to our existing stockholders. In addition, our board of directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our board of directors to create and issue a new series of preferred stock and certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our Common Stock, which, under certain circumstances, could reduce the market price of our Common Stock.

In addition, certain provisions of the Convertible Notes and the Senior Secured Notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of a fundamental change, subject to certain conditions, holders of Senior Secured Notes and Convertible Notes will have the right, at their option, to require us to purchase for cash all or any portion of their notes. We may also be required, under certain circumstances, to increase the conversion rate for the Convertible Notes if a holder elects to convert its Convertible Notes in connection with a make-whole fundamental change.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description

10.1		Restricted Stock Agreement, dated September 17, 2012, between ZaZa Energy Corporation and Ian H. Fay.

31.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

*Filed or furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized.

3
		ZAZA ENERGY CORPORATION


November 13, 2012		/s/ Todd A. Brooks
		Todd A. Brooks
		President and Chief Executive Officer


November 13, 2012		/s/ Ian H. Fay
		Ian H. Fay
		Chief Financial Officer


November 13, 2012		/s/ Jennifer A. Frisch
		Jennifer A. Frisch
		Chief Accounting Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. senior Avg

ZaZa Energy (ZAZA) Inactive 10-Q2012 Q3 Quarterly report

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