PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

ZAZA ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,646		$	34,649
Restricted cash	500			21,875
Accounts receivable	282			1,354
Prepayments and other current assets	983			1,134
Total current assets	8,411			59,012

Property and equipment:
Oil and gas properties, successful efforts method	51,021			151,828
Furniture and fixtures	1,855			2,947
Total property and equipment	52,876			154,775
Accumulated depletion, depreciation and amortization	(5,596		)	(4,705		)
Property and equipment, net	47,280			150,070

Restricted cash	15,000			—
Assets held for sale, net	—			9,965
Other assets	2,410			4,066

Total assets	$	73,101		$	223,113

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade	$	1,541		$	8,431
Accrued liabilities	6,857			12,200
Deferred income taxes	—			14,568
Senior Secured Notes, net of discount	9,858			—
Convertible Senior Notes, net of discount	—			25,298
Embedded conversion options associated with Convertible Senior Notes	—			21,382
Income taxes payable	1,013			3,658
Total current liabilities	19,269			85,537

Long-term accrued liabilities	12,076			53
Asset retirement obligations	384			130
Deferred income taxes	490			32,597
Long-term payable - related parties	4,128			4,128
Senior Secured Notes, net of discount	12,563			23,647
Convertible Senior Notes, net of discount	27,267			—
Subordinated notes	47,330			47,330
Warrants associated with Senior Secured Notes	19,161			28,043
Embedded conversion options associated with Convertible Senior Notes	6,599			—
Total liabilities	149,267			221,465

Stockholders’ equity (deficit):
Common stock, $0.01 par value, 250,000,000 shares authorized; 107,287,481 and 102,519,001 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	1,073			1,025
Additional paid-in capital	108,544			104,639
Accumulated retained deficit	(185,705		)	(104,048		)
Accumulated other comprehensive income (loss)	(78		)	32
Total stockholders’ equity (deficit)	(76,166		)	1,648

Total liabilities and stockholders’ equity (deficit)	$	73,101		$	223,113

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

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ZAZA ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues and other income:
Oil and gas revenues	$	1,102		$	2,198		$	6,266		$	7,353
Other income	—			196,985			—			197,027
Total revenues and other income	1,102			199,183			6,266			204,380

Operating costs and expenses:
Lease operating expense	688			845			1,627			2,992
Depreciation, depletion, amortization, and accretion	259			1,986			2,550			5,244
Impairment of oil and gas properties	9,204			2,160			102,349			2,160
General and administrative	4,230			17,313			23,642			71,048
Loss on asset divestitures	829			—			829			—
Total operating costs and expenses	15,210			22,304			130,997			81,444

Operating income (loss)	(14,108		)	176,879			(124,731		)	122,936

Other expenses:
Foreign currency exchange (gain) loss	15			(85		)	30			138
Loss on extinguishment of debt	405			15,224			16,568			15,224
Interest expense, net	3,491			3,802			10,378			10,767
(Gain) loss on fair value of warrants	(1,350		)	(27,106		)	(19,772		)	5,315
(Gain) loss on fair value of embedded conversion option	(1,408		)	—			(14,783		)	—
Total other expenses (income)	1,153			(8,165		)	(7,579		)	31,444

Income (loss) from continuing operations before income taxes	(15,261		)	185,044			(117,152		)	91,492
Income tax expense (benefit)	5,387			37,634			(35,445		)	71,362
Income (loss) from continuing operations	(20,648		)	147,410			(81,707		)	20,130
Income (loss) from discontinued operations, net of taxes	17			(13,578		)	50			(53,584		)
Net income (loss)	$	(20,631	)	$	133,832		$	(81,657	)	$	(33,454	)

Basic income (loss) per share:
Continuing operations	$	(0.20	)	$	1.45		$	(0.79	)	$	0.21
Discontinued operations	—			(0.13		)	—			(0.56		)
Total basic income (loss) per share	$	(0.20	)	$	1.32		$	(0.79	)	$	(0.35	)

Diluted income (loss) per share:
Continuing operations	$	(0.20	)	$	1.15		$	(0.79	)	$	0.21
Discontinued operations	—			(0.13		)	—			(0.56		)
Total diluted income (loss) per share	$	(0.20	)	$	1.02		$	(0.79	)	$	(0.35	)

Weighted average shares outstanding:
Basic	102,706			101,731			103,055			96,879
Diluted	102,706			105,020			103,055			96,879

Consolidated Statement of Comprehensive Loss
Net income (loss)	$	(20,631	)	$	133,832		$	(81,657	)	$	(33,454	)
Foreign currency translation, net of taxes	47			(4,398		)	(110		)	(2,218		)
Comprehensive income (loss)	$	(20,584	)	$	129,434		$	(81,767	)	$	(35,672	)

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

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ZAZA ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands)

						Accumulated			Accumulated
	Common			Additional		Retained			Other			Total
	Stock	Common		Paid-in		Earnings			Comprehensive			Stockholders’
	(Shares)	Stock ($)		Capital		(Deficit)			Income (Loss)			Equity

Balance at December 31, 2012	102,519	$	1,025	$	104,639	$	(104,048	)	$	32		$	1,648
Stock-based compensation cost	3,268	33		2,540		—			—			2,573
Stock issuance	1,500	15		1,365		—			—			1,380
Comprehensive income (loss)	—	—		—		(81,657		)	(110		)	(81,767		)
Balance at September 30, 2013	107,287	$	1,073	$	108,544	$	(185,705	)	$	(78	)	$	(76,166	)

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

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ZAZA ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	(81,657	)	$	(33,454	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion, amortization, and accretion	2,550			5,271
Loss on asset divestitures	829			—
Gain on French divestiture	(50		)	—
Loss on impairment of oil and gas properties	102,349			2,160
Deferred income taxes	(35,636		)	63,306
Amortization of deferred debt issuance costs and discount	3,389			3,418
Loss on extinguishment of debt	16,247			11,724
Unrealized (gain) loss on value of warrants	(19,772		)	5,315
Unrealized (gain) loss on value of embedded conversion option	(14,783		)	—
Stock-based compensation expense	2,573			12,793
(Gain) on the Hess transaction	—			(196,985		)
Changes in operating assets and liabilities:
Restricted cash	6,375			111
Accounts receivable	1,184			16,230
Prepayments and other assets	(45		)	1,576
Accounts payable and accrued liabilities	(9,515		)	(25,112		)
Cash used in operating activities - continuing operations	(25,962		)	(133,647		)
Cash provided by operating activities - discontinued operations	50			62,283
Net cash used in operating activities	(25,912		)	(71,364		)

Cash flows from investing activities:
Cash acquired in connection with the merger	—			4,118
Proceeds from divestitures	50,168			83,892
Capital expenditures	(47,099		)	(30,370		)
Cash provided by investing activities - continuing operations	3,069			57,640

Cash flows from financing activities:
Issuance of common stock	1,380			—
Issuance of senior secured notes	—			100,000
Payment of senior secured notes	(6,430		)	(33,000		)
Payment of debt issuance costs	—			(4,500		)
Payment of notes payable - members	—			(3,000		)
Payment of revolving line of credit	—			(5,000		)
Payment of Toreador notes	—			(31,754		)
Cash provided (used) by financing activities - continuing operations	(5,050		)	22,746

Effects of foreign currency translation on cash and cash equivalents	(110		)	4,982
Net increase (decrease) in cash and cash equivalents	(28,003		)	14,004
Cash and cash equivalents, beginning of period	34,649			10,619
Cash and cash equivalents, end of period	$	6,646		$	24,623

Supplemental disclosures:
Cash paid during the period for interest	$	7,289		$	4,714
Cash paid during the period for income taxes	$	2,363		$	112

The accompanying notes are an integral part of these financial statements

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

ZaZa Energy Corporation (“ZEC”, “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, 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 subsidiaries (including ZaZa LLC and Toreador) and each of their respective direct and indirect subsidiaries.

The accompanying Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 include the accounts of ZaZa Energy Corporation and all subsidiaries, including ZaZa LLC and Toreador. The Consolidated Statements of Operations and Comprehensive Income for three and nine months ended September 30, 2013 and 2012, the Consolidated Statements of Cash Flows for nine months ended September 30, 2013 and 2012, the Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2013, and Notes to the Consolidated Financial Statements include the results of our accounting predecessor, ZaZa LLC, through February 20, 2012 and all of our subsidiaries, including ZaZa LLC and Toreador, since February 21, 2012. All figures presented are in thousands except per share data unless otherwise indicated.

The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles 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.

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, 2012, included in the Form 10-K which was filed with the SEC on April 2, 2013. Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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”).

We finalized the purchase price allocation during the first quarter of 2013 without any adjustments compared to the preliminary purchase price presented as of December 31, 2012 in our annual report on Form 10-K.

Sale of ZaZa Energy France SAS

On November 13, 2012, the Company, through its wholly-owned subsidiary ZaZa France SAS (“Seller”), and Vermilion REP SAS (“Buyer”), a wholly owned subsidiary of Vermilion Energy Inc., entered into a Share Purchase Agreement (the “Purchase Agreement” or “French divestiture”) pursuant to which Seller sold to Buyer all of its shares in Seller’s wholly-owned subsidiary, ZaZa Energy France SAS (“ZEF”), formerly Toreador Energy France SAS. On December 21, 2012, the Company completed the sale of 100% of the shares in ZaZa Energy France SAS to Vermilion REP SAS.

Upon the closing, the net purchase price paid to Seller was approximately $76.0 million in cash following the application of certain closing adjustments required by the Purchase Agreement. Following reductions for advisor fees, estimated liquidation costs and taxes, the net proceeds to the Company were approximately $68.0 million. The Company used approximately half of the net proceeds to pay down a portion of the principal on its remaining Senior Secured Notes. Additionally, as part of the Paris Basin Agreement signed with Hess Corporation (“Hess”) in July 2012, $15.0 million of the sales proceeds will be held in escrow until all exploration permits for the Paris Basin are successfully transferred to Hess. In the second quarter of 2013, we concluded that the timing of the release of the $15 million held in escrow presented as restricted cash is uncertain. Accordingly, we reclassified the escrowed funds from current to non-current restricted cash. The remaining net proceeds were used by the Company to fund its development program in the United States.

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As a result of the consummation of the Purchase Agreement and with the exception of a 5% overriding royalty interest retained under the Paris Basin Agreement with Hess, we no longer have any meaningful operations or assets in connection with oil and gas operations in France. The Company anticipates solely focusing its efforts and resources on its oil and gas operations based in the United States. After the sale of ZEF, we now operate under one segment.

The results of operations of entities in France have been presented as discontinued operations in the accompanying consolidated statements of operations and comprehensive income. Results for these entities reported as discontinued operations for the three and nine months ended September 30, 2013 and for the three months ended September 30, 2012 and for the period from February 21, 2012 to September 30, 2012 are shown in the table below.

										Period from
	Three Months			Three Months			Nine Months			February 21, 2012
	Ended			Ended			Ended			to
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012

Oil revenues	$	—		$	8,013		$	—		$	19,638
Operating loss	—			21,406			—			60,454
Other expenses (income)	—			(66		)	—			(768		)
Loss (income) on disposal of assets	(17		)	—			(66		)	—
Income tax expense (benefit)	—			(7,762		)	16			(6,102		)
Loss (income) from discontinued operations	$	(17	)	$	13,578		$	(50	)	$	53,584

Eaglebine/Eagle Ford East Joint Venture with EOG

On March 21, 2013, we entered into a Joint Exploration and Development Agreement with EOG Resources, Inc. (“our counterparty”), (that was amended on April 2, 2013 and restated and amended on September 25, 2013 and October 15, 2013) for the joint development of certain of our Eaglebine/Eagle Ford East properties located in Walker, Grimes, Madison, Trinity, and Montgomery Counties, Texas (the “Amended JEDA”). Under the Amended JEDA, we and our counterparty will jointly develop up to approximately 110,000 acres in these counties. Pursuant to the Amended JEDA, our counterparty will act as the operator and pay us certain cash amounts, bear 100% of the drilling and completion costs of certain specified wells, and pay for a portion of our share of any additional seismic or well costs. Generally, ZaZa will retain a 25% working interest and our counterparty will earn a 75% working interest in the acreage subject to the Amended JEDA, that is currently 100% owned by ZaZa. ZaZa will retain a 25% working interest and our counterparty will earn a 50% working interest in the acreage that is currently owned 75% by ZaZa and 25% by Range Texas Production, LLC (“Range”), a subsidiary of Range Resources Corporation, subject to the terms of our Participation Agreement (the “Range Agreement”) with Range as described in “Note 12 — Commitments and Contingencies.” Range will retain its 25% interest in such acreage. This joint development was initially divided into three phases.

The first phase commenced on April 2, 2013 and has been substantially completed. In this phase we transferred approximately 20,000 net acres, of which approximately 15,000 came from our joint venture with Range, to our counterparty in exchange for a cash payment by our counterparty to us of $10 million and an obligation of our counterparty to drill and pay 100% of the drilling and completion costs of three wells. The two Phase I wells have been completed, with the second being the substitute well that we are required to drill pursuant to our agreement with Range described in “Note 12 — Commitments and Contingencies.”

On September 25, 2013, ZaZa and its counterparty entered into a Second Amendment and First Restatement of Joint Exploration and Development Agreement and a Third Amendment and Second Restatement of the Joint Exploration and Development Agreement, that resulted in the following transactions being closed on October 15, 2013:

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

million. Our counterparty may, however, elect to drill one or more vertical wells in order to achieve carry parity value for drilling horizontal wells. To complete its obligation in respect of the third well under Phase I of the Amended JEDA, our counterparty will pay for an additional $1.5 million of ZaZa’s costs for one or more additional vertical wells and has provided a further $1.5 million cash payment to ZaZa.

Phase III Acceleration. Under the Amended JEDA, ZaZa assigned on October 15, 2013 approximately 7,800 net acres from the former Phase III acreage for which ZaZa will receive approximately $11 million of interests (based on an independent reserves report) in the 15 producing wells of our counterparty (part of Phase II and referenced above). In addition, our counterparty has the option, until January 31, 2014, to acquire an interest in the remaining approximately 12,300 former Phase III net acres at a fixed price per net acre from ZaZa.

Exchange of Leases and Wells. Our counterparty has acquired approximately 19,000 additional net acres and interests in related wells in the parties’ Area of Mutual Interest, and has assigned to ZaZa a 25% working interest in these leases and wells. In consideration for ZaZa’s participation in our counterparty’s leases and producing wells, ZaZa assigned to our counterparty approximately 13,875 additional net acres and paid approximately $700,000 in cash.

Sale of Moulton Properties

On April 5, 2013 the Company closed a purchase and sale agreement and sold certain of its properties in the Eagle Ford trend located in Fayette, Gonzalez and Lavaca Counties, Texas, which we refer to as our Moulton properties, for approximately $9.2 million. Net proceeds from the sale, after closing purchase price adjustments and expenses were approximately $8.8 million. We used approximately $4.6 million of the proceeds to pay down our Senior Secured Notes.

We also entered into an agreement on June 27, 2013 to sell approximately 10,000 net acres of our properties in the Eagle Ford trend located in Fayette, Gonzalez and Lavaca Counties, Texas, including seven producing wells located on the Moulton properties, for approximately $28.8 million. We closed this transaction on July 26, 2013 and received cash proceeds of $29.3 million, inclusive of the $1.4 million deposit. We used $1.8 million to pay down our Senior Secured Notes reducing the principal balance to $26.8 million.

Revenues and lease operating expenses attributable to the Moulton properties for the three and nine months ended September 30, 2013 and 2012 were as follows:

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012

Revenues	$	443	$	1,027	$	4,586	$	1,547
Lease operating expenses	70		168		625		411

The following supplemental pro forma information presents consolidated results of operations as if the Moulton sale had occurred on January 1, 2012. The information does not purport to represent what the actual consolidated results of operations of the Company would have been had the transactions occurred on January 1, 2012, nor are they necessarily indicative of future consolidated results of operations.

	Three Months			Three Months		Nine Months			Nine Months
	Ended			Ended		Ended			Ended
	Pro Forma			Pro Forma		Pro Forma			Pro Forma
	September 30, 2013			September 30, 2012		September 30, 2013			September 30, 2012

Revenues	$	659		$	198,156	$	1,680		$	202,833
Operating income (loss)	(14,481		)	177,359		(120,167		)	123,145
Net income (loss)	(20,066		)	134,951		(76,270		)	(30,897		)

Basic earnings (loss) per share	$	(0.20	)	$	1.33	$	(0.74	)	$	(0.32	)
Diluted earnings (loss) per share	$	(0.20	)	$	1.03	$	(0.74	)	$	(0.32	)

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Eagle Ford Joint Venture with Sabine

On September 17, 2013, we entered into an agreement with Sabine South Texas LLC (“Sabine”), a subsidiary of Sabine Oil & Gas LLC, for the joint development of our Sweet Home prospect in the Eagle Ford trend located in Lavaca and DeWitt Counties, Texas. Under this agreement, Sabine will jointly develop with us up to approximately 7,600 net acres that we currently own and that comprise a portion of our interest in the Sweet Home prospect. Sabine has agreed to bear 100% of the drilling and completion costs of two commitment wells and up to $750,000 of construction costs related to gathering and infrastructure in order to earn a 75% working interest in 7,600 acres of the Sweet Home prospect and the Boening well. Sabine has also agreed to carry up to $300,000 of ZaZa’s expenses related to the extension and renewal of certain leases in the Sweet Home prospect.

If Sabine completes the first commitment well by February 15, 2014, ZaZa will transfer to Sabine a 75% working interest in approximately 3,200 net acres and the Boening well. If Sabine completes the second commitment well by April 15, 2014, ZaZa will transfer to Sabine a 75% working interest in the remaining net acres. Assuming the initial two commitment wells (or substitute wells, if necessary) are successful in achieving production, participating interests in any additional wells drilled or lease acreage acquired in the Sweet Home prospect will be shared 75% by Sabine and 25% by ZaZa under an area of mutual interest that will expire on September 15, 2015.

NOTE 2 — GOING CONCERN

In connection with the audit of our financial statements for the year ended December 31, 2012, our independent registered public accounting firm issued their report dated April 1, 2013, 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 dependency on the sale of non-core assets and success of our Eaglebine/Eagle Ford East joint venture entered into subsequent to December 31, 2012.

In 2013, we consummated the sale of the majority of our non-core assets and entered into the first development phase of our Eaglebine/Eagle Ford East joint venture resulting in combined total cash proceeds of $49.6 million. The cash proceeds received from these transactions were used to fund general corporate activities and to reduce both current liabilities and the outstanding principal on our Senior Secured Notes to $26.8 million as of September 30, 2013. As discussed in “Note 1 — Basis of Presentation,” we entered into and closed the Amended JEDA with our counterparty on September 25, 2013 and October 15, 2013, respectively, and in exchange for approximately $18 million in non-producing properties we received approximately $16.3 million in cash (excluding $1.5 million that was received in the third quarter of 2013), carries worth over $8 million, and working interests in several proved producing wells with a fair value of approximately $17 million.

The Company’s Board of Directors and management team have taken and continue to take proactive steps to streamline and strengthen the Company’s balance sheet. Over the next three months, we intend to fund approximately $4.2 million in general and administrative expenses and $3.5 million in interest payments. Additionally, we are required to further reduce the outstanding principal amount of Senior Secured Notes by $11.8 million to $15.0 million by February 28, 2014. We could fund the $11.8 million required principal payment in February 2014 by obtaining and borrowing under a reserve-based facility, which would be permitted under the terms of our Senior Secured Notes. We could secure the facility with approximately $17 million of working interest value in proved producing wells that we obtained in October 2013. However, we expect to utilize cash flow from operations and to access the capital markets by issuing equity and debt securities to fund our cash needs and to accomplish the balance sheet initiative described below in the section “Management’s discussion and analysis of financial condition and results of operations - liquidity and capital resources”. There could be a material adverse effect on the Company’s liquidity and ability to continue as a going concern if we are unable to realize one or a combination of these alternatives.

Upon entering into the Amended JEDA, closing of the sale of the majority of our non-core assets, and the reduction in our general and administrative costs as a result of a reduction in the workforce, we believe that we have made significant progress in addressing the uncertainties that gave rise to this going concern qualification. Our independent registered public accounting firm will provide a new opinion based on facts and circumstances at December 31, 2013 for the year then ended.

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 — 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. 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.

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. This concentration may impact the Company’s overall credit risk, either positively or negatively, in that it 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company’s third party 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. 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.

Amortization rates are updated at least annually 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 amortized 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 amortized 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, 2013 and September 30, 2012.

	Nine Months Ended September 30,
	2013			2012

Asset retirement obligations at beginning of period	$	130		$	309
Obligations assumed in the Combination	—			4,513
Obligations incurred	197			313
Revisions	157			—
Obligations extinguished	(119		)	(355		)
Accretion expense	19			411
Foreign currency exchange (gain)	—			(207		)
Asset retirement obligations at the end of period	$	384		$	4,984

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 Texas Railroad Commission and other vendors as well as debt issuance costs associated with the non-current portion of our Long-Term Debt. In 2012, debt issuance costs related to the current portion of our Long-Term debt are included in other current assets. At September 30, 2013 and December 31, 2012 debt issuance costs were $2.5 million and $7.0 million, and accumulated amortization was $0.3 million and $3.3 million, respectively. The costs are being amortized over the life of the associated debt.

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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 earnings (loss) per share was calculated by dividing net income or loss applicable to common shares by the weighted average number of common shares outstanding during the periods presented. Diluted earnings (loss) per share incorporate the potential dilutive impact of options and unvested stock outstanding during the periods presented, unless their effect is anti-dilutive. In addition, the Company applies the if-converted method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings (loss) per share if the effect would be anti-dilutive.

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.

Our policy is to issue new shares for the exercise 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 Long Term Incentive Plan (the “Plan”).

Recently adopted accounting pronouncements

In February 2013, the Financial Accounting Standards Board issued guidance on disclosure requirements for items reclassified out of accumulated other comprehensive income by component. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of accumulated other comprehensive income. We adopted this pronouncement for our fiscal year beginning January 1, 2013. The adoption of this pronouncement did not have a material effect on our consolidated financial statements.

In December 2011, the Financial Accounting Standards Board issued guidance on disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. In January 2013, the FASB clarified that the scope of this guidance applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement, or similar agreements. We

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NOTE 4 — 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,
	2013			2012			2013			2012
	(In thousands, except per share data)						(In thousands, except per share data)
Basic income (loss) per share:
Numerator:
Income (loss) from continuing operations	$	(20,648	)	$	147,410		$	(81,707	)	$	20,130
Income (loss) from disc. operations, net	17			(13,578		)	50			(53,584		)
Net income (loss)	$	(20,631	)	$	133,832		$	(81,657	)	$	(33,454	)

Denominator:
Weighted average common shares outstanding	102,706			101,731			103,055			96,879

Basic income (loss) per share:
Continuing operations	$	(0.20	)	$	1.45		$	(0.79	)	$	0.21
Discontinued operations	—			(0.13		)	—			(0.56		)
Total basic income (loss) per share	$	(0.20	)	$	1.32		$	(0.79	)	$	(0.35	)

Diluted income (loss) per share:
Numerator:
Income (loss) from continuing operations	$	(20,648	)	$	147,410		$	(81,707	)	$	20,130
Impact of assumed conversions on interest	—			—			—			—
Less: gain on fair value of warrants, net of tax	—			(27,106		)	—			—
	(20,648		)	120,304			(81,707		)	20,130
Income (loss) from disc. operations, net	17			(13,578		)	50			(53,584		)
Net income (loss)	$	(20,631	)	$	106,726		$	(81,657	)	$	(33,454	)

Denominator:
Weighted average common shares	102,706			101,731			103,055			96,879
Net warrants issued for secured debt under the treasury stock method	—		(a)	3,289			—		(a)	—		(a)
Weighted average shares associated with convertible debt	—		(b)	—			—		(b)	—
Unvested restricted stock	—		(c)	—		(c)	—		(c)	—		(c)
Weighted average diluted shares outstanding	102,706			105,020			103,055			96,879

Diluted income (loss) per share:
Continuing operations	$	(0.20	)	$	1.15		$	(0.79	)	$	0.21
Discontinued operations	—			(0.13		)	—			(0.56		)
Total diluted income (loss) per share	$	(0.20	)	$	1.02		$	(0.79	)	$	(0.35	)

(a) For the three and nine months ended September 30, 2013, the average ZaZa share price was lower than the exercise price of the warrants and therefore the anti-dilutive effect was not considered. For the nine months ended September 30, 2012, 5.1 million common equivalent shares from warrants associated with the Senior Secured Notes were excluded from the calculation of diluted income per share due to their anti-dilutive effect.

(b) For the three and nine months ended September 30, 2013, the number of shares used in the calculation of diluted income per share did not include 16.0 million common equivalent shares from the embedded convertible options associated with the Convertible Senior Notes issued in October 2012, due to their anti-dilutive effect.

(c) For the three and nine months ended September 30, 2013, the number of shares used in the calculation of diluted income per share did not include 2.6 million unvested restricted common stock awards due to their anti-dilutive effect. For the three and nine months ended September 30, 2012, the number of shares used in the calculation of diluted income per share did not include 4.3 million unvested restricted common stock awards due to their anti-dilutive effect.

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(Unaudited)

NOTE 5 — LONG-TERM DEBT

As described in more detail in our 2012 annual report on Form 10-K, our long-term debt includes 8.00% Senior Secured Notes due 2017, 9.00% Convertible Senior Notes due 2017 and 8.00% Subordinated Notes. The fair market values of debt, warrants associated with the Senior Secured Notes and embedded conversion option associated with Convertible Senior Notes are disclosed in “Note 9 — Fair Value Measurement”.

Our long-term debt consisted of the following:

	September 30,			December 31,
	2013			2012

Senior Secured Notes, net of discount (1)	$	22,421		$	23,647
Convertible Senior Notes, net of discount (2)	27,267			25,298
Subordinated notes	47,330			47,330
Total debt	97,018			96,275
Less: current portion (3)	(9,858		)	(25,298		)
Total long-term debt	$	87,160		$	70,977

(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 and rate of 12.8%.

(2) The Convertible Senior Notes original issuance discount is amortized to the principal amount through maturity on August 21, 2017 using the effective interest rate method and rate of 19.0%.

(3) The Convertible Notes are convertible, at the option of the holder, into shares of the Company’s common stock. The initial conversion rate equates to an initial conversion price of $2.50 per share. Due to certain limitations under the indenture regarding the Company’s ability to settle the conversion in shares, the debt was classified as current until May 30, 2013. As of May 30, 2013, shareholder approval of the issuance of common stock in excess of 20% of the outstanding shares allowed us to classify the debt as long-term. We classified $9.9 million of our Senior Secured Notes as current as of September 30, 2013 consisting of principal of $11.8 million and a discount of $1.9 million pursuant to Amendment No. 5 to the Securities and Purchase Agreement, as defined below.

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 Securities Purchase Agreement (the “SPA”), interest on the Senior Secured Notes accrues at 8% per annum, payable quarterly in cash. After giving effect to the shares issued to the entities controlled by Todd Alan Brooks, John E. Hearn Jr. and Gaston L. Kearby, the former managing members of ZaZa LLC (the “ZaZa LLC Members”) and the former stockholders of Toreador in the Combination, the Warrants initially represented approximately 20.6% of the outstanding shares of Common Stock on an as-exercised and fully-diluted basis. As of September 30, 2013, 27,433,244 warrants with an exercise price of $1.98 per share and an expiration date of August 31, 2020 were outstanding.

On March 28, 2013, we entered into Amendment No. 5 to the SPA (“Amendment No. 5”). Under Amendment No. 5, we agreed to make a prepayment on the Senior Secured Notes with the proceeds of an asset sale, which prepayment had previously been deferred, of approximately $4.6 million. Amendment No. 5 also provides for:

(a) revisions to the prepayment provisions to permit the Company to voluntarily prepay the Senior Secured Notes at 105% of their principal amount plus accrued and unpaid interest, if the aggregate principal amount of the Senior Secured Notes exceeds $25 million, at 103% if the aggregate principal amount of the Senior Secured Notes exceeds $15 million, and at 100% if the aggregate principal amount of the Senior Secured Notes are $15 million or less;

(b) the Company to make a prepayment to pay down the Senior Secured Notes to $15 million by February 28, 2014, and a provision that if the Senior Secured Notes have not been repaid in full by February 28, 2014, the interest rate will increase from 8% to 10% per annum;

(c) the Company to make a prepayment on the Senior Secured Notes if the Company sells some of its acreage in Sweet Home or the Company receives the release of certain escrow funds, which funds were placed in escrow for the benefit of Hess in connection with the Company’s sale of its French subsidiary,

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(Unaudited)

in each case prior to February 28, 2014, but solely to the extent to reduce the principal outstanding balance of the Senior Secured Notes to $15 million;

(d) revision of consent rights on all joint ventures involving oil and gas properties to permit our recently announced joint venture in the Eaglebine/Eagle Ford East without any requirement to use the proceeds thereof to pay down the Senior Secured Notes and to permit joint ventures in Hackberry and Sweet Home as long as 10% of the gross proceeds in excess of $10 million are used to pay down the Senior Secured Notes;

(e) the modification of the asset sale covenants to require (i) only 10% of the gross proceeds from asset sales in the Eaglebine/Eagle Ford East to be used to pay down the Senior Secured Notes, (ii) only 10% of the net proceeds from the sale of the Moulton properties to be used to pay down the Senior Secured Notes, and (iii) only 10% of the gross proceeds from asset sales in the Eagle Ford to be used to pay down the Senior Secured Notes until such time as the Notes have been paid down to $15 million, whereupon no such paydown shall be required subject to certain requirements regarding reinvestment of funds;

(f) the exercise price of the warrants issued in connection with the Senior Secured Notes to be reduced to $2.00 per share and the exercise period was extended to August 31, 2020; and

(g) the amendment of certain provisions of the lockup agreement entered into in connection with the SPA to permit certain additional categories of transfers.

Amendment No.5 was considered an extinguishment of debt. Accordingly, in the first quarter of 2013, we extinguished the Senior Secured Notes and associated discounts and debt issuance costs of $33.2 million, $9.1 million and $1.2 million, respectively. We recognized a loss on extinguishment of debt of $15.1 million consisting of a loss from the modification of the terms of the warrants of $10.9 million and a difference between the fair value and book value of debt of $4.2 million. We recorded the modified debt at its fair market value of $27.1 million, consisting of a principal amount of $33.2 million and discount of $6.1 million.

In the second and third quarters of 2013, we recognized a loss on extinguishment of debt of $1.1 million and $0.4 million, respectively, associated with penalties on the prepayments of principal on our Senior Secured Notes. On September 30, 2013, the Senior Secured Notes, which had a book value of $22.4 million, had a fair value of approximately $23.1 million. At September 30, 2013 and December 31, 2012, the unamortized issuance discount related to Senior Secured Notes was $4.4 and $9.6 million respectively. At September 30, 2013 and December 31, 2012, the outstanding principal on the Senior Secured Notes was $26.8 million and $33.2 million respectively.

9.00% Convertible Senior Notes due 2017

The Company has $40,000,000 aggregate principal amount of 9% Convertible Senior Notes due 2017 (the “Convertible Notes”). 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 and mature 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 close of business on the second business 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.

At September 30, 2013 and December 31, 2012, the unamortized issuance discount related to Convertible Senior Notes was $12.7 million and $14.7 million, respectively. The outstanding principal on the Convertible Senior Notes was $40.0 million at both September 30, 2013 and December 31, 2012.

8.00% Subordinated Notes

In February 2012, we issued Subordinated Notes in an aggregate amount of $47.33 million to the ZaZa LLC Members. These Subordinated Notes accrue interest at a rate of 8% per annum payable monthly in cash, and mature on August 17, 2017.

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(Unaudited)

Interest expense

For the three and nine months ended September 30, 2013 and 2012, interest expense consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013			2012

Interest expense on Senior Secured Notes	$	582	$	1,523	$	1,829		$	4,412
Interest expense on Convertible Senior Notes	900		—		2,700			—
Interest expense on Subordinated Notes	946		994		2,840			2,361
Interest expense on revolving credit line	—		—		—			45
Interest expense on Members’ Notes	—		—		—			50
Amortization original issuance discount on Senior Secured Notes	295		1,077		1,091			3,072
Amortization of issuance costs on Senior Secured Notes	—		122		58			346
Amortization original issuance discount on Convertible Senior Notes	673		—		1,969			—
Amortization of issuance costs on Convertible Senior Notes	95		—		271			—
Other interest (income) expense, net	—		86		(34		)	481
Capitalized interest	—		—		(346		)	—
Total interest expense, net	$	3,491	$	3,802	$	10,378		$	10,767

NOTE 6 — ASSETS HELD FOR SALE

Following the sale of the Moulton properties and impairments in 2013 on the remaining non-producing leasehold costs previously classified as held for sale, no assets held for sale remain at September 30, 2013.

The following table summarizes the assets and liabilities associated with assets held for sale (current and non-current).

	September 30,		December 31,
	2013		2012

Accounts receivable - revenue receivable	$	—	$	113
Oil and gas properties	—		13,095
Accumulated depletion	—		(3,060		)
Asset retirement obligations	—		(183		)
Accounts payable and accrued liabilities	—		—
Total assets held for sale, net (current and non-current)	$	—	$	9,965

NOTE 7 —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. Due to the uncertainty related to our effective tax rate for the year, the income tax provision is calculated based on the year to date actual effective tax rate. 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

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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. Additionally, we paid approximately $2.4 million in the second quarter of 2013 related to capital gains taxes from the wind up of our foreign subsidiaries that had been previously accrued.

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, 2013 and 2012 were:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Statutory tax at 34%	$	(5,358	)	$	63,850		$	(41,020	)	$	31,107
(Gain) Loss on Warrants	(473		)	(9,540		)	(3,109		)	1,807
Adjustments to valuation allowance	11,707			(17,642		)	8,384			37,959
Foreign rate differential and other	(489		)	966			300			489
Income tax expense (benefit)	$	5,387		$	37,634		$	(35,445	)	$	71,362

Income tax expense for the three months ended September 30, 2013 was $5.4 million while the nine months ended September 30, 2013 was a benefit of $35.4 million. The difference between the federal statutory tax benefit of $5.4 million and the tax expense of $5.4 million for the three months ended September 30, 2013 is primarily related to an increase in the valuation allowance. The difference between the federal statutory tax benefit of $41.0 million and the tax benefit of $35.4 million for the nine months ended September 30, 2013 is primarily related to an increase in the valuation allowance offset partially by non-taxable gains on warrants.

Income tax expense for the three and nine months ended September 30, 2012 was $37.6 and $71.4 million, respectively. The difference between the federal statutory tax expense of $63.9 million and the tax expense of $37.6 million for the three months ended September 30, 2012 is primarily related to a decrease in the valuation allowance and non-taxable gains on warrants. The difference between the federal statutory tax expense of $31.1 million and the tax expense of $71.4 million for the nine months ended September 30, 2012 is primarily related to an increase in the valuation allowance.

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

	Nine Months Ended September 30,
	2013		2012

Balance at the beginning of period	$	—	$	—
Gross increases - tax positions in current period	10,500		—
Gross increases - tax positions in prior periods	5,900		—
Settlement	—		—
Lapse of statute of limitations	—		—
Balance at the end of period	$	16,400	$	—

Included in the balance of unrecognized tax benefits as of September 30, 2013, and 2012, are $16.4 million and zero, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits at September 30, 2013, and 2012, are $16.4 million and zero, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.

The total amounts of interest and penalties recognized in the statement of operations and the total amounts of interest and penalties recognized in the statement of financial position are not material for the nine month periods ended September 30, 2013 and 2012.

NOTE 8 — FAIR VALUE MEASUREMENTS

“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

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(Unaudited)

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.

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 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 warrants and embedded conversions. 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.

The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value at September 30, 2013 and December 31, 3012, due to the short-term nature or maturity of the instruments.

The warrants were valued as written call options using a Binomial Lattice Model. Key inputs into this valuation model are our current stock price, US Treasury rate and the underlying stock price volatility. The debt was valued under the income approach using discounted cash flows. The discounting utilized the US Treasury rate and our credit spread. The current stock price, US Treasury rate and stock price volatility are based on observable market data and are considered Level 2 inputs. Our credit spread is unobservable and considered a Level 3 input. A binomial lattice model designed to value the Convertible Senior Note, which model is further described below, was used to estimate our credit spread. It was calculated by solving for a premium to the US Treasury rate that produces a value of the Convertible Senior Note as of the issuance date that equates to proceeds received. The fair value measurements are considered a Level 3 measurement within the fair value hierarchy. An increase in the volatility by 5% results in a $1.1 million increase in the fair value of the warrants. On September 30, 2013, the Senior Secured Notes, which had a book value of $22.4 million (net of unamortized discount of $4.4 million), had a fair value of approximately $23.1 million. An increase in the credit spread by 500 basis points results in a $1.5 million decrease in the fair value of the note.

The embedded conversion option and Convertible Senior Notes were valued using a Binomial Lattice Model designed to capture incremental value attributed to the conversion option in addition to the value of the note. Key inputs into this valuation model are our current stock price, US Treasury rate, our credit spread and the underlying stock price volatility. The current stock price, US Treasury rate and stock price volatility are based on observable market data and are considered Level 2 inputs. Our credit spread is unobservable and considered a Level 3 input. The valuation model was used to estimate our credit spread by solving for a premium to the US Treasury rate that produces a value of the Convertible Senior Note as of the issuance date that equates to proceeds received. The fair value measurements are considered a Level 3 measurement within the fair value hierarchy. An increase in the volatility by 5% results in a $0.5 million increase in the fair value of the conversion option. On September 30, 2013, the Convertible Senior Notes, which had a book value of $27.3 million (net of unamortized discount of $12.7 million), had a fair value of approximately $34.1 million. An increase in the credit spread by 500 basis points results in a $2.8 million decrease in the fair value of the note.

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables summarize the valuation of our liabilities measured on a recurring basis at levels of fair value at September 30, 2013 and December 31, 2012.

	Fair Value Measurement using
	(Level 1)		(Level 2)		(Level 3)		Total
At September 30, 2013
Warrants	—		—		19,161		19,161
Embedded conversion option	—		—		6,599		6,599
Total	$	—	$	—	$	25,760	$	25,760

	Fair Value Measurement using
	(Level 1)		(Level 2)		(Level 3)		Total
At December 31, 2012
Warrants	—		—		28,043		28,043
Embedded conversion option	—		—		21,382		21,382
Total	$	—	$	—	$	49,425	$	49,425

The following is a reconciliation of changes in fair value of our liabilities classified as Level 3 during the nine months ended September 30, 2013 and 2012:

	Nine Months Ended September 30,
	2013			2012
Balance at beginning of period	$	49,425		$	—
Issuance of warrants	—			33,632
Amendment to warrant agreement	10,890			—
Unrealized (gain) loss on warrants included in earnings	(19,772		)	5,315
Unrealized (gain) loss on embedded conversion option included in earnings	(14,783		)	—
Balance at end of period	$	25,760		$	38,947

NOTE 9 — IMPAIRMENT OF ASSETS

The Company reviews non-producing leasehold costs and proved oil and gas properties on a field-by-field basis for impairment when events or circumstances indicate a possible decline in the recoverability of the carrying value of such property. We compare the carrying value of the property to its estimated undiscounted future cash flows. If the carrying value of the property exceeds its estimated undiscounted future cash flows, the carrying value is reduced to its estimated fair value and any impairment is charged to expense in the period incurred. Fair value is estimated using comparable market data, a discounted future cash flow method, or a combination of the two. Significant Level 3 assumptions are used in the fair value determination and include management’s expectations of future production, commodity prices, operating and development costs, risk-adjusted discount rate and other relevant data.

In the second quarter of 2013, non-producing leasehold costs and producing oil and gas properties with combined carrying values of $145.5 million were written down to their fair values of $52.4 million, resulting in pretax impairment charges of $93.1 million. Included in the $93.1 million impairment charge are non-producing leasehold costs impairments of $56.9 million and producing oil and gas properties impairments of $36.2 million. The impairments of the non-producing leasehold costs primarily relate to reversals of book gains recorded in 2012 in connection with the Hess joint-venture dissolution. The impairments of producing oil and gas properties relate to the Boening, Commodore and Stingray wells.

In the third quarter of 2013, non-producing leasehold costs with carrying values of $13.1 million were written down to their fair values of $4.1 million and we wrote down the carrying value of our inventory by $0.2 million, resulting in pretax impairment charges of $9.2 million. The impairment of non-producing leasehold costs in the third quarter of 2013 was triggered by lease expirations in our Sweet Home, Hackberry/Oakland, and Dilley prospects.

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We recorded $2.2 million in asset impairments for both the three and nine months ended September 30 2012. Included in the $2.2 million impairment charge are non-producing leasehold cost impairments of $0.4 million triggered by lease expirations in our Hackberry/Oakland and Eaglebine/Eagleford East prospects. Producing oil and gas properties in Hackberry with carrying values of $3.2 million were also written down to their fair value of $1.4 million, resulting in a pretax impairment charge of $1.8 million.

NOTE 10 — STOCK-BASED COMPENSATION

Long Term Incentive Plan (the “Plan”)

We currently have 9.1 million shares authorized for issuance under the Plan adopted in March 2012. At September 30, 2013, approximately 4.4 million shares were available for future grants under the Plan.

Stock-based compensation costs for the three and nine months ended September 30, 2013 were $0.6 million and $2.4 million, respectively. Stock-based compensation costs for the three and nine months ended September 30, 2012 were $8.0 million and $12.8 million, respectively.

The following table presents the changes in restricted stock awards pursuant to the Plan:

	Number		Weighted Average
	of Shares		Grant Date
	(in thousand)		Fair Value per Share
Unvested balance at December 31, 2012	155		$	4.32
Granted	3,508		1.54
Vested	(979	)	1.70
Cancelled/Forfeited	(80	)	1.32
Unvested balance at September 30, 2013	2,604		$	1.65

At September 30, 2013, we had $3.2 million of total unrecognized compensation costs related to unvested awards which is expected to be recognized over a weighted average period of 1.95 years. 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 11 — SEVERANCE COSTS

In April 2013, ZaZa announced a significant reduction in workforce and terminated approximately 37 employees and contractors, and closed offices in Corpus Christi and Dallas. In the second quarter of 2013, we recognized $3.9 million in severance expense and $0.7 million in onerous contracts for a total expense of $4.6 million included in general and administrative expenses. As of September 30, 2013, we have a remaining liability of $3.4 million of which $2.4 million is recorded in current accrued liabilities and $1.0 million is recorded in non-current accrued liabilities.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

FLMK/Emerald Leasing Claims

On August 9, 2012, ZaZa LLC filed a lawsuit in Harris County District Court against certain lease brokers, consultants and law firms who were involved in the leasing of acreage for the company in DeWitt and Lavaca Counties. ZaZa paid certain of these brokers for approximately 3,924 acres of leases which the brokers have not delivered to the company. Additionally, there are net lease acreage shortages for which ZaZa has made a claim. The relief sought by ZaZa includes economic damages, exemplary damages, and reasonable attorney’s fees. To the extent that ZaZa receives any such settlement as a result of these claims, it is required to share one-half of such settlement with Hess pursuant to the terms of the agreement dissolving the Hess joint venture. Certain of the defendants have settled, and ZaZa continues to pursue its claims against the remaining defendants, which include Emerald Leasing LLC, FLMK Acquisition, LLC, John T. Lewis, Billy Marcum, Brad Massey, Max Smith, Heroux & Helton PLLC, W&L Holdings, LLC, Rock Leasing, LLC, Nwk Resources, LLC, and Hlk Acquisitions, LLC.

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ZAZA ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Sankalp Americas, Inc. Casing Collar Failure

On March 13, 2013, ZaZa LLC filed a lawsuit in Harris County District Court against Sankalp Americas, Inc. (“Sankalp”). The dispute arose due to the catastrophic loss of a 17,000 plus foot horizontal well, the Stingray A-1H, drilled by ZaZa LLC in Walker County, Texas. While ZaZa LLC worked to complete the sixteenth stage of its hydraulic fracturing operations, a casing collar manufactured by Sankalp failed, separating completely, and causing a downhole restriction. This restriction, which could not be remediated, ultimately resulted in the loss of the entire horizontal portion of the well. ZaZa LLC seeks to recover its economic damages and court costs from Sankalp for its substantial losses caused by such failure. The case is set for trial in the second quarter of 2014.

Range Transaction

On March 28, 2012, ZaZa LLC entered into a Participation Agreement with Range under which ZaZa LLC agreed to acquire a 75% working interest from Range in certain leases located in Walker and Grimes Counties, Texas (the “Leases”). Pursuant to the terms of the Range Agreement, Range retained a 25% working interest in the Leases and ZaZa LLC committed to drill a well (the “Commitment Well”). ZaZa LLC drilled the Commitment Well but ceased completion operations due to a restriction. As a result of the restriction, the lateral section of the well was lost and, because of the resulting operational delay, effective January 16, 2013, ZaZa LLC and Range entered into an Amendment No. 5 to the Range Agreement (the “Amendment”). The Amendment requires ZaZa LLC to (i) commence re-completion operations on the Commitment Well by March 16, 2013 (the Company timely commenced such operations), (ii) commence drilling operations of a substitute Commitment Well (the “Substitute Well”) by July 17, 2013 (the Company timely commenced such operations), and (iii) initiate sales of oil and/or gas from the Substitute Well by September 1, 2013. Failure to do so will require ZaZa to assign a 25% working interest in the Leases to Range and relinquish operatorship. On March 25, 2013, ZaZa entered into the Sixth Amendment to the Range Agreement (the “Sixth Amendment”). The Sixth Amendment extended the deadline for initiating sales of oil and/or gas from the Substitute Well from September 1, 2013 to November 1, 2013. The Substitute Well has been completed, and sales have been initiated as of November 1, 2013. Discussions are ongoing with Range regarding the Substitute Well, whether ZaZa’s obligations to Range now have been fulfilled and whether Range will elect (or not) into certain leases acquired within the parties area of mutual interest.

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 such suit or claim would not have a material adverse effect on our financial position, results of operations or cash flows.

NOTE 13 — SUBSEQUENT EVENTS

The Company evaluated its September 30, 2013 financial statements for subsequent events. Other than as noted herein, we are not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements.

As discussed in “Note 1 — Basis of Presentation”, we entered into and closed the Amended JEDA with our counterparty on September 25, 2013 and October 15, 2013, respectively, and in exchange for approximately $18 million in non-producing properties we received approximately $16.3 million in cash (excluding $1.5 million that was received in the third quarter of 2013), carries worth over $8 million, and working interests in several proved producing wells with a fair value of approximately $17 million. The carry, worth over $8 million, includes our counterparty’s requirement to drill two horizontal wells and one vertical well totaling approximately $7 million in net expenditures and a carry for miscellaneous expenses of $1.25 million. The Amended JEDA will be accounted for as a business combination and will require us to recognize and measure identifiable assets acquired and liabilities assumed at their fair value. Accordingly, we expect to recognize a net increase to oil and gas properties including carries of approximately $12 million and an associated gain ranging between $28 and $33 million in the fourth quarter of 2013.

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

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 optimize our balance sheet and to raise necessary capital in the future;

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

· whether our joint venture partners elect to move forward with subsequent phases of our joint ventures;

· our ability to maintain or renew our existing oil and gas leases or obtain new ones;

· possible title impairments to our properties;

· our ability to obtain equipment and personnel;

· uncertainties in reserve and production estimates;

· 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;

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

· volatility in oil and natural gas prices;

· our ability to execute our business strategy and be profitable;

· volatility in the financial and credit markets;

· changes in general economic conditions;

· drilling and operating risks;

· production expense estimates;

· the impact of derivative positions;

· the effects of delays in completion of, or shut-ins of, gas gathering systems, pipelines and processing facilities; and

· other matters that are discussed in our filings with the SEC.

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 Part II 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, 2012, filed with the SEC on April 2, 2013 and that 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.

We produce both oil and natural gas. Throughout this Quarterly Report, when we refer to “total production,” “total reserves,” “percentage of production,” “percentage of reserves,” or any similar term, we have converted our natural gas reserves or production into barrel of oil equivalents. For this purpose, six thousand cubic feet of natural gas is equal to one barrel of oil, which is based on the relative energy content of natural gas and oil. Natural gas liquids are aggregated with oil in this Quarterly Report.

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EXECUTIVE OVERVIEW

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 and its subsidiaries.

Recent Developments

Eaglebine/Eagle Ford East Joint Venture with EOG

Phase II Acceleration. Our counterparty accelerated Phase II of the joint venture, and we assigned approximately 20,000 net acres to our counterparty on October 15, 2013, in exchange for (i) cash consideration of $17 million and (ii) approximately $3 million of interests (based on an independent reserves report) in 15 producing wells of our counterparty located outside of the Area of Mutual Interest or “AMI” (established by the amended and restated JEDA). Also, during Phase II, our counterparty will drill two horizontal wells and one vertical well in the parties’ AMI, carry ZaZa’s interests in those wells and provide a miscellaneous work and land carry of up to $1.25 million. Our counterparty may, however, elect to drill one or more vertical wells in order to achieve carry parity value for drilling horizontal wells. To complete its obligation in respect of the third well under Phase I of the Amended JEDA, our counterparty will pay for an additional $1.5 million of ZaZa’s costs for one or more additional vertical wells and has provided a further $1.5 million cash payment to ZaZa.

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producing wells, ZaZa assigned to our counterparty approximately 13,875 additional net acres and paid approximately $700,000 in cash.

The Amended JEDA will be accounted for as a business combination and will require us to recognize and measure identifiable assets acquired and liabilities assumed at their fair value. Accordingly, we expect to recognize a net increase to oil and gas properties including carries of approximately $12 million and an associated gain ranging between $28 and $33 million in the fourth quarter of 2013.

The following table presents the acreage position following the Amended JEDA:

	Gross Acres Held by ZaZa (a)		Net Acres to Partner (a)	Net Acres to ZaZa (a)
Phase I	36,667	(b)	20,025	6,675
Phase II	26,700		20,025	6,675
Former Phase III	10,424		7,818	2,606
Partner AMI	19,000		14,250	4,750
Retained Acreage	18,500		13,875	4,625
Sub Total	111,291		75,993	25,331

Former Phase III Option (c)	12,311		9,233	3,078

Total with Former Phase III Option Election	123,602		85,226	28,409
Total without Former Phase III Option Election	111,291		75,993	37,642

(a) All acreage figures are approximate.

(b) Gross acres include currently owned by Range acreage.

(c) Partner can participate in up to 12,311 remaining former Phase III net acres on or before January 31, 2014 for cash consideration at a fixed price per acre.

Sale of Moulton acreage (collectively “Moulton Transactions”)

Revenues and lease operating expenses attributable to the Moulton properties for the three and nine months ended September 30, 2013 and 2012 were as follows:

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012

Revenues	$	443	$	1,027	$	4,586	$	1,547
Lease operating expenses	70		168		625		411

The following supplemental pro forma information presents consolidated results of operations as if the Moulton sale had occurred on January 1, 2012. The information does not purport to represent what the actual consolidated results of operations of the Company would have been had the transactions occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations.

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	Three Months			Three Months		Nine Months			Nine Months
	Ended			Ended		Ended			Ended
	Pro Forma			Pro Forma		Pro Forma			Pro Forma
	September 30, 2013			September 30, 2012		September 30, 2013			September 30, 2012

Revenues	$	659		$	198,156	$	1,680		$	202,833
Operating income (loss)	(14,481		)	177,359		(120,167		)	123,145
Net income (loss)	(20,066		)	134,951		(76,270		)	(30,897		)

Basic earnings (loss) per share	$	(0.20	)	$	1.33	$	(0.74	)	$	(0.32	)
Diluted earnings (loss) per share	$	(0.20	)	$	1.03	$	(0.74	)	$	(0.32	)

Eagle Ford Joint Venture with Sabine

On September 17, 2013, we entered into an agreement with Sabine South Texas LLC (“Sabine”) for the joint development of our Sweet Home prospect in the Eagle Ford trend located in Lavaca and DeWitt Counties, Texas. Under this agreement, Sabine will jointly develop with us up to approximately 7,600 net acres that we currently own and that comprise a portion of our interest in the Sweet Home prospect. Sabine has agreed to bear 100% of the drilling and completion costs of two commitment wells and up to $750,000 of construction costs related to gathering and infrastructure in order to earn a 75% working interest in 7,600 acres of the Sweet Home prospect and the Boening well. Sabine has also agreed to carry up to $300,000 of ZaZa’s expenses related to the extension and renewal of certain leases in the Sweet Home prospect.

Financial Summary

For the nine months ended September 30, 2013:

· Production was 87 MBOE of which 62 MBOE was oil production (71%).

· Revenues and other income from continuing operations were $6.3 million.

· Operating costs of continuing operations were $131.0 million, including $102 million of asset impairments driven primarily by the reversal of upward fair value adjustments recorded in 2012.

· Net loss from continuing operations was $81.7 million, including $66.5 million of asset impairments.

At September 30, 2013, we had:

· Cash and cash equivalents of $6.6 million.

· Current ratio (current assets/current liabilities) of 0.44 to 1.

RESULTS OF OPERATIONS

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, since February 21, 2012 excluding ZEF which was sold on December 21, 2012 and is presented as discontinued operations. The discussion below relates to our continuing corporate activities and oil and gas exploration and production operations, and excludes discontinued operations.

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Revenue and other income

Oil and gas revenue

Oil and gas revenue for the three months ended September 30, 2013 was $1.1 million (of which $0.85 million was oil and $0.25 million was gas), compared to $2.2 million for the three months ended September 30, 2012. This decrease in revenue is primarily due to the loss of the Cotulla revenues ($0.8 million) as a result of the Hess dissolution and decrease in Moulton production ($0.6 million) following sale to Sanchez on July 26, 2013, partially offset by the Boening well (Sweet Home) beginning test production on February 3, 2013 ($0.3 million).

Oil and gas revenue for the nine months ended September 30, 2013 was $6.3 million (of which $5.7 million was oil and $0.5 million was gas), compared to $7.4 million for the nine months ended September 30, 2012. Revenues decreased due to the loss of Cotulla production ($5.4 million) as a result of the Hess dissolution offset partially by the Boening well (Sweet Home) which began test production on February 3, 2013 ($0.6 million), Eaglebine/Eagle Ford East ($0.4 million), and an increase in Moulton production for the Crabb Ranch well ($1.8 million) and the Ring Unit wells ($1.3 million), and other non operated ($0.3 million).

The following table presents our production and average prices obtained for our production for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Production:
Oil (Bbls):	10,251		24,263		62,098		74,051
Gas (Mcf):	72,494		38,547		149,414		114,323
Equivalents (BOE):	22,333		30,688		87,001		93,104

Average Price:
Oil ($/Bbl):	$	83.17	$	86.61	$	92.51	$	95.15
Gas ($/Mcf):	$	3.45	$	2.50	$	3.49	$	2.69

The following tables present our production data for the referenced geographic areas for the periods indicated:

	Three Months Ended September 30, 2013				Nine Months Ended September 30, 2013
	Gas		Oil	Equivalent	Gas	Oil	Equivalent
	(Mcf)		(Bbls)	(BOE)	(Mcf)	(Bbls)	(BOE)

South Texas (1)	34,584		9,047	14,811	109,208	58,963	77,165
East Texas (2)	37,932		1,089	7,411	40,018	2,519	9,189
Other Onshore Non-Operated	(22	)	115	111	188	616	647
Total	72,494		10,251	22,333	149,414	62,098	87,001

(1) South Texas area includes the following sub-regions: Moulton, Sweet Home, and Hackberry/Oakland.

(2) East Texas area includes the following sub-regions: Eaglebine/Eagle Ford East.

	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
	Gas	Oil	Equivalent	Gas	Oil	Equivalent
	(Mcf)	(Bbls)	(BOE)	(Mcf)	(Bbls)	(BOE)

South Texas (1)	38,303	22,445	28,829	113,900	71,422	90,405
East Texas (2)	—	—	—	—	—	—
Other Onshore Non-Operated	244	1,819	1,859	423	2,628	2,699
Total	38,547	24,263	30,688	114,323	74,051	93,104

(1) South Texas area includes the following sub-regions: Cotulla, Moulton, Sweet Home, and Hackberry/Oakland.

(2) East Texas area includes the following sub-regions: Eaglebine/Eagle Ford East.

The above table of production and average prices compares both volumes and prices received for our oil and gas production. The results of our operations are highly dependent upon the prices received from our oil

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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.

Operating costs and expenses

The following table presents our lease operating expense for the referenced geographical areas for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012

South Texas (1)	$	236	$	797	$	1,130	$	2,943
East Texas (2)	447		—		479		—
Other Onshore U.S.	5		48		18		49
Total	$	688	$	845	$	1,627	$	2,992

(1) South Texas area includes the following sub-regions: Cotulla, Moulton, Sweet Home, and Hackberry/Oakland.

(2) East Texas area includes the following sub-regions: Eaglebine/Eagle Ford East.

Lease operating expenses

Lease operating expenses were $0.7 million, or $30.81 per BOE produced, for the three months ended September 30, 2013, compared to $0.8 million, or $27.54 per BOE produced, for the three months ended September 30, 2012. This decrease is primarily due to the exclusion of Cotulla of $0.4 million (as a result of the Hess dissolution) and decrease in Hackberry of $0.2 million. This decrease was partially offset by an increase in Eaglebine/Eagle Ford East of $0.5 million.

Lease operating expenses were $1.6 million, or $18.70 per BOE produced, for the nine months ended September 30, 2013, compared to $3.0 million, or $32.14 per BOE produced, for the nine months ended September 30, 2012. This decrease is primarily due to the exclusion of Cotulla of $1.5 million (as a result of the Hess dissolution) and decrease in Hackberry of $0.6 million. This decrease was partially offset by an increase in Moulton ($0.3 million) and Eaglebine/Eagle Ford East ($0.5 million).

Depreciation, depletion and amortization

Depreciation, depletion and amortization for the three months ended September 30, 2013 was $0.3 million compared to $2.0 million for the three months ended September 30, 2012. The decrease is primarily due to lower production volumes following the sale of the Moulton properties during 2013 combined with lower depletion rates in the third quarter of 2013 following the impairments recorded in the prior quarter.

Depreciation, depletion and amortization for the nine months ended September 30, 2013 was $2.6 million compared to $5.2 million for the nine months ended September 30, 2012. The decrease is primarily due to lower production volumes following the sale of the Moulton properties during 2013.

Impairments

We recorded $2.2 million in asset impairments for both the three and nine months ended September 30, 2012. Included in the $2.2 million impairment charge are non-producing leasehold cost impairments of $0.4 million triggered by lease expirations in our Hackberry/Oakland and Eaglebine/Eagleford East prospects. Producing oil and

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gas properties in Hackberry with carrying values of $3.2 million were also written down to their fair value of $1.4 million, resulting in a pretax impairment charge of $1.8 million.

General and administrative

General and administrative expenses for the three months ended September 30, 2013 totaled $4.2 million, compared to $17.3 million for the same period in 2012. This decrease was due to lower severance costs of $5.5 million, stock based compensation of $2.4 million, legal and consulting fees of $4.0 million, and a decrease in Toreador’s contribution to G&A expense of $1.2 million.

General and administrative expense for the nine months ended September 30, 2013 totaled $23.6 million, compared to $71.0 million for the same period in 2012. This decrease was due to lower severance costs of $2.7 million, stock based compensation of $4.6 million, legal and consulting fees of $8.0 million, and a decrease in Toreador’s contribution to G&A expense of $9.0 million. Furthermore, in connection with Combination in 2012, we paid $9.8 million in legal and advisory fees, $4.8 million to four executives of ZaZa LLC pursuant to the net profit agreements between ZaZa LLC and each such executive, deferred compensation of $10.8 million and bonuses and $6.7 million, respectively, to ZaZa LLC Members. This is partially offset in 2013 by higher salary expense of $3.4 million, settlements received totaling $2.8 million, and reimbursements received under the terms of the Hess joint venture for expenses related to lease acquisition costs of $2.8 million.

Other expenses

Loss on extinguishment of debt

Loss on extinguishment of debt for the nine months ended September 30, 2013 was $16.6 million. The loss primarily related to an amendment to the Senior Secured Notes dated March 28, 2013 that triggered debt extinguishment accounting. It consisted of a loss from the modification of the terms of the warrants of $10.9 million and a difference between the fair value and book value of debt of $4.2 million. The remaining $1.5 million are associated with penalties on the prepayments of principal on our Senior Secured Notes in 2013.

Interest expenses, net

The following table presents details of net interest expenses for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013			2012

Interest expense on Senior Secured Notes	$	582	$	1,523	$	1,829		$	4,412
Interest expense on Convertible Senior Notes	900		—		2,700			—
Interest expense on Subordinated Notes	946		994		2,840			2,361
Interest expense on revolving credit line	—		—		—			45
Interest expense on Members’ Notes	—		—		—			50
Amortization original issuance discount on Senior Secured Notes	295		1,077		1,091			3,072
Amortization of issuance costs on Senior Secured Notes	—		122		58			346
Amortization original issuance discount on Convertible Senior Notes	673		—		1,969			—
Amortization of issuance costs on Convertible Senior Notes	95		—		271			—
Other interest (income) expense, net	—		86		(34		)	481
Capitalized interest	—		—		(346		)	—
Total interest expense, net	$	3,491	$	3,802	$	10,378		$	10,767

Gain (loss) on valuation of warrants and embedded derivatives

For the three months ended September 30, 2013, we recorded a gain in fair value of warrants associated with our Senior Secured Notes of $1.4 million and a gain in fair value of embedded derivatives associated with our Convertible Senior Notes of $1.4 million. The variances are mainly a result of fluctuations in our stock price and passing of time.

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For the nine months ended September 30, 2013, we recorded a gain in fair value of warrants associated with our Senior Secured Notes of $19.8 million and a gain in fair value of embedded derivatives associated with our Convertible Senior Notes of $14.8 million. The variances are mainly a result of fluctuations in our stock price and passing of time.

Income tax expense

LIQUIDITY AND CAPITAL RESOURCES

This section should be read in conjunction with “Note 1 - Basis of Presentation”, “Note 2 - Going Concern” and “Note 5 - Long Term Debt” in the Notes to the consolidated financial statements included in this filing.

Liquidity

In connection with the audit of our financial statements for the year ended December 31, 2012, our independent registered public accounting firm issued their report dated April 1, 2013, that included an explanatory paragraph describing the existence of conditions that raised substantial doubt about our ability to continue as a going concern due to our dependency on the sale of non-core assets and the success of our Eaglebine/Eagle Ford East joint venture.

As of September 30, 2013 we had $6.6 million in cash and cash equivalents. In addition, we had current restricted cash of $0.5 million as of September 30, 2013. As described in “Note 5 - Long Term Debt” in more detail, we have $97.0 million in long term debt, of which $9.9 million is classified as current, consisting of the following:

	September 30,			December 31,
	2013			2012

Senior Secured Notes - Principal	$	26,770		$	33,200
Senior Secured Notes - Discount	(4,349		)	(9,553		)
Senior Secured Notes - Net of discount	22,421			23,647

Convertible Senior Notes - Principal	40,000			40,000
Convertible Senior Notes - Discount	(12,733		)	(14,702		)
Convertible Senior Notes - Net of discount	27,267			25,298

Subordinated notes	47,330			47,330
Total debt	97,018			96,275

Less: current portion	(9,858		)	(25,298		)
Total long-term debt	$	87,160		$	70,977

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

See “Note 12 - 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 Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on April 2, 2013. under the heading “Risk Factors - Risks Relating to Our Company.”

Our development and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and gas reserves.

The oil and gas exploration and development industry is capital intensive. We expect to continue making substantial capital expenditures in our business and operations for the purpose of exploration, development, production and acquisition of, oil and gas reserves. In the past, we financed capital expenditures in part from contributions, bonus payments and cost reimbursements by Hess under our joint venture with them. As a result of the termination of our joint venture with Hess in 2012, we have sold assets and incurred indebtedness in order to provide capital to carry out our activities. To maintain our oil and gas leases and pursue our planned drilling program, we will need to raise additional capital. We sold all of our Moulton properties during the second and third quarter of 2013.

Our cash flow from operations and access to capital are subject to a number of variables that may or may not be within our control, including:

· the level of oil and gas we are able to produce from existing wells;

· the prices at which our oil and gas production is sold;

· the results of our development programs associated with proved and unproved reserves;

· our ability to acquire, locate and produce new economically recoverable reserves;

· global credit and securities markets; and

· the ability and willingness of lenders and investors to provide capital and the cost of that capital.

We will need to raise capital to maintain our oil and gas leases and finance our drilling operations. We intend to pursue various strategies to raise capital, including asset sales, debt or equity financing, and joint ventures. However, our existing indebtedness contains covenants that restrict our ability to pursue these strategies. If we are unable to sell assets or if financing and joint venture partnerships are not available on acceptable terms or at all, we may have limited ability to obtain the capital necessary to sustain our operations at current levels or to implement our strategy, including executing on our portfolio of drilling opportunities or expanding our existing portfolio. There can be no assurance as to our ability to sell assets or as to the availability or terms of any joint ventures or other financing.

The failure to obtain additional capital could result in an inability to implement our strategy to pursue our drilling program and a curtailment of our operations relating to exploration and development of our prospects, which in turn could lead to possible write-downs in the carrying value of our properties, a material decline in our oil and gas reserves as well as our revenues and results of operations. The failure to obtain additional capital could also materially adversely affect our operations and prospects, including potentially resulting in the reversion of certain portions of our acreage to the lessors.

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.

As of September 30, 2013, we had approximately $26.8 million outstanding in aggregate principal under our Senior Secured Notes due 2017 (the “Senior Secured Notes”) and $40 million outstanding in aggregate principal under our 9% Convertible Senior Notes due 2017 (the “Convertible Notes”) and we may incur additional indebtedness in the future. In addition, we had approximately $47 million outstanding in aggregate principal amount

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under our Subordinated Notes. 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 entering into joint ventures, 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 and with certain carveouts to enter into our joint venture with EOG and to sell our Moulton acreage. 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.

If we do not satisfy our drilling obligations under our agreement with Range, we could lose a portion of our acreage and revenue stream in the Eaglebine/Eagle Ford East, which could adversely affect our expected revenues.

On March 28, 2012, the Company entered into a Participation Agreement (the “Range Agreement”), and associated Joint Operating Agreement, with Range Texas Production, LLC (“Range”), a subsidiary of Range Resources Corporation, under which the Company agreed to acquire a 75% working interest from Range in certain leases located in Grimes Country, Texas (the “Leases”). Pursuant to the terms of the Range Agreement, Range retained a 25% working interest in the Leases. Pursuant to a Sixth Amendment to the Range Agreement, the Company is required to initiate sales of oil and gas from the Leases by November 1, 2013. The Substitute Well has been completed, and sales have been initiated as of November 1, 2013. Discussions are ongoing with Range regarding the Substitute Well, whether ZaZa’s obligations to Range now have been fulfilled and whether Range will elect (or not) into certain leases acquired within the parties area of mutual interest.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5 - OTHER INFORMATION

On November 8, 2013, the Company entered into the First Amendment (the “Amendment”) to the Employment Agreement by and between the Company and Scott Gaille, Chief Compliance Officer and General Counsel. The Amendment provides for a payment on the thirtieth day following any change of control of the Company of (i) an amount equal to the aggregate of three times the most recent cash short-term incentive award and (ii) the cash portion of any outstanding, unvested long-term incentive award that would have been payable had Mr. Gaille’s employment with the Company continued through the applicable vesting date.

A copy of the Amendment is attached hereto as Exhibit 10.4 to this Form 10-Q and is incorporated by reference herein. The description of the material terms of the Amendment is not complete and is qualified in its entirety by reference to such exhibit.

ITEM 6 - EXHIBITS

Exhibit Number		Description

3.1		Restated Certificate of Incorporation of ZaZa Energy Corporation (incorporated by reference to Exhibit 3.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).

3.2		Amended and Restated Bylaws of ZaZa Energy Corporation (incorporated by reference to Exhibit 3.2 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).

10.1	* †	First Amendment of Joint Exploration and Development Agreement between ZaZa Energy Corporation and EOG Resources, Inc.

10.2	* †	Second Amendment and First Restatement of Joint Exploration and Development Agreement between ZaZa Energy Corporation and EOG Resources, Inc.

10.3	* †	Third Amendment and Second Restatement of Joint Exploration and Development Agreement between ZaZa Energy Corporation and EOG Resources, Inc.

10.4	*	Amendment to Employment Agreement between ZaZa Energy Corporation and Scott Gaille.

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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

101.INS	*	XBRL Instance Document

101.SCH	*	XBRL Schema Document

101.CAL	*	XBRL Calculation Linkbase Document

101.LAB	*	XBRL Label Linkbase Document

101.PRE	*	XBRL Presentation Linkbase Document

101.DEF	*	XBRL Definition Linkbase Document

* Filed or furnished herewith

† Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the Securities and Exchange Commission.

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EXHIBIT INDEX

Exhibit Number		Description

3.1		Restated Certificate of Incorporation of ZaZa Energy Corporation (incorporated by reference to Exhibit 3.1 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).

3.2		Amended and Restated Bylaws of ZaZa Energy Corporation (incorporated by reference to Exhibit 3.2 of ZaZa Energy Corporation’s Current Report on Form 8-K filed February 22, 2012).

10.1	* †	First Amendment of Joint Exploration and Development Agreement between ZaZa Energy Corporation and EOG Resources, Inc.

10.2	* †	Second Amendment and First Restatement of Joint Exploration and Development Agreement between ZaZa Energy Corporation and EOG Resources, Inc.

10.3	* †	Third Amendment and Second Restatement of Joint Exploration and Development Agreement between ZaZa Energy Corporation and EOG Resources, Inc.

10.4	*	Amendment to Employment Agreement between ZaZa Energy Corporation and Scott Gaille.

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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

101.INS	*	XBRL Instance Document

101.SCH	*	XBRL Schema Document

101.CAL	*	XBRL Calculation Linkbase Document

101.LAB	*	XBRL Label Linkbase Document

101.PRE	*	XBRL Presentation Linkbase Document

101.DEF	*	XBRL Definition Linkbase Document

* Filed or furnished herewith

† Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the Securities and Exchange Commission.

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

		Page
PART I - FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)
	Consolidated Balance Sheets - September, 2013 and December 31, 2012	2
	Consolidated Statements of Operations and Comprehensive Income - three and nine months ended September 30, 2013 and 2012	3
	Consolidated Statements of Changes in Stockholders’ Equity (Deficit) - nine months ended September 30, 2013	4
	Consolidated Statements of Cash Flows - nine months ended September 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4	Controls and Procedures	32

PART II - OTHER INFORMATION

Item 1	Legal Proceedings	33
Item 1A	Risk Factors	33
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3	Default Upon Senior Securities	34
Item 4	Mine Safety Disclosures	34
Item 5	Other Information	35
Item 6	Exhibits	35

	ZAZA ENERGY CORPORATION


November 12, 2013	By:	/s/ Todd A. Brooks
		Todd A. Brooks
		President and Chief Executive Officer


November 12, 2013	By:	/s/ Ian H. Fay
		Ian H. Fay
		Chief Financial Officer


November 12, 2013	By:	/s/ Paul F. Jansen
		Paul F. Jansen
		Chief Accounting Officer

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