Pegasi Energy Resources Corporation. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Pegasi Energy Resources Corporation.	ex321.htm
EX-31.1 - EXHIBIT 31.1 - Pegasi Energy Resources Corporation.	ex311.htm
EX-31.2 - EXHIBIT 31.2 - Pegasi Energy Resources Corporation.	ex312.htm
EX-10.08 - EXHIBIT 10.08 - Pegasi Energy Resources Corporation.	ex1008.htm
EX-10.01 - EXHIBIT 10.01 - Pegasi Energy Resources Corporation.	ex1001.htm
EX-10.02 - EXHIBIT 10.02 - Pegasi Energy Resources Corporation.	ex1002.htm
EX-10.09 - EXHIBIT 10.09 - Pegasi Energy Resources Corporation.	ex1009.htm
EX-10.06 - EXHIBIT 10.06 - Pegasi Energy Resources Corporation.	ex1006.htm
EX-10.05 - EXHIBIT 10.05 - Pegasi Energy Resources Corporation.	ex1005.htm
EX-10.04 - EXHIBIT 10.04 - Pegasi Energy Resources Corporation.	ex1004.htm
EX-10.03 - EXHIBIT 10.03 - Pegasi Energy Resources Corporation.	ex1003.htm
EX-10.07 - EXHIBIT 10.07 - Pegasi Energy Resources Corporation.	ex1007.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

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

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER: 333-134568

PEGASI ENERGY RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)

Nevada		20-4711443
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

218 N. Broadway, Suite 204

Tyler, Texas 75702

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 903- 595-4139

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

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

There were 33,610,801 shares of the registrant's common stock outstanding as of November 8, 2010.

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	18
Item 4. Controls and Procedures	19

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	20
Item 1A. Risk Factors	20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults Upon Senior Securities	20
Item 4. (Removed and Reserved)	20
Item 5. Other Information	20
Item 6. Exhibits	20

SIGNATURES	21

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2010			2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	536,641		$	127,176
Accounts receivable, trade		81,956			98,578
Accounts receivable, related parties		11,274			13,002
Joint-interest billings receivable, related parties, net		45,854			17,983
Joint-interest billings receivable, net		72,782			-
Restricted cash – leasing program		409,869			-
Other current assets		23,562			51,288
Total current assets		1,181,938			308,027

Property and equipment:
Equipment		682,575			601,759
Pipelines		701,065			700,765
Buildings		19,916			19,916
Leasehold improvements		7,022			7,022
Vehicles		50,663			50,663
Office furniture		138,325			137,071
Website		15,000			15,000
Total property and equipment		1,614,566			1,532,196
Less accumulated depreciation		(626,127	)		(515,101	)
Property and equipment, net		988,439			1,017,095

Oil and gas properties:
Oil and gas properties, proved		11,836,036			11,928,985
Oil and gas properties, unproved		8,952,678			9,150,426
Capitalized asset retirement obligations		220,237			220,237
Total oil and gas properties		21,008,951			21,299,648
Less accumulated depletion		(962,787	)		(900,275	)
Oil and gas properties, net		20,046,164			20,399,373

Other assets:
Certificates of deposit		77,774			77,195
Total other assets		77,774			77,195

Total assets	$	22,294,315		$	21,801,690

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

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS (CONTINUED)

	September 30,			December 31,
	2010			2009
	(Unaudited)
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	683,350		$	251,336
Accounts payable, related parties		1,208,911			874,076
Revenues payable		80,551			104,366
Interest payable, related party		236,625			840,052
Liquidated damages payable		166,488			142,083
Other payables		18,632			35,795
Lease program deposits		409,869			-
Drilling prepayments		364			-
Drilling prepayments, related parties		8,184			-
Current portion of notes payable		2,814			6,570
Current portion of notes payable, related party		8,160,646			6,352,303
Total current liabilities		10,976,434			8,606,581

Notes payable		3,332			4,803
Asset retirement obligations		313,829			300,311

Total liabilities		11,293,595			8,911,695

Commitments and contingencies (Note 5)

Stockholders' equity:
Common stock; $0.001 par value; 75,000,000 shares authorized;
33,610,801 shares issued and outstanding at September 30, 2010 and December 31, 2009		33,611			33,611
Additional paid-in capital		19,673,102			19,673,102
Accumulated deficit		(8,705,993	)		(6,816,718	)
Total stockholders' equity		11,000,720			12,889,995

Total liabilities and stockholders' equity	$	22,294,315		$	21,801,690

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

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
Revenues:
Oil and gas	$	128,920		$	141,392		$	434,237		$	387,648
Condensate and skim oil		17,405			25,469			73,274			66,292
Transportation and gathering		50,898			50,443			182,519			187,103
Saltwater disposal income		11,675			26,368			62,382			122,943
Total revenues		208,898			243,672			752,412			763,986

Operating expenses:
Lease operating expenses		71,789			76,030			223,291			282,583
Saltwater disposal expenses		33,866			38,677			168,007			178,950
Pipeline operating expenses		16,946			16,344			64,286			62,632
Cost of gas purchased for resale		30,981			28,022			117,476			114,249
Depletion and depreciation		55,702			59,039			173,564			180,931
General and administrative		454,998			447,131			1,428,534			1,587,420
Total operating expenses		664,282			665,243			2,175,158			2,406,765
Loss from operations		(455,384	)		(421,571	)		(1,422,746	)		(1,642,779	)

Other income (expenses):
Interest income		193			396			579			2,223
Interest expense		(158,401	)		(118,521	)		(437,019	)		(333,941	)
Liquidated damages		(14,153	)		(5,126	)		(24,405	)		(15,378	)
Other income (expense)		-			43			(5,684	)		708
Total other expenses		(172,361	)		(123,208	)		(466,529	)		(346,388	)

Loss before income tax expense		(627,745	)		(544,779	)		(1,889,275	)		(1,989,167	)

Income tax expense		-			-			-			(370	)

Net loss	$	(627,745	)	$	(544,779	)	$	(1,889,275	)	$	(1,989,537	)

Basis and diluted loss per share	$	(0.02	)	$	(0.02	)	$	(0.06	)	$	(0.06	)

Weighted average shares outstanding		33,610,801			33,610,801			33,610,801			33,610,801

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

PEGASI ENERGY RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
	2010			2009
Operating Activities
Net loss	$	(1,889,275	)	$	(1,989,537	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depletion and depreciation		173,564			180,931
Accretion of discount on asset retirement obligations		13,518			12,753
Loss on abandonment of equipment		5,727			-
Changes in operating assets and liabilities:
Accounts receivable, trade		16,622			140,997
Accounts receivable, related parties		1,728			33,152
Joint-interest billing receivable, net		(72,782	)		-
Joint-interest billings receivable, related parties, net		(27,871	)		50,424
Other current assets		27,726			(104,671	)
Accounts payable		432,014			(87,527	)
Accounts payable, related parties		334,835			166,251
Revenues payable		(23,815	)		(78,336	)
Interest payable, related party		431,916			332,718
Liquidated damages payable		24,405			15,378
Other payables		(17,163	)		(10,969	)
Drilling prepayments		364			-
Drilling prepayments, related parties		8,184			-
Net cash used in operating activities		(560,303	)		(1,338,436	)

Investing Activities
Additions to certificate of deposit		(579	)		-
Proceeds from sale of working interest		305,667			-
Purchases of property and equipment		(88,123	)		(25,590	)
Purchases of oil and gas properties		(14,970	)		(393,561	)
Net cash provided by (used in) investing activities		201,995			(419,151	)

Financing Activities
Payments on notes payable		(5,227	)		(4,904	)
Proceeds from borrowing on notes payable, related party		773,000			1,075,000
Net cash provided by financing activities		767,773			1,070,096

Net increase (decrease) in cash and cash equivalents		409,465			(687,491	)
Cash and cash equivalents at beginning of period		127,176			792,255

Cash and cash equivalents at end of period	$	536,641		$	104,764

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	410		$	1,223

Non-cash financing activity relating to addition of accrued and unpaid interest into notes payable, related party	$	1,035,343		$	-

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

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND 2009

1. NATURE OF OPERATIONS

Pegasi Energy Resources Corporation (“PERC” or the “Company”) is engaged in the exploration and production of natural gas and oil through the development of a repeatable, low-geological risk, high-potential project in the active East Texas oil and gas region. The Company's business strategy, which it designated as the “Cornerstone Project”, is to identify and exploit resources in and adjacent to existing or indicated producing areas within the Rodessa field area. PERC’s principals spent over three years and invested over $3.5 million in equity for data harvesting, prospect evaluation and acreage acquisitions for the Cornerstone Project.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) Basis of Presentation

The accompanying unaudited interim consolidated financial statements of PERC have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with PERC’s audited consolidated financial statements for the year ended December 31, 2009, and notes thereto, which are included in the Company’s annual report on Form 10-K filed with the SEC on March 29, 2010. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The notes to consolidated financial statements, which would substantially duplicate the disclosures required in the Company’s 2009 annual consolidated financial statements, have been omitted.

b) New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This standard requires reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by Statement of Financial Accounting Standards (“SFAS”) No. 157 (FASB ASC 820). The guidance is effective for any interim and annual reporting periods that begin after December 15, 2009. The Company adopted ASU No. 2010-06 in the first quarter of 2010 and the adoption did not have a material impact on the Company’s disclosures. The standard also requires entities to provide a reconciliation of purchases, sales, issuance, and settlements of anything valued with a Level 3 method. This guidance is effective for fiscal years beginning after December 15, 2010, and for interim and periods within those fiscal years. The Company is currently assessing the impact that the adoption will have on its disclosures.

c) Reclassifications

Certain reclassifications have been made to the comparative consolidated financial statements to conform to the current period’s presentation.

3. NOTES PAYABLE, RELATED PARTY

Notes payable, related party consisted of the following at:	September 30, 2010			December 31, 2009
Original note payable dated May 21, 2007 to Teton (the “Teton Note”). Additional funds added by amendments three, four, five to the note result in an outstanding balance of $5,952,303, including interest at 8%, with all interest and principal due on the maturity date of May 21, 2010. Substantially all of the Company’s assets are pledged as collateral on the note. Upon maturity this note was replaced with the “Teton Renewal Note” below.	$	-		$	5,952,303
Note payable to Teton (the “Teton Renewal Note”) in the amount of $6,987,646 dated June 1, 2010, including interest at 8%, with all principal due on the maturity date of June 1, 2011. Interest payments are due January 1, 2011; April 1, 2011; and at maturity. Renewed original note above which matured May 21, 2010. Secured by a stock pledge and security agreement.		6,987,646			-
Original unsecured promissory note payable in the amount of $1 million dated October 14, 2009 to Teton (the “Teton Promissory”). Additional funds added by amendment two to the note result in funds available of $1.5 million, including interest of 6.25%, with all interest and principal due on the maturity date of January 2, 2011.		1,173,000			400,000
Total notes payable, related party		8,160,646			6,352,303
Less current portion		(8,160,646	)		(6,352,303	)
Total long-term notes payable, related party	$	-		$	-

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND 2009

On June 1, 2010, a Promissory (Teton Renewal Note) note was executed to renew and extend the original note payable (Teton Note) which matured May 21, 2010. The renewal note’s principal balance of $6,987,646 is the total of the outstanding principal of $5,952,303 and accrued and unpaid interest of $1,035,343 on the original note. In October 2010 an amendment to the Teton Renewal Note, effective October 1, 2010, was executed to eliminate the October 1, 2010 interest payment. The final maturity date of the Teton Renewal Note was unchanged and remains June 1, 2011.

The Teton Promissory was amended effective January 1, 2010 to eliminate the requirement of interest payments to be made on January 1, 2010; April 1, 2010; and October 1, 2010. In May 2010, a second amendment was executed which increased the available balance to $1,500,000 effective March 2, 2010. Effective July 1, 2010, a third amendment to the Teton Promissory was executed to eliminate the interest payment required on July 1, 2010 and to extend the maturity date of the note to January 2, 2011 at which time all outstanding principal and accrued and unpaid interest will be due.

On May 1, 2007, a “Memorandum of Understanding” was executed to grant Teton the right to convert the outstanding balance on the Teton Note into shares of PERC’s common stock at a fixed conversion price of $1.20 per share. Teton has the right, but not the obligation to convert all or a portion of the indebtedness at any time after May 1, 2008, unless the debt is repaid before such date. This option will continue in existence as long as any balance remains outstanding on the note.

On March 3, 2009, a “Second Amendment to Renewal Promissory Note and Loan Modification Agreement” (the “Second Amendment”) was executed, which amended the Teton Note. This agreement added $550,000 of additional cash proceeds and $20,000 of advances payable to the outstanding balance of the Teton Note and pledged substantially all of the Company’s assets to secure repayment of the note. The Second Amendment confirmed that the fixed conversion price of $1.20 per share would remain for the portion of the note payable balance that existed prior to its execution, and a fixed conversion price of $1.60 was agreed upon for conversion of the additional funds.

In May 2009, the third and fourth amendments to the Teton Note were executed. The third amendment deferred the May 21, 2009 interest payment to September 21, 2009 and the fourth amendment added $350,000 of additional funds to the outstanding balance of the Teton Note. In September 2009, the fifth amendment was executed, which added $175,000 of additional funds to the outstanding balance of the Teton Note and deferred the interest payment due date from September 21, 2009 to October 21, 2009. In February 2010, the seventh amendment to the Teton Note, dated May 21, 2007, was executed. This amendment amended the sixth amendment, executed in October 2009, to defer the October 21, 2009 interest payment to February 21, 2010. The seventh amendment eliminated the February 21, 2010 interest payment. The final maturity date of the Teton Note was unchanged and remained May 21, 2010. Upon maturity, the outstanding principal and accrued and unpaid interest on this note was renewed and extended to a maturity date of June 1, 2011. See the Teton Renewal Note above.

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND 2009

4. SEGMENT INFORMATION

The following information is presented in accordance with FASB ASC Topic 280, Segment Reporting. The Company is engaged in oil and gas exploration and production, saltwater disposal and pipeline transportation. PERC is engaged in the exploration and production of natural gas and oil. Pegasi Operating, Inc. (“POI”), a wholly-owned subsidiary of PERC, conducts the exploration and production operations. TR Rodessa, Inc. (“TR Rodessa”) operates a 40-mile gas pipeline and gathering system which is used to transport hydrocarbons to market to be sold. 59 Disposal, Inc. (“59 Disposal”) operates a saltwater disposal facility which disposes saltwater and flow-back waste into subsurface storage and also sells the skim oil it separates from the saltwater. The Company identified such segments based on management responsibility and the nature of their products, services, and costs. There are no major distinctions in geographical areas served as all operations are in the United States. The Company measures segment profit (loss) as income (loss) from operations. Business segment assets are those assets controlled by each reportable segment. The following table sets forth certain information about the financial information of each segment as of September 30, 2010 and December 31, 2009 and for the three and nine months ended September 30, 2010 and 2009.

	Three Months Ended September 30, 2010		Three Months Ended September 30, 2009		Nine Months Ended September 30, 2010		Nine Months Ended September 30, 2009

Business segment revenue:
Oil and gas	$	128,920	$	141,392	$	434,237	$	387,648
Condensate and skim oil		17,405		25,469		73,274		66,292
Transportation and gathering		50,898		50,443		182,519		187,103
Saltwater disposal income		11,675		26,368		62,382		122,943
Total revenues	$	208,898	$	243,672	$	752,412	$	763,986

	Three Months Ended September 30, 2010			Three Months Ended September 30, 2009			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009
Business segment profit (loss):
Oil and gas	$	(25,058	)	$	(6,677	)	$	(29,674	)	$	(278,562	)
Condensate and skim oil		17,405			25,469			73,274			66,292
Transportation and gathering		(7,836	)		(3,725	)		(50,512	)		(28,044	)
Saltwater disposal		(49,048	)		(35,595	)		(185,182	)		(131,248	)
General corporate		(390,847	)		(401,043	)		(1,230,652	)		(1,262,217	)
Loss from operations	$	(455,384	)	$	(421,571	)	$	(1,422,746	)	$	(1,642,779	)

Depreciation and depletion:
Oil and gas	$	20,626		$	25,307		$	68,334		$	80,294
Transportation and gathering		7,491			7,599			22,475			22,797
Saltwater disposal		19,821			16,996			59,464			50,465
General corporate		7,764			9,137			23,291			27,375
Total depletion and depreciation	$	55,702		$	59,039		$	173,564		$	180,931

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND 2009

	Nine Months Ended September 30, 2010		Nine Months Ended September 30, 2009
Capital expenditures:
Oil and gas	$	14,970	$	393,561
Transportation and gathering		300		-
Saltwater disposal		84,920		23,197
General corporate		2,903		2,393
Total capital expenditures	$	103,093	$	419,151

	September 30,		December 31,
		2010		2009
Business segment assets:
Oil and gas	$	20,568,808	$	20,508,595
Transportation and gathering		617,434		664,306
Saltwater disposal		330,738		294,086
General corporate		777,334		334,703
Total assets	$	22,294,315	$	21,801,690

5. COMMITMENTS AND CONTINGENCIES

Management monitors developments related to legal matters and, when appropriate, makes adjustments to record liabilities to reflect current facts and circumstances. Management has recorded a liability related to its registration rights agreement with investors that provides for the filing of a registration statement for the registration of the shares issued in the offering in December 2007, as well as the shares issuable upon exercise of related warrants. The Company failed to meet the deadline for the effectiveness of the registration statement and therefore was required to pay liquidated damages of approximately $100,000 on the first day of effectiveness failure, or July 18, 2008. An additional $100,000 penalty was required to be paid by the Company every thirty days thereafter, prorated for periods totaling less than thirty days, until the effectiveness failure was cured, up to a maximum of 18% of the aggregate purchase price, or approximately $1,800,000. The Company’s registration became effective on August 21, 2008. At September 30, 2010, management reevaluated the status of the registration statement and determined an accrual of $166,488 was sufficient to cover any potential payments for liquidated damages. The damages are reflected as liquidated damages payable of $166,488 and $142,083 in the accompanying consolidated balance sheets as of September 30, 2010 and December 31, 2009, respectively.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with the reporting requirements of FASB ASC Topic 825-10-50, Disclosures about Fair Value of Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this topic and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair values of accounts receivable, accounts payable, and other current assets and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of long-term debt approximates market value due to the use of market interest rates.

7. RESTRICTED CASH – LEASING PROGRAM

During the first quarter of 2010, the Company executed agreements with two independent oil and gas companies regarding leasing specific areas on the Cornerstone Project. The agreements include both extensions and renewals of existing leaseholds that the Company currently holds and acquisitions of new leaseholds in order to expand the Company’s acreage position. Funds received from these companies are restricted to the leasing programs and are considered released when they are spent in accordance with the agreements. Total funds of $2,738,000 were received on these programs and $2,328,131 was spent on leasing activities leaving a balance of $409,869 in restricted cash and lease program deposits at September 30, 2010.

PEGASI ENERGY RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND 2009

8. SUBSEQUENT EVENTS

In October 2010, upon the written consent of the directors and the holders of the majority of the shares issued and outstanding, the Company amended Section 4.01 of its Articles of Incorporation to authorize two classes of stock, common and preferred. Both classes of stock will have a par value at $0.001. The Company will have the authority to issue 125,000,000 shares of common stock and 5,000,000 shares of blank-check preferred stock. Previously, the Company had the authority to issue one class of common stock with 75,000,000 shares at a par value of $0.001.

Also in October 2010, the Company adopted the 2010 Stock Option Plan (the “2010 Plan”) for directors, executives and selected employees and consultants to reward them for making major contributions to the success of the Company by issuing long-term incentive awards under the 2010 Plan and thereby provide them with an interest in the growth and performance of the Company. The 2010 Plan reserves 5,000,000 shares of common stock for issuance by the Company as stock options, stock awards or restricted stock purchase offers.

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

Forward Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company should be read in conjunction with the Consolidated Financial Statements and notes related thereto included in this Quarterly Report on Form 10-Q. Important factors not currently known to management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Company Overview

We are an independent energy company engaged in the exploration and production of natural gas and oil through the development of a repeatable, low-geological risk, high-potential project in the active East Texas oil and gas region. We currently hold interests in properties located in Marion and Cass County, Texas, home to the Rodessa oil field. The field has historically been the domain of small independent operators and is not a legacy field for any major oil company.

Our business strategy, which we designated as the “Cornerstone Project”, is to identify and exploit resources in and adjacent to existing or indicated producing areas within the Rodessa field area. We intend to quickly develop and produce reserves at a low cost and will take an aggressive approach to exploiting our contiguous acreage position through utilization of “best in class” drilling, (i.e. using the latest drilling techniques available and seismic technology). We believe that we are uniquely familiar with the history and geology of the Cornerstone Project area based on our collective experience in the region as well as through our ownership of a large proprietary database which details the drilling history of the Cornerstone Project area since 1980. We believe implementing our drilling strategy and using new drilling and completion techniques will enable us to find significant gas and oil reserves in the Cornerstone Project area.

We conduct our main exploration and production operations through our wholly-owned subsidiary, POI. We conduct additional operations through two other wholly-owned subsidiaries: (i) TR Rodessa and (ii) 59 Disposal.

TR Rodessa owns an 80% undivided interest in and operates a 40-mile natural gas pipeline and gathering system which we currently use to transport our hydrocarbons to market. Excess capacity on this system is used to transport third-party hydrocarbons.

59 Disposal owns an 80% undivided interest in and operates a saltwater disposal facility which disposes saltwater and flow-back waste into subsurface storage.

We previously operated under the name Maple Mountain Explorations, Inc. (“Maple Mountain”). On December 12, 2007, Maple Mountain entered into a Share Exchange with the shareholders of PERC, a Texas corporation, pursuant to which Maple Mountain purchased from PERC’s shareholders all issued and outstanding shares of PERC’s common stock in consideration for the issuance of 17,500,000 shares of Maple Mountain’s common stock. Effective January 23, 2008, we changed our name to Pegasi Energy Resources Corporation.

Plan of Operations

We intend to continue to use our competitive strengths to advance our corporate strategy. The following are key elements of that strategy:

·	Develop the Cornerstone Project in East Texas through an aggressive lease renewal and lease acquisition program along with a drilling program. We will focus our near-term efforts on our leasing program and development drilling on existing acreage. We expect this drilling program to increase our proved reserve and cash flow profile. In early August, we drilled the Norbord #1 well to 7,000 feet and pipe was set to the bottom. Based on initial evaluations, we are encouraged. The well will require additional evaluation which should be completed by the end of November 2010. Engineering work continues to connect the well to the TR Rodessa pipeline and follow up with drilling. If the well is successful, we will set up additional development locations. If warranted, additional drilling on these locations could be started in December 2010. We have a gross working interest of 25% in the well as we have been carried for the cost of the well. We are presently building out the location to drill the Swamp Fox #1 test well which is a planned 7,000 foot Travis Peak oil test well. Depending on rig availability, the well is expected to spud prior to December 1, 2010.
·	Apply management expertise in the Cornerstone Project area and recent developments in drilling and completion technology to identify new drilling opportunities and enhance production. We plan to maximize the present value of our vertical wells by utilizing a shotgun dual or sawtooth production technique. We will also implement the latest drilling, fracturing, and completion techniques, including shotgun duals, to develop our properties as well as horizontal drilling. These horizontal wells will primarily target the Bossier formation and we anticipate these wells will yield significantly higher hydrocarbon flow rates than our vertical wells. We plan to begin our horizontal drilling programs in the first quarter of 2011.
·	Continue to lease underdeveloped acreage in the Cornerstone Project area. We are continuing our leasing program to support our present and future drilling plans with funding up to $8.7 million budgeted with our two partners. The partners pay 100% of the cost for a 50% interest. The program includes renewing existing leasehold and acquiring new leaseholds. We are using our extensive proprietary database to help optimize additional drilling locations and to acquire additional acreage. We intend to target acreage with exploitation and technology upside within the Cornerstone Project area. Most properties in the project area are held by smaller independent companies that lack the resources to exploit them fully. We intend to pursue these opportunities to selectively expand our portfolio of properties. These acreage additions will complement our existing substantial acreage position in the area and provide us with additional drilling inventory.
·	Maintain a conservative and flexible financial strategy. We intend to continue to focus on maintaining a low level of corporate overhead expense in addition to continued utilization of outsourcing, when appropriate, to maximize cash flow. We believe this internally-generated cash flow, coupled with reserve-based debt financing when appropriate, will provide the optimal capital structure to fund our future drilling activity.

In order to implement our strategy, we will first need to raise additional capital to develop our properties. We are seeking to raise additional capital. We currently do not have any contracts or commitments for funding and there are no guarantees that we will be able to raise funds on terms acceptable to us, if at all. We may also consider farm-out agreements, whereby we would lease parts of our properties to other operators for drilling purposes and we would receive payment based on the production. We anticipate the cost of a horizontal oil well will be approximately $5 million and a vertical shallow gas well to be approximately $1 million.

Our oil and gas assets are located in Cass and Marion counties in northeast Texas. As of September 30, 2010, we operated nine wells.

As of October 15, 2010, our leasehold position is approximately 25,210 gross acres and 15,849 net acres with the company having net acres of 9,280 which represents 40% to 80% working interest in the acreage. We have an ongoing leasing program whereby expiring leases are being renewed and previously unleased acreage is being leased. We began discussions with two independent oil and gas companies during the first quarter of 2010 regarding leasing specific areas on the Cornerstone Project. Agreements were finalized in the middle of February and late March 2010 and could result in up to $4,000,000 and $4,700,000, respectively, in lease acquisitions. We anticipate spending all of the funds but the complexity of the title in the area being leasing is very meticulous and slow. However, we are very pleased as to the progress of the leasing program. Both agreements are being funded and a leasing program is underway. This includes both extensions and renewals of existing leasehold that we currently hold and acquisitions of new leaseholds in order to expand our acreage position. The participating companies are paying 100% of the cost for a 50% interest in the acreage, resulting in no cost to us. We believe that this will result in follow-up drilling opportunities. We plan on drilling several vertical wells of which the first well, the Norbord #1, has been drilled and the casing set. Depending on the success of this well, additional development wells would be drilled.

In addition to the operating of the wells, we own an 80% undivided interest in approximately 40 miles of natural gas pipeline as well as an 80% undivided interest in a saltwater and drilling fluid disposal system.

If we are able to obtain funding, our main emphasis will be to explore for oil with horizontal drilling. The present discussions are based on pursuing an aggressive drilling program where we would be carried for an interest in any wells at no cost to us. In addition, any funds could be used to apply fracture treatment to the Harris #2 and Childers #2 as well as deepening the Childers #1 and Harris #1. The deepening will be to a minimum depth to complete the wells in the Cotton Valley formation and possibly deeper in order to evaluate the Cotton Valley Lime formation.

Results of Operations

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009.

Summarized Results of Operations

	2010			2009			Increase (Decrease)
Total revenues	$	208,898		$	243,672		$	(34,774	)
Total operating expenses		664,282			665,243			(961	)
Loss from operations		(455,384	)		(421,571	)		33,813
Total other income (expenses)		(172,361	)		(123,208	)		49,153
Loss before income tax expense		(627,745	)		(544,779	)		82,966
Income tax expense		-			-			-
Net loss	$	(627,745	)	$	(544,779	)	$	82,966

Revenues: Total revenues for the three months ended September 30, 2010 totaled $208,898, compared to $243,672 for the three months ended September 30, 2009. Oil and gas revenue for the three months ended September 30, 2010 was $128,920 compared to $141,392 for the three months ended September 30, 2009. The decrease of $12,472 was mainly due to decreased production on the Childers 2 and Huntington 1 wells in 2010. Saltwater disposal income for the three months ended September 30, 2010 was $11,675 compared to $26,368 for the three months ended September 30, 2009. The decrease of $14,693 was due to a decrease in drilling activity in the area requiring water disposal.

Expenses: Total operating expenses for the three months ended September 30, 2010 were $664,282, compared to $665,243 for the three months ended September 30, 2009. General and administrative costs increased $7,867 to $454,998 for the three months ended September 30, 2010 from $447,131 for the three months ended September 30, 2009, primarily due to the hiring in 2010 of an investor relations consultant. This increase was offset by decreases in lease operating expenses and saltwater disposal expenses. Lease operating expenses decreased $4,241 to $71,789 for the three months ended September 30, 2010 from $76,030 for the three months ended September 30, 2009 due to a decrease in the production from the wells. Saltwater disposal expenses for the three months ended September 30, 2010 was $33,866 compared to $38,677 for the three months ended September 30, 2009 resulting in a decrease of $4,811 due to a reduction in the drilling activity requiring water disposal.

Other Income (Expenses): Total other expenses for the three months ended September 30, 2010 were $172,361, compared to $123,208 of other expenses for the three months ended September 30, 2009. Interest expense for the three months ended September 30, 2010 was $158,401 compared to $118,521 for the three months ended September 30, 2009. The $39,880 increase was due to the addition of the accrued and unpaid interest on the Teton Note being added to the principal balance of the Teton Renewal Note on June 1, 2010. This increase in the balance of the Teton Renewal Note resulted in an increase in interest expense.

Net Loss: As a result of the above described revenues and expenses, we incurred a net loss of $627,745 for the three months ended September 30, 2010 as compared to a net loss of $544,779 for the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009.

Summarized Results of Operations

	2010			2009			Increase (Decrease)
Total revenues	$	752,412		$	763,986		$	(11,574	)
Total operating expenses		2,175,158			2,406,765			(231,607	)
Loss from operations		(1,422,746	)		(1,642,779	)		(220,033	)
Total other expenses		(466,529	)		(346,388	)		120,141
Loss before income tax expense		(1,889,275	)		(1,989,167	)		(99,892	)
Income tax expense		-			(370	)		(370	)
Net loss	$	(1,889,275	)	$	(1,989,537	)	$	(100,262	)

Revenues: Total revenues for the nine months ended September 30, 2010 totaled $752,412, compared to $763,986 for the nine months ended September 30, 2009. Oil and gas revenue for the nine months ended September 30, 2010 was $434,287 compared to $387,648 for the nine months ended September 30, 2009. The increase of $46,589 reflected the impact of increases in sales prices for natural gas of about 34% and oil of about 41%. The price increases were offset by decreases in production of natural gas of approximately 4.8% and oil of approximately 27.6%. Saltwater disposal income for the nine months ended September 30, 2010 was $62,382 compared to $122,943 for the nine months ended September 30, 2009. The decrease of $60,561 was due to a decrease in drilling activity in the area requiring water disposal.

Expenses: Total operating expenses for the nine months ended September 30, 2010 were $2,175,158, compared to $2,406,765 in the nine months ended September 30, 2009. This change is composed primarily of decreases in general and administrative expenses and in lease operating expenses.

·	Lease Operating Expense: The $59,292 decrease in lease operating expense to $223,291 for the nine months ended September 30, 2010 from $282,583 for the nine months ended September 30, 2009 is primarily due to workover costs on the Bramlett and Ralph #1 wells incurred in the first half of 2009.

General and Administrative Expense: The $158,886 decrease in general and administrative expense to $1,428,534 for the nine months ended September 30, 2010 from $1,587,420 for the nine months ended September 30, 2009 is primarily due to a decrease in legal and accounting fees of $145,358 and a decrease in regulatory filing expense of $40,027 offset by an increase in investor relations expense of $24,500. The decrease was due to continued efficiencies in the accounting work performed during the first quarter of 2010 related to the preparation of the 2009 10-K as compared to fees for accounting work in the first quarter of 2009 related to the preparation of the 2008 10-K.

Other Income (Expenses): Total other expenses for the nine months ended September 30, 2010 was $466,529, compared to $346,388 of other expenses for the nine months ended September 30, 2009. Interest expense for the nine months ended September 30, 2010 was $437,019 compared to $333,941 for the nine months ended September 30, 2009. The $103,078 increase was due to the increase in the balance of the line of credit as well as the addition of the accrued and unpaid interest on the Teton Note being added to the principal balance of the Teton Renewal Note on June 1, 2010 both of which resulted in higher interest expense.

Net Loss: As a result of the above described revenues and expenses, we incurred a net loss of $1,889,275 in the nine months ended September 30, 2010 as compared to a net loss of $1,989,537 in the nine months ended September 30, 2009.

Liquidity and Capital Resources

We ended the third quarter of 2010 with $536,641 in cash and cash equivalents, compared to $127,176 at December 31, 2009. The increase in cash and cash equivalents is related to proceeds received from notes payable during the first three quarters of 2010 as well as funds received in advance from some of our drilling partners. Additionally, we received cash proceeds as a prospect fee relating to promotion agreements and sale of working interest entered into during the second quarter of 2010. The increase was offset by purchases of lease and well equipment and oil and gas properties and using cash to cover operating expenses. In addition, our trade accounts payable have increased by $432,014 due to the drilling activity on the Norbord #1 well during the third quarter of 2010.

Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2010 and 2009:

	Nine Months Ended September 30,
	2010			2009
Total cash provided by (used in):
Operating activities	$	(560,303	)	$	(1,338,436	)
Investing activities		201,995			(419,151	)
Financing activities		767,773			1,070,096
Increase (decrease) in cash and cash equivalents	$	409,465		$	(687,491	)

Cash used in operating activities for the nine months ended September 30, 2010 totaled $560,303, compared to $1,338,436 used in operating activities for the nine months ended September 30, 2009. The decrease in cash used of $778,133 is primarily due to additional cash provided by changes in connection with operating assets and liabilities of $678,746 and a decrease in the net loss of $100,262. The net loss was $1,889,275 for the nine months ended September 30, 2010, a decrease from the net loss of $1,989,537 for the nine months ended September 30, 2009. The changes in operating assets and liabilities are primarily due to changes in accounts receivable, related parties; account payable; accounts payable, related parties; and interest payable, related party.

Cash provided by investing activities for the nine months ended September 30, 2010 was $201,995, compared to cash used of $419,151 for the nine months ended September 30, 2009. The change is due primarily to decreased drilling activities for the nine months ended September 30, 2010. We spent $393,561 on leasehold costs, lease and well equipment, and intangible drilling and completion costs in the first nine months of 2009 compared to $14,970 in the first nine months of 2010. During 2010, the participants in our drilling program paid for the intangible drilling and completion costs on the Norbord #1 well. In addition, we received $305,667 of proceeds on the sale of working interests in our new well in the first three quarters of 2010.

Cash provided by financing activities for the nine months ended September 30, 2010 totaled $767,773, compared to $1,070,096 of cash provided by financing activities for the nine months ended September 30, 2009. During the first nine months of 2010, we received proceeds of $773,000 on a related party note payable compared to proceeds of $1,075,000 for the first nine months of 2009.

Sources of Liquidity

Our main source of liquidity continues to be from funds generated by production promotion fees and financing from a related party in the form of notes payable. During the third quarter of 2010, we received promotion fees which pay for a portion or all of our cost in a proposed drilling well as well as prospect fees associated with the transactions. Any shortfall in revenue to cover costs has been covered by utilizing financing from a related party in the form of notes payable. We believe that the proceeds from production and financing available from related parties will be sufficient to finance our operations for the remainder of 2010. However, we have no additional commitments from related parties beyond those already in place. In addition, future acquisitions and future exploration, development, production and marketing activities, as well as administrative requirements (such as salaries, insurance expenses, general overhead expenses, legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.

We plan to pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We have aggressively contacted many potential investors both within the industry as well as institutional investors to secure additional financing. Additional financing would be used for drilling opportunities and additional lease funding in the near future, along with working capital purposes. We do not have any commitments or agreements financing, and we cannot assure you that additional funding will be available on terms acceptable to us, if at all.

We also entered into a credit agreement with various lenders led by Amegy Bank, N.A. in November 2007. Pursuant to the terms of the credit agreement, the aggregate commitment is $50 million, with no initial borrowing base or borrowing base reduction under the agreement. Upon satisfaction of various conditions precedent to the initial credit extension, the borrowing base will be $5 million and the initial monthly borrowing base reduction will be determined on the initial funding date. As of September 30, 2010, these conditions had not been met.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our consolidated financial condition, revenues, results of operations, liquidity or capital expenditures.

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the notes to consolidated financial statements which accompany the consolidated financial statements included in our annual report on Form 10-K filed with the SEC on March 29, 2010. These policies have been consistently applied in all material respects and address such matters as revenue recognition and depreciation methods. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the recorded amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Accounts Receivable

We perform ongoing credit evaluations of our customers’ financial condition and extend credit to virtually all of our customers. Collateral is generally not required, nor is interest charged on past due balances. Credit losses to date have not been significant and have been within management’s expectations. In the event of complete non-performance by our customers, our maximum exposure is the outstanding accounts receivable balance at the date of non-performance.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from five to thirty-nine years. Expenditures for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. Upon the sale or abandonment, the cost of the equipment and related accumulated depreciation are removed from the accounts and any gains or losses thereon are recognized in the operating results of the respective period.

Oil and Gas Properties

We use the full-cost method of accounting for our oil and gas producing activities, which are all located in Texas. Accordingly, all costs associated with the acquisition, exploration, and development of oil and gas reserves, including directly-related overhead costs, are capitalized.

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the units-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment will be added to the capitalized costs to be amortized.

In addition, the capitalized costs are subject to a “ceiling test,” which limits such costs to the aggregate of the “estimated present value,” discounted at a ten percent interest rate, of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties and less the income tax effects related to the properties.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the operating results of the respective period.

Revenue Recognition

We utilize the accrual method of accounting for natural gas and crude oil revenues, whereby revenues are recognized based on our net revenue interests in the wells. Crude oil inventories are immaterial and are not recorded.

Gas imbalances are accounted for using the entitlement method. Under this method, revenues are recognized only to the extent of our proportionate share of the gas sold. However, we have no history of significant gas imbalances.

Income Taxes

Deferred income taxes are determined using the “liability method” in accordance with FASB ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the operating results of the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required under Regulation S-K for “smaller reporting companies.”

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2010. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and chief financial officer concluded that that, as a result of the following material weaknesses in internal control over financial reporting, our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure:

We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures. Also, we do not have an independent audit committee. As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and

ii.

Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Remediation Plans

We are committed to improving our financial organization. As part of this commitment, we will look to increase our personnel resources and technical accounting expertise within the accounting function by the end of 2010 to resolve non-routine or complex accounting matters. In addition, when funds are available, which we expect to occur by the end of 2010, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel, which management estimates will cost approximately $100,000 per annum. We currently engage an outside accounting firm to assist us in the preparation of our consolidated financial statements. As necessary, we will engage consultants in the future as necessary in order to ensure proper accounting for our consolidated financial statements.

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weakness: insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements.

Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our internal accounting staff consists solely of a Chief Financial Officer, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turn over issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, consolidated financial condition or operating results.

Item 1A. Risk Factors.

Not required under Regulation S-K for “smaller reporting companies.”

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

None.

Item 3. Defaults Upon Senior Securities.

None

Item 4. (Removed and Reserved)

Item 5. Other Information.

None.

Item 6. Exhibits.

10.01

Form of Renewal Promissory Note, issued to Teton, Ltd. on May 21, 2007

10.02

Form of Amendment to Renewal Promissory Note, effective as of May 21, 2008, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd.

10.03

Form of Second Amendment to Renewal Promissory Note and Loan Modification Agreement, effective as of March 3, 2009, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd.

10.04

Form of Third Amendment to Renewal Promissory Note, effective as of May 21, 2009, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd.

10.05

Form of Fourth Amendment to Renewal Promissory Note, effective as of May 20, 2009, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd.

10.06

Form of Fifth Amendment to Renewal Promissory Note, effective as of September 21, 2009, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd.

10.07

Form of Sixth Amendment to Renewal Promissory Note, effective as of October 21, 2009, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd.

10.08

Form of Seventh Amendment to Renewal Promissory Note, effective as of February 15, 2010, by and among Pegasi Energy Resources Corporation, Pegasi Operating Inc., TR Rodessa, Inc., 59 Disposal, Inc. and Teton, Ltd.

10.09

Form of Promissory Note, issued to Teton, Ltd. on June 1, 2010

31.01

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

31.02

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

32.01

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

SIGNATURES

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

	PEGASI ENERGY RESOURCES CORPORATION
Date: November 12, 2010	By: /s/ MICHAEL NEUFELD
	Michael Neufeld
	Chief Executive Officer (Principal Executive Officer)

Date: November 12, 2010	By: /s/ RICHARD LINDERMANIS
	Richard Lindermanis
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Attached files

Pegasi Energy Resources Corporation. Reports

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