Trimerica Energy Corp - FORM 10-Q

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EX-31.1 - CERTIFICATION - Trimerica Energy Corp	teco_ex311.htm
EX-32.1 - CERTIFICATION - Trimerica Energy Corp	teco_ex321.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

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

FOR THE TRANSITION PERIOD FROM ___________ TO _____________.

Commission file number: 000-28015

TREATY ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Nevada		86-0884116
(State or other Jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

201 St. Charles Ave., Suite 2558

New Orleans, LA 70170

(Address of principal executive offices)

(504) 599-5684

(Registrant’s telephone number, including area code)

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 þ No o

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

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

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

The number of shares of the registrant’s common stock outstanding as of May 2, 2011, was 574,649,907.

TREATY ENERGY CORPORATION

FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION

Item 1 –	Financial Statements	3

Item 2 -	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	18

Item 3 -	Quantitive And Qualitative Disclosures About Market Risk	19

Item 4 –	Controls and Procedures	19

PART II – OTHER INFORMATION

Item 1 –	Legal Proceedings	19

Item 1A –	Risk Factors	20

Item 2 -	Unregistered Sales of Equity Securities	20

Item 3 –	Defaults Upon Senior Securities	20

Item 4 -	(Removed and Reserved)	20

Item 5 –	Other Information	20

Item 6 –	Exhibits	21

SIGNATURES		22

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

BALANCE SHEETS

	March 31, 2011 (Unaudited)		December 31, 2010 (Audited)

ASSETS

Cash and equivalents	$	-	$	148
Oil and gas accounts receivable		-		-
Total current assets		-		148

Oil and gas properties (unproved), net (successful efforts method of accounting)		252,424		252,424

Other property, plant and equipment, net		106,381		1,759
Prepaid expenses and other		50,000		-
TOTAL ASSETS	$	408,805	$	254,331

LIABILITIES

Accounts payable and accrued liabilities	$	373,561	$	469,775
Notes and accrued interest to related parties		378,724		481,646
Notes and accrued interest payable		537,728		534,278
Total current liabilities		1,290,013		1,485,699

TOTAL LIABILITIES	$	1,290,013	$	1,485,699

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

BALANCE SHEETS

(Continued)

	March 31, 2011 (Unaudited)			December 31, 2010 (Audited)

STOCKHOLDERS' DEFICIT

Preferred stock - par value $0.001, 50 million shares authorized, none issued or outstanding at March 31, 2011	$	-		$
Common stock – par value $0.001, 750 million shares authorized. 573,149,907 and 496,605,424 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively.		573,150			496,605
Additional paid in capital		1,250,823			527,483
Common stock payable		-			204,000
Accumulated loss - pre exploration stage		(644,829	)		(644,829	)
Accumulated loss - exploration stage		(2,060,352	)		(1,814,627	)

Total stockholders' deficit		(881,208	)		(1,231,368	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	408,805		$	254,331

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENTS OF OPERATIONS

							From Re Entry to the
	Three Months Ended March 31,						Development Stage
	2011 (Unaudited)			2010 (Unaudited)			(7/1/09) to 03/31/11

Sales of oil	$	-		$	-		$	1,570

Total revenues		-			-			1,570


Royalties		-			-			1,122
Lease operating expenses		106,715			-			582,035
Transportation costs		-			-			(354	)
Production taxes		-			-			(352	)
Impairment of oil and gas properties		-			-			411,412
General and administrative		142,548			131,589			1,314,349
Depreciation, depletion and amortization		2,346			-			2,471
Interest expense		11,403			3,123			60,499

Total expenses		263,012			134,712			2,371,182

Operating income / (loss)		(263,012	)		(134,712	)		(2,369,612	)


Gains / (losses) on dispositions of properties		-			-			291,973
Gains / (losses) on retirement of debt		17,287			-			17,287

NET LOSS	$	(247,725	)	$	(134,712	)	$	(2,060,352	)

Net loss per common shares - basic and diluted	$	-		$	-
Weighted average common shares outstanding - basic and diluted		515,356,400			496,605,424

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENT OF SHAREHOLDERS’ DEFICIT

(Unaudited)

					Additional			Common	Pre-Develop.
	Common Stock				Paid In			Stock	Stage		Develop. Stage
	Shares		Amount		Capital			Payable	Losses		Losses			Total

Balances, December 31, 2007		460,061,553	$	460,062	$	(304,208	)	$	$	-	$	(246,073	)	$	(90,219	)

Interest imputed on related party note payable						5,240									5,240
Expenses paid on behalf of the Company by a related party						169,648									169,648
Debt acquired in reverse merger						(500,000	)								(500,000	)
Net loss, year ended 12/31/08												(241,514	)		(241,514	)

Balances, December 31, 2008		460,061,553		460,062		(629,320	)			-		(487,587	)		(656,845	)

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENT OF SHAREHOLDERS’ DEFICIT

(Unaudited)

(Continued)

					Additional			Common	Pre-Develop.
	Common Stock				Paid In			Stock	Stage			Develop. Stage
	Shares		Amount		Capital			Payable	Losses			Losses			Total

Cashless exercise of options		49,148		49		(49	)									-
Cash provided by a related party						104,000										104,000
Expenses paid on behalf of the Company by a related party:
Paid in cash						61,822										61,822
Paid in stock						162,695										162,695

Interest imputed on notes payable						10,090										10,090
Acquisitions of oil and gas properties		7,000,000		7,000		168,000										175,000
Stock for services		4,000,000		4,000		48,400										52,400
Sale of stock for cash		3,000,000		3,000		36,000										39,000
Officer and director compensation		7,886,776		7,886		316,831										324,717
Retirement of debt		14,607,947		14,608		197,219										211,827
Net loss, year ended 12/31/09										(644,829	)		(557,361	)		(1,202,190	)

Balances, December 31, 2009		496,605,424		496,605		475,688				(644,829	)		(1,044,948	)		(717,484	)

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENT OF SHAREHOLDERS’ DEFICIT

(Unaudited)

(Continued)

					Additional		Common			Pre-Develop.
	Common Stock				Paid In		Stock			Stage			Develop. Stage
	Shares		Amount		Capital		Payable			Losses			Losses			Total

Expenses paid by a related party		-		-		1,155		-									1,155
Interest imputed on notes payable		-		-		7,812		-									7,812
Vesting of deferred compensation		-		-		42,828		-									42,828
Stock payable to consultant		-		-		-		204,000									204,000
Net loss, for year ended 12/31/10		-		-		-		-						(769,679	)		(769,679	)

Balances, December 31, 2010		496,605,424		496,605		527,483		204,000			(644,829	)		(1,814,627	)		(1,231,368	)

Interest imputed on notes payable						1,953		-									1,953
Purchase of equipment		8,500,000		8,500		63,750		-									72,250
Stock issued for services		31,847,874		31,848		314,384		(204,000	)								142,232
Stock issued for director and officer services		11,900,000		11,900		124,800		-									136,700
Retirement of debt		14,000,000		14,000		168,000		-									182,000
Stock issued for cash		10,296,609		10,297		50,453		-									60,750

Net loss														(245,725	)		(245,725	)
Balances, March 31, 2011		573,149,907	$	573,150	$	1,250,823	$	-		$	(644,829	)	$	(2,060,352	)	$	(881,208	)

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)

							From Re Entry to the
	Three Months Ended Mar 31,						Development Stage
	2011			2010			(7/1/09) to 3/31/11

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(245,725	)	$	(134,712	)	$	(2,060,352	)

Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
Depreciation, depletion and amortization		2,346			-			2,471
Gain on sales of oil and gas interests		-			-			(291,973	)
Gain on retirement of debt		(17,287	)		-			(17,287	)
Impairment of oil and gas assets		-			-			411,412
Amortization of discount on production note		5,313			-			26,567
Accretion of asset retirement obligation		-			-			-
Stock based compensation		42,200			18,414			666,145
Interest imputed on related-party notes		1,953			1,953			13,671

Changes in operating assets and liabilities:
Accounts payable and accrued liabilities		(24,874	)		15,820			169,772
Officer and director liabilities		30,000			79,031			458,364
Interest payable		(1,863	)		1,169			15,651
Prepaid expenses		(50,000	)		-			(50,000	)

Net cash provided by / (used in) operating activities		(257,937	)		(18,325	)		(655,559	)

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

	Three Months Ended Mar 31,					From Re Entry to the Development Stage
	2011			2010		(7/1/09) to 3/31/11
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of oil and gas properties		-			-		(235,475	)
Development of oil and gas properties		-			-		(40,101	)
Purchases of other fixed assets		(34,718	)		-		(36,477	)
Proceeds from sales of oil and gas properties		-			-		445,000
Net cash provided by / (used in) investing activities		(34,718	)		-		132,947

CASH FLOWS FROM FINANCING ACTIVITIES
Expenses paid by related parties-cash		-			1,155		131,405
Net borrowings (repayments) to related parties		231,757			17,400		171,661
Proceeds from notes payable		-					122,000
Principal payments on notes payable		-					(5,000	)
Common stock issued for cash		60,750					99,750

Net cash provided by / (used in) financing activities		292,507			18,555		519,816

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

	Three Months Ended Mar 31,					From Re Entry to the Development Stage
	2011			2010		(7/1/09) to 3/31/11
Net increase / (decrease) in cash and cash equivalents		(148	)		230		(2,796	)
Cash and cash equivalents, beginning of period		148			-		2,796
Cash and cash equivalents, end of period	$	-		$	230	$	-

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	6,000		$	-	$	6,000
Cash paid for income taxes		-			-		-
Shares issued for retirement of debt		622,732			-		834,559
Shares issued to acquire oil and gas properties		-			-		175,000
Acquisition of oil and gas properties with related party debt		19,500			-		19,500
Acquisition of other assets with stock		72,250					72,250

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

TREATY ENERGY CORPORATION

(An Exploration Stage Company)

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Information Regarding Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. We generally use words such as "believe," "may," "could," "will," "intend," "expect," "anticipate," "plan," and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described below and elsewhere in this report. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made, and our future results, levels of activity, performance or achievements may not meet these expectations. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

History

Treaty Energy Corporation, formerly known as Alternate Energy Corp., (“Treaty”, “the Company”, “we”, or “us”) was incorporated as COI Solutions, Inc. in the State of Nevada in August, 1997.

We incorporated as COI Solutions, Inc. on August 1, 1997 as a Nevada corporation. On May 22, 2003, we acquired all the assets of AEC I Inc., formerly known as Alternate Energy Corporation, and changed our name to Alternate Energy Corp. We commenced active business operations on June 1, 2003 and were a development stage company under Codification Topic No. 915 developing alternate renewable energy sources.

The Company merged with Treaty Petroleum, Inc., a Texas Corporation under a transaction commonly referred to as a reverse merger. With the change in ownership in December 2008, we embarked on a new business plan, focusing on oil and gas production.

Upon merging with Treaty Petroleum, Inc. we acquired producing properties in Crockett County, Texas. During 2009, we lost those leases due to a lack of production. We therefore re-entered to the exploratory phase on July 1, 2009.

We are an oil producing company.

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principals in the United States.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “ASC”). The ASC has become the single source of non-governmental accounting principles generally accepted in the United States (“GAAP”) recognized by the FASB in the preparation of financial statements. The ASC does not supersede the rules or regulations of the Securities and Exchange Commission (“SEC”), therefore, the rules and interpretive releases of the SEC continue to be additional sources of GAAP for the Company. The Company adopted the ASC as of September 30, 2009. The ASC does not change GAAP and did not have an effect on the Company’s financial position, results of operations or cash flows.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates underlying these consolidated financial statements include the estimated quantities of proved oil reserves used to compute depletion of oil and natural gas properties and the estimated fair value of asset retirement obligations.

All of the Company’s accounting policies are not included in this Form 10-Q. A more comprehensive set of accounting policies adopted by the Company are included on our Form 10-K as of December 31, 2010 and are herein incorporated by reference.

Fair Value Measurement

The Company has adopted guidance contained in Codification Topic No. 820 which defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. Topic 820 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. Topic 820 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company believes that the adoption of Topic 820 will not have a material effect on its statements of operations and financial condition. Topic 820 requires disclosure of assets and liabilities measured at fair value within a three-tiered hierarchy.

The following table shows the Company’s fair value instruments, measured on a recurring basis:

Level	03/31/11		12/31/10
Level 1:	$	-	$	-

Level 2:		-		-

Level 3:
Notes and accrued interest to related parties		378,724		481,646
Notes and accrued interest		537,728		534,578

Revenue Recognition

Oil revenue is recognized when persuasive evidence of an arrangement exists, our oil is delivered, the fee is fixed and determinate and collectability is reasonably assured.

Stock-Based Compensation

In December of 2004, the Financial Accounting Standards Board issued guidance now codified as Topic 718 (“Topic 18”) which applies to transactions in which an entity exchanges its equity instruments for goods or services and also applies to liabilities an entity may incur for goods or services that are based on the fair value of those equity instruments. For any unvested portion of previously issued and outstanding awards, compensation expense is required to be recorded based on the previously disclosed Topic 18 methodology and amounts. Prior periods presented are not required to be restated. The Company adopted Topic 18 at its inception and applied the standard using the modified prospective method.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2008, the FASB issued a new accounting standard relating to the hierarchy of Generally Accepted Accounting Principles. This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). This standard becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendment to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” and is not expected to have a significant impact on our consolidated financial statements.

The Company has adopted a new accounting standard issued by the FASB related to fixed assets and impairments of fixed assets (“Topic 360”). This topic requires us to review for impairment long-lived assets, such as property, plant, equipment, and acquired intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. We assess recoverability of assets to be held and used by comparing their carrying amount to the expected future undiscounted net cash flows they are expected to generate. If an asset or group of assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset or group of assets exceeds fair value. We report long-lived assets meeting the criteria to be considered as held-for-sale at the lower of their carrying amount or fair value less anticipated disposal costs.

In May 2009, the FASB issued a new accounting standard relating to subsequent events (“Topic 855”). This pronouncement establishes standards for accounting for and disclosing subsequent events (events which occur after the balance sheet date but before financial statements are issued or are available to be issued). Topic 855 requires an entity to disclose the date subsequent events were evaluated and whether that evaluation took place on the date financial statements were issued or were available to be issued. It is effective for interim and annual periods ending after June 15, 2009. The Company has adopted this standard in the current report on Form 10-Q.

The Company adopted a new accounting standard issued by the FASB related accounting for conditional asset retirement obligations. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. The Company estimates a fair value of the obligation on each well in which it owns an interest by identifying costs associated with the future dismantlement and removal of production equipment and facilities and the restoration and reclamation of a production operation’s surface to a condition similar to that existing before oil and natural gas extraction began. As of the balance sheet date, the Company has no interests in any oil wells. Accordingly, we have no conditional asset retirement obligations.

In general, the amount of an Asset Retirement Obligation (“ARO”) and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for the Company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of funds and the liability is increased each period as the retirement obligation approaches.

NOTE 4 – GOING CONCERN

The accompanying financial statements have been prepared assuming that Treaty will continue as a going concern. As shown in these financial statements, we have had continuing negative cash flows from operations and working capital deficits and have few productive assets as of March 31, 2011. These conditions raise substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Management intends to finance these deficits by making additional shareholder notes and seeking additional outside financing through either debt or sales of its common stock.

NOTE 5 – OIL AND GAS PROPERTIES

As of December 31, 2010 and March 31, 2011, we did not have any producing properties. Although we have acquired properties in Tennessee and Belize, they are not yet producing. Except for continued seismic studied in Belize, the status of these properties remains unchanged from December 31, 2010. For a more complete discussion of our recent acquisitions, see Note 4 to the financial statements as of December 31, 2010, filed on our Form 10-K on April 15, 2011.

NOTE 6 – NOTES PAYABLE

At March 31, 2011, we have the following liabilities to related and unrelated parties:

	March 31, 2011		December 31, 2010

Notes and Interest Payable
Notes and interest payable to previous officers and directors	$	168,351	$	167,178
Liability relating to Crockett County lease		111,616		106,303
Liabilities relating to our acquisitions in Tennessee		153,670		238,797
Liabilities relating to our Belize project		104,091		-
Other		-		22,000
Total notes and interest payable	$	537,728	$	534,278

Notes and Interest Payable to Related Parties
Advances from affiliates		372,424		164,722
Accrued compensation to officers and directors		6,300		316,924
Total related party notes and interest payable	$	378,724	$	481,646

Notes and Interest Payable to Previous Officers and Directors

These liabilities arose principally between January, 2007 and December, 2008 as cash contributions and accrued compensation to officers and directors of Treaty Petroleum, Inc. with whom Treaty Energy Corporation merged in December of 2008. Some additional compensation was accrued during 2009 until the Crockett County, Texas leases were lost.

On January 29, 2010, a lawsuit (Highground et al. versus Ronald L. Blackburn et al.) was filed in the 22nd Judicial District Court, Parish of St. Tammany, Louisiana naming Treaty Energy Corporation, among others, as a defendant. The lawsuit alleges certain wrongdoings by the defendants (other than Treaty) which have no bearing on our operations since inception. The lawsuit also alleges certain monies owed to some of the plaintiffs by the Company.

On March 11, 2010, we filed a Notice of Removal of the state action to the United States District Court, Eastern District of Louisiana, based upon the diversity of all the parties. The case has been moved to the United States District Court.

On April 11, 2010, the defendants filed a countersuit against the plaintiffs seeking damages against Highground, et al based on misrepresentation of the Crockett County, Texas leases. The lawsuit is in recess as of the date of this filing and should reconvene in May, 2011.

Liability relating to the Crockett County Leases

Upon assuming the rights to receive production revenues assigned to Treaty Energy Corporation from Treaty Petroleum, Inc., we agreed to service the note payable to the assignee of the working interest (Treaty Petroleum, Inc.) so long as the Company held the lease.

As is discussed more thoroughly in Note 4 to our annual report on Form 10-K as of December 31, 2010, we lost the Crockett County, Texas leases due to our failure to hold the leases by production. At the point the leases were lost, we had net note balance owed of $85,049. Although the Company has not issued a promissory note in this amount, we continue to carry this liability until we collect evidence that the original note made by Treaty Petroleum, Inc. has been retired. During the three months ended March 31, 2011, we amortized $5,313 of the discount on this note to interest expense.

When the Crockett County leases were lost, the assignor of the lease to Treaty Petroleum, Inc. sued the original shareholders of Treaty Petroleum, Inc. in Shelby County, Texas for the amount that was contractually obligated should the lease be lost. That contractual amount was $150,000. The plaintiff in this case won a judgment against the shareholders of Treaty Petroleum, Inc. and has been paid the principal due on this note, but has not released Treaty Petroleum, Inc. The plaintiff is insisting on certain interest and attorney fees before such a release will be forthcoming.

We expect the plaintiff and defendants to resolve this case in the near future and provide a release. When we receive such a release, this liability will be removed.

Advances from an Affiliate

This liability relates to amounts contributed by a shareholder to pay certain Company expenses. The shareholder expects to be reimbursed in cash or stock.

Accrued Compensation to Officers and Directors

Accrued Compensation to Officers and Directors includes compensation amounts unpaid as of March 31, 2011.

NOTE 8 – SHAREHOLDERS’ EQUITY

We are authorized to issue 750 million shares of our common stock. At December 31, 2010, we had 496,605,424 shares issued and outstanding. During the three months ended March 31, 2011, we issued the following shares:

·	On February 14, 2011, we issued 10,296,609 shares for cash and received $60,750.

·	On March 1, 2011, we issued 1 million shares to a consultant. We valued the shares at the closing price on the date of grant and recorded a charge to general and administrative expense of $8,200.

·	Also on March 1, 2011, we issued 2,250,000 shares to our previous operator in Tennessee to settle contractual amounts owed by us to him. We valued the shares at the closing price on the grant date and reduced his liability from $20,000 to $1,550.

On March 3, 2011, we issued 23,500,000 shares to our seismic consultant in Belize. 15 million of these shares were for services rendered in 2010. We reduced our stock payable to the consultant from $204,000 to zero. 8.5 million of these shares were in payment of an aircraft for use on our Belize project. These shares were valued at the closing price on the date of grant and we recorded our cost basis in the aircraft at $72,250.

·	Also on March 3, 2011, we issued 13,597,874 shares to a consultant for work performed during 2009 and 2010. We valued the shares at the closing price on the grant date, reduced the liability from $94,345 to $23,500 and recorded a loss on retirement of debt in the amount of $69,737.

·	On March 16, 2011, we issued 4 million shares to a previous director and recorded. We valued the shares at the closing price on the grant date and charged general and administrative expenses with $34,000.

On March 29, 2010, we issued 14 million shares to our previous CEO and Chairman, Randall Newton, for work performed during 2009 and 2010, and repayment of cash contributions made by him. We valued the shares at the closing price on the grant date, reduced our liability to him from $269,024 to zero, and recorded a gain on retirement of debt of $87,024.

·	On March 31, 2011, we issued 7,900,000 shares to our current CEO and Chairman, Andrew Reid in payment for services. We valued the shares at the closing price on the grant date, and reduced our liability to him from $109,000 to $6,300.

Imputed Interest

Pursuant to our notes payable to our former corporate secretary and the former operator of the Crockett County leases, the aggregate unpaid principal amount of which is $156,545, and which forms a portion of the lawsuit discussed in Note 5 to our annual report filed on Form 10-K as of December 31, 2010, we accrue simple interest at 3% per year. This resulted in an interest charge collectively of $1,671 for three months ended March 31, 2011.

Management believes that the stated interest on these notes is not equivalent to the Company’s realistic cost of capital. We therefore imputed an additional 5% interest and charged interest expense with an additional $1,953 for the three months ended March 31, 2011.

NOTE 9 – RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2011, we had the following transactions with related parties:

·	We paid $24,427 in cash to a major shareholder in repayment of cash contributions previously made.

·	We accrued $30,000 in compensation costs to our Chairman and CEO and paid him 7.9 million shares, reducing his balance from $109,000 to $6,300.

We issued 14 million shares to our previous CEO and Chairman, Randall Newton, for work performed during 2009 and 2010, and repayment of cash contributions made by him. We valued the shares at the closing price on the grant date, reduced our liability to him from $269,024 to zero, and recorded a gain on retirement of debt of $87,024.

·	We borrowed $312,506 from an entity owned by our Chairman and CEO, Andrew Reid, and repaid $80,750 in cash. At March 31, 2011, our debt to that entity is $370,723.

NOTE 10 – SUBSEQUENT EVENTS

On April 8, 2011, we acquired C&C Petroleum Management, LLC for $600,000 as follows:

·	$50,000 was escrowed on March 31, 2011.

·	10 equal monthly payments of $25,000 beginning May 25, 2011.

·	6 million shares of common stock.

·	36,000 shares of convertible preferred stock, 12,000 shares each convertible at $0.03, $0.05 and $0.10 per share.

The assets of C&C include three producing leases in Texas with all equipment.

On April 4, 2011, we purchased a George E. Failing 1500 CF Truck Mounted Drilling Rig.

In April, 2011, we issued 1.5 million shares to a consultant for services.

We have evaluated subsequent events through the date of issuance of the financial statements.

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

You should read the following discussion in conjunction with management’s discussion and analysis contained in our 2010 Annual Report on Form 10-K, as well as the financial statements and notes hereto included in this quarterly report on Form 10-Q. The following discussion contains forward-looking statements that involve risks, uncertainties, and assumptions, such as statements of our plans, objectives, expectations, and intentions. Our actual results may differ materially from those discussed in these forward-looking statements because of the risks and uncertainties inherent in future events.

Results of Operations

Three Months Ended March 31, 2011, compared with Three Months Ended March 31, 2010

We had no revenues for either the three months ended March 31, 2011 or 2010.

Our lease operating expenses were $106,715 in 2011 versus zero in 2010 entirely due to our seismic activity in Belize.

General and administrative expenses have increased from $131,589 in 2009 to $142,548 in 2010, mostly resulting in an increase in our Exchange Act compliance costs.

Our depreciation, depletion and amortization expenses for the three months ended March 31, 2011 were $2,346 as compared to zero for the same period in 2010, owing to the start of depreciation on our equipment and aircraft that we use in Belize..

Interest expense is higher during the three months ended March 31, 2011 versus the same period in 2010, due to higher debt levels.

Liquidity and Capital Resources

Our financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

Currently, we are not able to maintain our existing operations through the existing cash balances and internally generated cash flows from sales of oil production. Moreover, we have determined that our existing capital structure is not adequate to fund our planned growth.

We intend to finance our drilling, work over and acquisition program by bank debt and additional sales of common stock. There can be no assurance that we will be successful in procuring the financing we are seeking or find investors willing to purchase our common stock. Future cash flows are subject to a number of variables, including the level of production, natural gas prices and successful drilling efforts. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures.

Plan of Operation

Over the next twelve months we intend to develop the following initiatives:

Revenue Generation

We expect that the Kansas oil and gas leases, if acquired and financing is obtained, will initially produce between 135 and 150 barrels per day which will immediately add positive cash flows from operations to our negative cash flows currently existing due to our corporate costs. We expect that our aggressive drilling program will provide additional cash flows in the future.

In July, 2010, we completed the Robin Moody well #1 and Joseph Schwallie #1 wells in Tennessee. After initial flow rates that exceeded expectations, the Robin Moody #1 well declined to 1 barrel per day. We are currently evaluating whether to acidize the well to improve production. The Joseph Schwallie #1 well was acidized and is currently producing gas. We expect that the existence of the gas production is an indication that oil will be produced in the near future.

In Belize, we intend to finance the drilling of three wells by selling additional interests in our Joint Venture with Princess Petroleum Limited and through the sale of debt. We are currently undertaking geological and geophysical studies in Belize to determine the location of our first well.

There is no guarantee that we can raise the funds to accomplish our production goals or consummate our intended acquisitions, or that the expenditures on our existing leases will produce the increases in production we anticipate.

Financing

We hope to finance our work over, drilling and acquisition programs by a combination of bank financing, owner financing and cash flows from operations.

There is no guarantee that we can raise the required capital to make acquisitions, drill new wells, or repair equipment on any acquired properties, or that undertaking such repairs, acquisitions and drilling program will make us profitable or self-sustaining.

ITEM 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this item.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our principal executive officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Change In Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

The lawsuit alleges certain wrongdoings by the defendants (other than Treaty) which have no bearing on our operations since inception. The lawsuit also alleges certain monies owed to the some of the plaintiffs by the Company.

On March 11, 2010, we filed a Notice of Removal of the state action to the United States District Court, Eastern District of Louisiana, based upon the diversity of all the parties. The Complainants may challenge the removal, but as of the date of this report have not responded.

On April 11, 2010, the defendants filed a countersuit against the plaintiffs seeking damages against Highground, et al based on misrepresentation of the Crockett County, Texas leases.

The case is in recess until May, 2011.

We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances. We are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances, except as disclosed in this report.

ITEM 1A – RISK FACTORS

Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock are described under “Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, filed April 15, 2011.

This information should be considered carefully, together with other information in this report and other reports and materials we file with the Securities and Exchange Commission.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES

See Note 8 for a listing of shares issued during the three months ended March 31, 2011.

Options and Warrants

During the three months ended March 31, 2011, no options or warrants have been granted, expired or exercised.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - (REMOVED AND RESERVED)

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

Exhibit No.		Description of Exhibit

3.1		Articles of Incorporation, as filed August 1, 1997 (included as Exhibit 3.1 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).

3.2		Bylaws (included as Exhibit 3.2 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).

3.3		Articles of Amendment to the Articles of Incorporation, as filed August 23, 1997 (included as Exhibit 3.3 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).

3.4		Articles of Amendment to the Articles of Incorporation, as filed November 20, 1998 (included as Exhibit 3.4 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).

3.5		Articles of Amendment to the Articles of Incorporation, as filed May 16, 2003 (included as Exhibit 3.5 to the Form 10-SB12G filed November 10, 1999, and incorporated herein by reference).

4.1		2003 Stock Benefit Plan, dated July, 1, 2003 (included as Exhibit 4.1 to the Form S-8 filed July 23, 2003, and incorporated herein by reference).

4.2		Form of Class A Warrant (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).

4.3		Form of Class B Warrant (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).

4.4		Form of Class C Warrant (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).

4.5		Subscription Agreement between the Company and various subscribers (included as Exhibit 10.1 to the Form SB-2/A filed September 14, 2005, and incorporated herein by reference).

4.6		Subscription Agreement between the Company and various subscribers (included as Exhibit 4 to the Form 8-K filed March 15, 2005, and incorporated herein by reference).

14.1		Corporate Code of Ethics (included as Exhibit 14 to From 10-KSB filed March 16, 2004, and incorporated herein by reference).

2.1		Subsidiaries of the registrant (filed herewith).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Treaty Energy Corporation

Date: May 16, 2011	By:	/s/ Andrew V. Reid
		Andrew V. Reid
		Chief Executive Offic

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