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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 September 30, 2012

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
Smaller reporting company
 þ
(do not check if a smaller reporting company)      

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes  o No þ    
 
The number of shares of the registrant’s common stock outstanding as of November 16, 2012, was 937,034,096.
 


 
 

 
TREATY ENERGY CORPORATION
FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION   3  
           
 Item 1 –
Financial Statements  
    3  
           
Item 2 –
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations  
    22  
           
 Item 3 –
Quantitive And Qualitative Disclosures About Market Risk  
    24  
           
Item 4 –
Controls and Procedures  
    24  
           
PART II – OTHER INFORMATION      26  
           
Item 1 –  
Legal Proceedings  
    26  
           
Item 1A –  
Risk Factors  
    26  
           
Item 2 –
Unregistered Sales of Equity Securities  
    26   
           
Item 3 –  
Defaults Upon Senior Securities  
    26  
           
Item 4 –
Submission of Matters to a Vote of Security Holders  
    27  
           
Item 5 –
Other Information  
    27  
           
Item 6 –
Exhibits  
    27  
           
SIGNATURES      28  
 
 
2

 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1 – FINANCIAL STATEMENTS
 
TREATY ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
 
   
September 30, 2012
   
December 31, 2011
 
     (Unaudited)        
ASSETS
           
             
Cash and cash equivalents
  $ 14,780     $ 14,716  
Accounts & other receivables
    31,644       23,438  
Total current assets
    46,424       38,154  
                 
Oil and gas properties (successful efforts)
               
Proved producing
    1,912,795       105,494  
Unproved
    48,075       48,075  
Oilfield support equipment
    907,343       1,141,701  
Less: accumulated depreciation, depletion and amortization
    (206,741 )     (125,439 )
Net oil and gas properties and support equipment
    2,661,472       1,169,831  
                 
Property, plant and equipment, net
    911,621       494,473  
Prepaid expenses and other assets
    205,363       65,363  
Carved out interest, net
    73,313       76,005  
TOTAL ASSETS
  $ 3,898,193     $ 1,843,826  
                 
LIABILITIES
               
                 
Accounts payable and accrued liabilities
  $ 668,586     $ 717,612  
Notes and accrued interest payable
    1,493,475       829,095  
Related party payable
    49,321       -  
Purchase Option Liabilities
    25,000       25,000  
Total current liabilities
    2,236,382       1,571,707  
                 
Deferred Revenue
    509,772       545,507  
Asset retirement obligation
    223,964       130,397  
TOTAL LIABILITIES
  $ 2,970,118     $ 2,247,611  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 

TREATY ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Continued)
 
   
September 30, 2012
   
December 31, 2011
 
     (Unaudited)        
Convertible Redeemable Class A Preferred Stock (0 and 12,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively, $5 redemption value)
    -       60,000  
                 
STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
Preferred stock - par value $0.001, 50 million shares authorized, none issued or outstanding at September 30, 2012 and December 31, 2011
    -       -  
Common stock – par value $0.001, 950 million shares authorized,  893,153,954 and 746,449,069 shares issued  at September 30, 2012 and December 31, 2011, and 893,153,954 and 737,449,069 shares outstanding at September 30, 2012 and December 31, 2011, respectively
    893,153       746,449  
                 
Treasury Stock
    -       (355,500 )
Additional paid in capital
    15,997,466       8,730,631  
Common stock payable
    1,721,743       85,875  
Accumulated loss - pre-exploration stage
    (644,829 )     (644,829 )
Accumulated loss - exploration stage
    (16,793,051 )     (8,963,829 )
Accumulated other comprehensive income
    6,976       390  
                 
Total stockholders' equity (deficit) attibutable to Treaty Energy
    1,181,458       (400,813 )
                 
Non-Controlling Interest
    (253,383 )     (62,972 )
   Total Stockholder's equity (deficit)
    928,075       (463,785 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  $ 3,898,193     $ 1,843,826  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 

TREATY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  
REVENUES
                       
Oil and gas revenues
  $ 145,770     $ 102,555     $ 75,667     $ 48,693  
Total revenues
    145,770       102,555       75,667       48,693  
                                 
EXPENSES
                               
Lease operating expenses
    260,473       372,351       101,594       150,893  
Direct drilling costs
    419,198       25,634       208,721       17,394  
Land lease costs
    20,000       -       -       -  
Production taxes
    3,740       7,231       -       4,026  
General and  administrative
    5,885,492       3,656,897       4,680,631       862,787  
Depreciation, depletion and amortization
    287,048       53,817       133,732       31,616  
Accretion of asset retirement obligation
    18,339       1,574       6,102       864  
Interest expense
    136,384       139,845       41,507       13,052  
Total expenses
    7,030,674       4,257,349       5,172,287       1,080,632  
                                 
 Operating Loss
    (6,884,904 )     (4,154,794 )     (5,096,620 )     (1,031,939 )
                                 
OTHER INCOME AND EXPENSE ITEMS
                         
Gain (Loss) on retirement of debt
    (862,212 )     (1,250,464 )     (860,835 )     (179,762 )
Gain (loss) on disposition of royalty interests
    -       790,776       -       790,776  
Gain (Loss) on sale of assets
    (272,517 )     -       (265,163 )     -  
  NET LOSS
    (8,019,633 )     (4,614,482 )     (6,222,618 )     (420,925 )
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
5

 

TREATY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
 
Less: Loss attributable to Non-Controlling Interests
    190,411       -       101,781       -  
Net loss attributable to Treaty Energy Corporation
  $ (7,829,222 )   $ (4,614,482 )   $ (6,120,837 )   $ (420,925 )
Foreign Currency Translation Gain/(Loss)
    6,587       -       2,947       -  
Comprehensive Loss attributable to Treaty
    (7,822,635 )     (4,614,482 )     (6,117,890 )     (420,925 )
Add: loss attributable to Non-Controlling Interests
    (190,411 )     -       (101,781 )     -  
Total Comprehensive Loss
  $ (8,013,046 )     (4,614,482 )     (6,219,671 )     (420,925 )
                                 
Net loss per common shares - basic and diluted
  $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.00 )
Weighted average common shares outstanding - basic and diluted
    764,129,590       628,317,210       814,027,452       725,031,575  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
6

 
 
TREATY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
     
Nine Months Ended September 30,
 
     
2012
   
2011
 
     
(Unaudited)
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES            
 
Net loss
  $ (8,019,633 )   $ (4,614,482 )
 
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
               
 
Depreciation, depletion and amortization
    287,048       53,817  
 
Loss on sales of assets
    272,517       -  
 
(Gain) loss on retirement of debt
    862,212       1,250,464  
 
ORRI issued with note as inducement, expensed due to short term note
    -       25,900  
 
Gain on sale of ORRI
    -       (790,776 )
 
Amortization of discount on notes payable
    9,633       45,076  
 
Accretion of asset retirement obligation
    18,339       1,574  
 
Stock based compensation (shares issued and owed)
    4,217,770       2,736,711  
 
Interest imputed on related-party notes
    27,712       11,517  
 
Amortization of deferred revenue
    (35,735 )     -  
 
Changes in operating assets and liabilities:
               
 
   Accounts receivable
    (8,206 )     (114,171 )
 
   Accounts payable & accrued expenses
    89,144       (67,851 )
 
   Prepaid expenses & other assets
    -       (65,363 )
 
Net cash provided by / (used in) operating activities
    (2,279,199 )     (1,527,584 )
                   
                   
CASH FLOWS FROM INVESTING ACTIVITIES                
 
Acquisitions of oil and gas properties & lease equipment
    (516,793 )     (478,088 )
 
Proceeds from sale of ORRI
    -       515,000  
 
Purchases of fixed assets
    (498,197 )     -  
 
Proceeds from sales of oil and gas interests
    60,000       -  
 
Net cash provided by / (used in) investing activities
    (954,990 )     36,912  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
7

 

TREATY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
             
CASH FLOWS FROM FINANCING ACTIVITIES
           
Advances from related parties, net
    1,833,625       1,011,362  
Proceeds from notes payable
    908,000       353,000  
Principal payments on notes payable
    (506,469 )     (466,062 )
Bank overdraft
    (1,982 )     2,205  
Common stock issued for cash
    531,750       373,750  
Proceeds from sale of Treasury Stock
    -       225,000  
Common stock payable for cash
    462,743       -  
Net cash provided by / (used in) financing activities
    3,227,667       1,499,255  
                 
Net increase / (decrease) in cash and cash equivalents
    (6,522 )     8,583  
Foreign Currency translation gain/loss
    6,586       -  
Cash and cash equivalents, beginning of period
    14,716       148  
Cash and cash equivalents, end of period
  $ 14,780     $ 8,731  
                 
                 
SUPPLEMENTAL CASH FLOW INFORMATION
               
Purchase of treasury stock for increase  in related party expense
  $ -     $ 790,000  
Cost of treasury shares in excess of cash received for resale
    -       214,500  
Shares issued for retirement of debt
    1,042,801       2,153,014  
ORRI issued to relieve debt
    -       176,351  
Preferred and common shares issued to acquire oil and gas properties and fixed assets
    1,228,414       265,100  
Acquisition of oil & gas properties with debt
    328,012       1,296,017  
Preferred shares converted to common shares
    60,000       120,000  
Note relieved in exchange for transfer of assets
    -       69,011  
Assumption of asset retirement obligation with acquisition of oil and gas properties
    76,707       35,548  
Shares issued to relieve stock payable
    -       204,000  
Shares issued to shareholder to reimburse issuances on behalf of the company
    -       26,809  
Shares issued by related party on behalf of company for potential acquisition
    140,000       -  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
8

 

TREATY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Related party debt donated to Additional Paid in Capital
    971,504       397,671  
Asset retirement obligation assumed with acquisition
    95,578       -  
Debt discount due to sale of ORRI attached to note payable
    137,620       -  

The accompanying notes are an integral part of these consolidated financial statements
 
 
9

 
 
TREATY ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED 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.
 
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Treaty Energy Drilling, C&C Petroleum Management, LLC, and Treaty Belize Energy, Ltd., in which the Company holds a 76% interest.  All significant intercompany transactions have been eliminated.

The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of financial information for the interim periods presented.  These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current period presentation. There was no material effect to the consolidated financial statements as result of these reclassifications.
 
 
10

 

Use of Estimates
 
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 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, 2011 and are herein incorporated by reference.
 
Revenue Recognition
 
The Company recognizes oil, gas and natural gas condensate revenue in the period of delivery. Settlement on sales occurs anywhere from two weeks to two months after the delivery date. The Company recognizes revenue when an arrangement exists, the product has been delivered, the sales price is fixed or determinable, and collectability is reasonably assured.
 
The Company recognizes drilling revenue in the period services are rendered.  The Company recognizes revenue when a drilling engagement exists, the service has been rendered, the contract fee is fixed or determinable, and collectability is reasonably assured.
 
Stock-Based Compensation
 
In December of 2004, the Financial Accounting Standards Board (FASB) 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.
 
Class A Convertible Preferred shares
 
During the quarter ended June 30, 2011 the Company issued 36,000 shares of Class A Convertible Preferred shares. These shares have a stated value of $5 per share. The preferred shares are convertible into common stock at varying rates for each third (12,000 shares) of the preferred stock issued. The first tranche is convertible according to the stated value of the preferred shares divided by $0.03, the second tranche at $0.05, and the final tranche at $0.10. These preferred shares are also to be repaid to the holder in the event that the Company’s share price does not exceed the conversion value during the 24 months from the issuance date. The preferred shares are redeemable at their stated value of $5 per share on April 8, 2013 if this event occurs.

Based on these shares being conditionally redeemable under circumstances that are not within the control of the Company, these shares were accounted for outside of permanent equity and liabilities consistent with the applicable literature on conditionally redeemable preferred stock. The shares will be re-classed to permanent equity upon conversion to common stock or to liabilities if redemption becomes certain to occur.  As of September 30, 2012 and December 31, 2011, 0 and 12,000 shares convertible at $0.10 and valued at $ 0 and  $60,000, respectively were outstanding.
 
Accounting for Asset Retirement Obligations
 
The Company accounts for conditional asset retirement obligations in accordance with FASB ASC 410-20.  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.

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.  See Note 11 for a discussion of our estimated Asset Retirement Obligation.
 
 
11

 
 
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
 
In October 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations. 
 
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations. 
 
In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations. 
 
In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented.  The adoption of ASU 2011-12 is not expected to have a material impact on our financial position or results of operations.
 
 In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”).  This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS.  The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.
 
 
12

 
 
NOTE 4 – GOING CONCERN
 
The accompanying consolidated financial statements have been prepared assuming that Treaty will continue as a going concern. As shown in these consolidated financial statements, we have had continuing negative cash flows from operations and a working capital deficit as of September 30, 2012.  These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated 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

On August 15, 2012, the Company purchased three leases from 3K Oil Trust increasing the Company’s holdings by 357 acres.  The purchase was made with a payment of $400,000 and the obligation to issue 30,000,000 shares of the Company’s common stock.  Shown at September 30, 2012, in Common Stock Payable for $1,200,000, the shares were issued on October 9, 2012.

On September 21, 2012, the Company purchased the Converse lease for $379,832, which included cash payments of $51,820 and a mortgage obligation of $328,012.

Our geographical proved and unproved properties are as follows:

 
 
09/30/12
   
12/31/11
 
Oilfield Support Equipment
  $ 907,343     $ 1,141,701  
Less: accumulated depreciation
    (143,007 )     (107,353 )
Total
    764,336       1,034,348  
Proved developed producing:
               
Texas
  $ 1,912,795     $ 105,494  
Less: accumulated depletion
    (63,734 )     (18,086 )
Total
    1,849,061       87,408  
                 
Unproved:
               
Belize
    48,075       48,075  
Total
  $ 48,075     $ 48,075  

Production of Oil from all fields

We recorded depletion expense of $45,647 and $914 for the nine months ended September 30, 2012 and 2011 based on total production of approximately 2,948 and 755.4 barrels for those periods.

For the three and nine months  ended September 30, 2012, we shipped 1,496.33 and 2,212.65  barrels, and reflect a $30,096  net  receivable (after  royalty and production tax reductions) for shipments made prior to September 30, 2012.
 
 
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Carved Out Production Payment

As noted in the 10-K filed for the year ended December 31, 2011, we entered into an agreement with an investor to sell a 5% permanent royalty and a 15% temporary royalty to be paid until production reaches 200 barrels per day for $600,000.  The interests for both the permanent and temporary royalties relate to all current and future Texas leases.  Once total Texas production exceeds 200 barrels per day, the temporary 15% royalties will revert to Treaty Energy Corporation.

In recording the temporary portion of the royalties sold, an advance on a production payment liability was established.  Since the amount of proceeds to be paid out in the future is not readily determinable and the Company is not responsible for any shortfall in payment related to future production, the temporary 15% is treated as a “Carved-Out Production Payment Payable in Product” consistent with the guidance in ASC 932-10.  Moreover, since the payout amounts are uncertain, no allocation of the proceeds between the permanent 5% and the temporary 15% Overriding Royalty was made, and therefore, no gain or loss was recorded on the transaction.

Consistent with the aforementioned guidance, the cash received related to the 15% carved-out production interest is treated as deferred revenue and amortized with production and payment to the holder.  The proportional amount of carrying value of oil and gas assets will be amortized with production to match the costs to the production periods.

Amortization was based on the independent reserve report and is subject to future changes in estimates.

For the three and nine months ended September 30, 2012 and September 30, 2011, the amortization of the Carved Out Production payment was $ 495 and $ -0- and  $2,692 and $ -0-,  respectively. The carrying value of the carved out interest was $53,169 and $76,005 as of September 30, 2012 and December 31, 2011, respectively.

For the three and nine months ended September 30, 2012 and September 30, 2011, the amortization of the Deferred Revenue was $4,930 and $ -0-, and $35,758  and $ -0-,  respectively. The carrying value of the related deferred revenue was $509,772 and $545,507 as of September 30, 2012 and December 31, 2011, respectively.
 
Oil and Gas Dispositions
 
On September 28, 2012, the Company sold its interest in the Long, Henderson and Barnes leases for $60,000.  The carrying value of the assets at the time of the sale was $345,513, including impairment charged against the acquisition at December 31, 2011.  The sale also relieved the Asset Retirement Obligation associated with these leases by $20,350.  The Company has recognized a loss on the sale of the leases of $265,163.

For the nine months ended September 30, 2012 and September 30, 2011, the Company had realized production revenues of $9,423 and $-0-, from these leases.  Expenses related to the operation of these leases was not segregated from those of our entire lease and drilling operations and therefore the net losses associated with these discontinued operations cannot be fully and accurately disclosed.

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

Other property, plant and equipment consist principally of drilling rigs, and office furniture and equipment.  Historical cost and accumulated depreciation are as follows:

   
09/30/12
   
12/31/11
 
             
 Drilling rigs and related equipment
  $ 839,696     $ 467,656  
 Office equipment
    5,165       3,958  
 Furniture and fixtures
    1,049       1,000  
 Vehicles
    200,435       42,520  
 Equipment
    25,043       32,474  
 Total property, plant and equipment - at cost
    1,071,388       547,608  
 Less: accumulated depreciation
    (159,767 )     (53,135 )
 Net property, plant and equipment - other
  $ 911,621     $ 494,473  
 
 
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Assets other than drilling equipment and vehicles generally have estimated useful lives of three years.  Estimated useful lives of drilling equipment and vehicles is five years. Depreciation expense for the nine months ended September 30, 2012 and 2011 was $106,632 and $51,257,  respectively.

NOTE 7 – NOTES PAYABLE

As of September 30, 2012 and December 31, 2011, we had notes and accrued interest payable totaling  $1,542,796 and $829,095, respectively.

This consisted of the following:
 
Notes and Interest Payable to Previous Officers and Directors (Principal of S -0- and  $156,545 and Accrued Interest of $-0- and $17,644 as of September 30, 2012 and December 31, 2011, respectively)
 
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.

This note is subject to following legal actions:

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.

In April of 2010, some of the plaintiffs in this lawsuit filed for protection under federal bankruptcy laws.  This caused the action to be moved to the federal bankruptcy courts where it remains as of the filing of this report.

During the quarter ended June 30, 2012, the court indicated that the Company will have a liability, though a decision on the level of liability, including interest determinations will not be determined until subsequent to September 30, 2012, while settlement conferences continue.  The Company has paid funds greater than the principal and interest owed at September 30, 2012, which eliminates the liabilities carried on the books.
 
Promissory Note Issued for the Acquisition of the Great 8 lease (principal of $211,494 and $354,219  as of September 30, 2012 and  December 31, 2011, respectively, and accrued interest of $3,795 and $146 as of September 30, 2012 and December 31, 2011, respectively)
 
On May 31, 2011, we issued a promissory note in the amount of $692,539 for the Great 8 leases in Texas, the payment terms of which are: monthly payments including interest and principal with the final payment due on June 1, 2012. This note accrues interest at 5%.  At September 30, 2012, the Company was behind four installments on its payment obligations with this note and could be subject to foreclosure on the property due to default.

Promissory Note Issued for Cash Deposit (principal of $ 120,239 and $150,000  as of September 30, 2012 and December 31, 2011, respectively, and accrued interest of $2,268 and $2,170 as of September 30, 2012 and December 31, 2011, respectively)
 
On November 14, 2011, we issued a promissory note in the amount of $150,000 in return for a cash advance. Stated interest on the loan is at 12% with quarterly payments starting September 30, 2012.  As of September 30, 2012, one quarterly payment had been made.  Principal on the note is to be paid in four annual installments commencing one year from the date of the note.
 
 
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Promissory Note Issued for Cash Deposit (principal of $ 50,000 and $-0- as of September 30, 2012 and  December 31, 2011, respectively, and accrued interest of $ 15,000 and $-0- as of September 30, 2012 and December 31, 2011, respectively)
On January 13, 2012, we issued a promissory note in the amount of $50,000 in return for a cash advance.  Payments are interest only at 5% per month for one year at which time the principal amount is due and payable.

Promissory Note Issued for Cash Deposit (principal of $ 100,000 and $-0-  as of September 30, 2012 and  December 31, 2011, respectively, and accrued interest of $ 40,000 and $-0- as of September 30, 2012 and December 31, 2011, respectively)
 
On January 30, 2012, we issued a promissory note in the amount of $100,000 in return for a cash advance.  Payments are interest only at 5% per month for one year at which time the principal amount is due and payable.  This note is collateralized with 10,000,000 common shares of the Company. In the event the Company defaults on the note these shares would be owed to the lender. The agreement requires that the Company provide additional collateral if the fair value of the shares decreases below $200,000 while the note is outstanding. As of September 30, 2012 the value of the collateral exceeded $200,000.
 
Promissory Note Issued for Cash Deposit (principal of $746,071 and $-0- as of September 30, 2012 and  December 31, 2011, respectively, and discount of $131,970 and $-0- as of September 30, 2012 and December 31, 2011, respectively)
On August 12, 2012, we issued a promissory note in the amount of $750,000 in return for a cash advance.  Payments are structured to be paid at a rate of 5% of royalties earned on three of the East Texas leases, plus one-half (1/2) of the net income derived from those wells until the note is paid in full.  The note specifies that repayment must be completed within 24 months.

There is no stated interest rate on the note, however, the Company has assigned a 7% royalty interest to the lender that will continue after the note is paid in full.  The Company has recognized the royalty interest as a discount on the note for $137,620 and is amortizing it over a 24 month period.  Amortization of $5,650 was recognized for the three months ended September 30, 2012, and the remaining discount, as of that date, was $131,970.

Promissory Note Issued for Lease purchase (principal of $328,012 and $-0-  as of September 30, 2012 and  December 31, 2011, respectively, and accrued interest of $566 and $-0- as of September 30, 2012 and December 31, 2011, respectively)
On September 21, 2012, the Company purchased the Converse lease and issued a promissory note in the amount of $328,012.  The note requires two (2) $20,000 payments in October, 2012, and $20,000 per month thereafter.  Interest accrues at a rate of 7%.

Demand Note Issued for a cash advance (principal of $8,000 and $-0- as of September 30, 2012 and December 31, 2011, respectively, and accrued interest of $4 and $-0- as of September 30, 2012 and December 31, 2011, respectively)
On September 28, 2012, we issued a demand note for a cash advance of $8,000.  The note bears an interest rate of 6%.

NOTE 8 – SHAREHOLDERS’ EQUITY

We are authorized to issue 950 million shares of our common stock.  At September 30, 2012, the Company had 893,153,954 shares issued and outstanding.  At December 31, 2011, we had 746,449,069 shares issued and 737,449,069 outstanding.

  
On June 7, 2012, the Company issued 177,143 shares of common stock to a related party, to relieve $5,000 of debt.  The fair value of the shares was $6,377 resulting in a loss of $1,377.
  
On August 3, 2012, the Company issued 15,872,936 shares of common stock valued at $427,500 for cash payments from unrelated investors.
  
Also on August 3, 2012, the Company issued 4,592,986 shares of common stock valued at $234,242, to a related party controlled by our Chairman, Andrew Reid, to relieve debt to that company, resulting in a loss of $107,967.
  
Also on August 3, 2012, the Company issued 1,000,000 shares of common stock valued at $43,000, for services rendered to the Company by consultants.
  
Also on August 3, 2012, the Company issued 557,143 shares of common stock valued at $28,414 for the purchase of equipment.
 
 
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Also on August 3, 2012, the Company issued 1,962,490 shares of common stock valued at $100,084, to pay an outstanding balance to one of our legal consultants.
  
On August 8, 2012, the Company issued 22,185,893 shares of common stock valued at $1,082,672 to a principal in a related company controlled by our Chairman and Chief Executive Officer, Andrew Reid as recognition for his efforts in providing shares for fund raising on behalf of  the Company and for unpaid and unreimbursed fees and expenses.
  
On August 9, 2012, the Company issued 7,616,533 shares of common stock valued at 373,210 to our Chairman and Chief Executive Officer, Andrew Reid as recognition for his efforts in providing shares for fund raising on behalf of  the Company and for unpaid and unreimbursed fees and expenses.
  
On August 20, 2012, the Company issued 3,943,750 shares of common stock valued at $104,250 for cash payments from unrelated investors.
  
Also on August 20, 2012, the Company issued 28,506,812 shares of common stock valued at $1,331,268, to a related party controlled by our Chairman, Andrew Reid, to relieve debt to that company, resulting in a loss of $752,868.
  
 Also on August 20, 2012, the Company issued 8,347,188 shares of common stock valued at $389,814, for services rendered to the Company by consultants.
  
On August 27, 2012, the Company issued 7,500,000 shares of common stock valued at $345,000, to the Company’s new Chief Financial Officer, George Warren, in recognition of his efforts in raising capital for the company.
  
On August 29, 2012, the Company issued 18,662,011 shares of common stock valued at $839,791, to consultants and others who had provided services to the company.
  
On September 5, 2012, the Company issued 600,000 shares of common stock, valued at $60,000 for the conversion of preferred stock.  The conversion was consistent with the original issuance agreement, therefore no gain or loss was recognized.
  
On September 6, 2012, the Company issued 20,180,000 shares of common stock valued at $864,200, to consultants and others who had provided services to the company.
  
On September 17, 2012, the Company issued 5,000,000 shares of common stock valued at $180,000, to consultants and others who had provided services to the company.

Stock Payable
 
  
On May 20, 2011 the Company entered into a note agreement for $100,000 that required payment of 1,000,000 shares as an inducement to the lender. Due to the short term nature of the note the full value of the shares of $39,000 was expensed and recorded to stock payable with the agreement. These shares remained unissued as of September 30, 2012, and are recorded within stock payable as of September 30, 2012.
  
On May 20, 2011, the Company agreed to issue 1,500,000 shares for $20,000 of cash proceeds received. These shares remained unissued as of September 30, 2012, and are recorded within stock payable as of September 30, 2012.
  
On July 1, 2011 we contracted with a broker to purchase and sell shares of our common stock. As of September 30, 2012, $26,875 had been received for 1,343,750 shares subscribed to but not yet issued by the Company.  The agreement has now been abandoned and the stock payable was terminated with a related party agreeing to pay the $26,875 back to the broker.
  
On June 8, 2012, an unrelated investor advanced the Company  $26,250 for 1,500,000 common shares to be issued.  These shares were issued with the August 3, 2012, issuance of shares described above.
  
During the three months ended September 30, 2012, the Company received $462,743 from various unrelated investors for which stock had not been issued as of this report date.
  
On August 15, 2012, the Company purchased three leases from 3K Oil Trust.  Under the terms of that agreement, the Company is to issue 30,000,000 shares of common stock.  These shares were issued on October 9, 2012, subsequent to the report date.  The value of the shares is reflected in the Stock Payable at  $1,200,000.
 
 
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Treasury Stock

On July 1, 2011, we purchased  20,000,000 shares of our stock from a related company also controlled by our Chairman and Chief Executive Officer, Andrew Reid.  The shares were valued at $790,000, the amount the Company agreed to re-pay with an outstanding liability. This amount was equal to the fair value of the shares acquired on the acquisition date.

Also, on July 1, 2011, we issued 11,000,000 of those shares and reduced the Treasury Stock balance by $434,500.   Losses on the sale of Treasury Stock are not reflected on the Income Statement, therefore the difference between cost and the proceeds  received was charged to Additional Paid in Capital.

On June 1, 2012, The related company also controlled by our  Chairman and Chief Executive Officer, Andrew Reid agreed to repurchase the  9,000,000 shares remaining in Treasury Stock at the market value  that day yielding a repurchase  price of $360,000 for the  $355,500 of Treasury Stock.  The gain of $4,500 is not recognized as the transaction is between related parties and was credited to Additional Paid in Capital.

As of September 30, 2012, the Company has no Treasury Stock.

Imputed Interest

Interest was imputed on the daily outstanding balance owed to a related party controlled by our Chairman, Andrew Reid.  Imputed interest for the three and nine months ended September 30, 2012 was $8,121 and $21,853, respectively.

NOTE 9 – PENDING LITIGATION

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 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.

Several of the defendants in the lawsuit filed for bankruptcy protection.  On April 30, 2010, the case was moved to the US Bankruptcy Court for the Eastern District of Louisiana, Section B.

During the quarter ended June 30, 2012, the court indicated that the Company will have a liability, though a decision on the level of liability, including interest determinations will not be determined until subsequent to September 30, 2012, while settlement conferences continue.  The Company has paid funds greater than the principal and interest owed at September 30, 2012, which eliminates the liabilities carried on the books.
 
 
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NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at September 30, 2012 and December 31, 2011 consist of the following:

   
09/30/12
   
12/31/11
 
                 
Trade accounts payable
  $ 361,957     $ 425,903  
Accrued expenses – related party
    -          
Accrued expenses
    54,849          
Royalties payable
    18,302          
Liabilities associated with our reverse merger in December, 2008
    200,380       200,380   
Bank overdraft
    -       1,982  
All-Secure payable
    33,098       89,347  
Total
  $ 668,586     $ 717,612  

NOTE 11 – ASSET RETIREMENT OBLIGATION

A reconciliation of the aggregate carrying amount of asset retirement obligations is as follows:

   
09/30/12
   
12/31/11
 
Beginning Balance
  $ 130,397     $ 128,367  
Increase due to purchased leases
    95,578        -0-  
Decrease due to property disposed of
    (20,350 )     -0-  
Accretion to balance sheet date
    18,339       2,030  
Asset retirement obligation at balance sheet date
  $ 223,964     $ 130,397  

The Company recorded an accretion expense of $6,102 and $864 for the three months ended September 30, 2012 and September 30, 2011, respectively and $18,339 and $1,574 for the nine months ended September 30, 2012 and September 30, 2011, respectively.
 
 
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NOTE 12 – RELATED PARTY TRANSACTIONS
 
During the nine months ended September 30, 2012, we had the following transactions with related parties:
 
  
We accrued $90,000 and $270,000 of compensation costs for the three and nine months ended September 30, 2012 to our Chairman and CEO and two other related consultants.  During the three months ended March 31, 2012, $90,000 was forgiven by these parties and relieved to Additional Paid in Capital.   During the three months ended September 30, 2012, stock was issued to each of the parties to pay all of the unpaid accrued payments, as well as, prepaying fees of $90,000 through December 31, 2012.
 
  
September 30, 2012, we borrowed a net amount of $1,819,625 for the nine months ended September 30, 2012, from an entity owned by our Chairman and CEO, Andrew Reid.  During the nine months ended September 30, 2012, $881,504 was forgiven by this party and relieved to Additional Paid in Capital.  During the three months ended September 30, 2012, the Company issued shares to the principals of the related party, reducing the liability by $709,675.  Amounts owed as of September 30, 2012 and December 31, 2011 were $49,321 and $0, respectively.
 
  
An entity owned by our Chairman and CEO, Andrew Reid, paid 4,000,000 shares they held in our common stock to an acquisition target as a deposit for a potential acquisition. The shares were valued on the date they were issued at $140,000 and recorded as an addition to other assets and additional paid in capital as the entity contributed the shares and is not seeking repayment. The acquisition had not closed as of September 30, 2012 and relates to a Belize target with undrilled and unproved oil and gas leases. If the acquisition is closed the Company will be obligated to pay $4,500 monthly for 3 years.
 
  
The entity owned by our Chairman and CEO, Andrew Reid, reacquired stock they had sold back to the Company during 2011.  The Company reacquired the 9,000,000 shares previously held by the Company as treasury stock in lieu of relief of debt of $333,125 and assumption of a stock payable owed valued at $26,875. The fair value of the shares issued was equal to $360,000 as of the date of grant. As a result of this transaction, treasury stock was credited for $355,500 (cost basis of treasury shares issued), additional paid in capital was credited for $4,500 (to value shares at fair market value), related party debt was debited for $333,125, and stock payable was debited for $26,875.
 
  
On August 8, 2012, the Company issued 22,185,893 shares of common stock to a principal in a related company controlled by our Chairman and Chief Executive Officer, Andrew Reid as recognition for his efforts in providing shares for fund raising on behalf of  the Company and for unpaid and unreimbursed fees and expenses.
  
On August 9, 2012, the Company issued 7,616,533 shares of common stock to our Chairman and Chief Executive Officer, Andrew Reid as recognition for his efforts in providing shares for fund raising on behalf of  the Company and for unpaid and unreimbursed fees and expenses.
  
On August 24, 2012, the Company received a cash payment of $14,000 for the purchase of Company shares of common stock.  Prior to September 30, 2012, our Chairman, Andrew Reid, issued shares to the investor from his personal holdings.  The Company has included the $14,000 in the Related Party payable at September 30, 2012.
 
NOTE 13 – SALE OF NON-CONTROLLING INTEREST IN SUBSIDIARY

On September 12, 2011, we sold 400 shares (representing a 4% interest) of our subsidiary, Belize Energy, Ltd. for $100,000 in cash The shares have an anti-dilution clause and the Company received an option to purchase 600 additional shares at varying prices depending on their option exercise dates. If the option is exercised within 60 days, the price is $240,000, from 61 to 120 days: $340,000, from 121 to 180: $500,000. Exercise of all of these options would results in additional sales of 1,800 shares. After 180 days these options expire. The anti-dilution clause entails additional shares being issued to the recipient in order for the recipient to maintain their 4% interest. No issuances were owed related to this clause and all such amounts owed will be accounted for prospectively in the event a diluting event may occur.

The agreement also specifies that the lender received an option to purchase up to 15% of a company in Belize which we have not acquired as of September 30, 2012. We received an additional $25,000 in cash for this option.
 
 
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We accounted for the sale of a portion of the subsidiary according to Accounting Codification Standards 810 – Consolidations (“ASC 810”). ASC 810 requires that we record such changes as equity transactions, recording no gain or loss on such a sale.

We allocated the carrying value of our Belize subsidiary (or $2,204) and reclassified to Non Controlling Interest in the equity section of our balance sheet.

Based on the above, we recorded $125,000 increase to cash and a $2,204 debit to non-controlling interests. The offsetting credits for the transaction were $25,000 liability for the deposit, and a credit to additional paid in capital of $102,204. As of September 30, 2012 we owned 76% of our Belize subsidiary.
 
NOTE 14 – SUBSEQUENT EVENTS

Subsequent to September 30, 2012, we

  
Paid an additional $40,000 on our promissory note on the promissory note from Wiljam.
  
Paid an additional $13,000 on our payable to All Secure Holdings.
  
Have set aside $342,000 in escrow against the legal judgment pending with former officers. The balance expected to be paid is already fully accrued at September 30, 2012.
  
Have issued 30,000,000 shares of common stock to conclude our obligations from the purchase of  the 3K Oil Trust.
  
Have issued 13,880,142 shares of common stock for services rendered by consultants.

We have evaluated subsequent events through the date of issuance of the financial statements.
 
 
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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 2011 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
 
Nine Months Ended September 30, 2012, compared with Nine Months Ended September 30, 2011
 
We had $145,770 in revenues for the nine months ended September 30, 2012 from our Texas acquisitions versus $161,560   for the same period in 2011. Oil sales during the nine months in 2012 were higher, however, revenues for that period in 2011 included third party drilling service revenues, a service no longer offered by the Company.
 
Our lease operating expenses were $260,473 in 2012 versus $372,351 in 2011, the decrease due to increased management oversight of expenses resulting from our Texas and Belize acquisitions, and the shift of more expenditures for drilling operations
 
Our drilling expenses have increased from $25,634for the nine months ended September 30, 2011, to $419,198 for the same period in 2012, as drilling activity is significantly increasing at both our Texas and Belize operations.

General and administrative expenses have increased from $3,656,897 for the nine months ended September 30, 2011 to $5,538,925 in 2012.  The increase is primarily due to increased consulting fees, most of which were paid with common stock.

Our depreciation, depletion and amortization expenses for the nine months ended September 30, 2012 were $287,048 as compared to $53,817 for the same period in 2011, owing to the start of depreciation on our equipment  that we use in Belize and from our unit of production depletion in Texas.

Interest expense is lower during the nine months ended September 30, 2012 versus the same period in 2011, due to more favorable borrowing arrangements.
 
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 able to maintain our existing operations through funding agreements with related party companies.  The existing cash balances and internally generated cash flows are from sales of oil production.  We have determined that our existing capital structure is adequate to fund our planned growth.

We intend to finance our drilling, work over and acquisition program by related party loans and private debt offerings.  There can be no assurance that we will be successful in procuring the financing we are seeking.  Future cash flows are subject to a number of variables, including the level of production, oil and gas prices and successful drilling efforts.  There can be no assurance that operations and other capital recourses will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures.
 
 
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Plan of Operation
 
Over the next twelve months we intend to develop the following initiatives:
 
Revenue Generation
 
In Texas, we have been reworking the wells acquired during 2011, allowing additional sources of production.  This process will continue through 2012 and into 2013, gradually increasing our daily oil output.   During the quarter Treaty sold some of its non-producing properties in order to focus on its core leases.  The work-over projects have been ongoing on our existing West Texas Leases.  At the beginning of the third quarter daily production had fallen to substantially due in part to regulatory and compliance issues.   Once all issues had been resolved with the Leases we were able to focus on bringing production back on to prior levels and sustained growth from that point.  Today the leases in West Texas are currently producing 26 barrels per day and expected to steadily increase for the remainder of the year.
 
Current leases under production include the West Texas: Willingham, Mable Kennard, Hobbs, Compton, McComus, Loven, Shotwell, Wooldridge and Brown properties.

Drilling

West Texas

Treaty currently has hundreds of proven, undeveloped acreage in which we can drill on.  Depth of the new wells will range from a shallow 550 feet to 2600 feet.  Some wells will reach deeper than 4500 feet.

On November 14, 2011 Treaty acquired the Mark H. & Eula E. Wooldridge Leases, totaling 260 acres.  This Lease has 3 wells currently producing 5 barrels of oil per day.  Treaty has secured funding in the amount of $700,000 in order to infield drill twelve new wells to 550 feet.  Drilling permits for the first 2 wells were approved on March 9, 2012.  After months of delays we are expected to begin the drilling the week of November 19,  2012 with an expected completion rate of 5-7 days per well.  Once the first two wells are placed into production the remaining financing will be available and we will begin the process of permitting and drilling to remaining 10 wells in the project.  We expect this project to be completed by the end of the 4th Quarter and add an estimated 100 BOPD in production.

Treaty began the first of a 9 well drilling project in the third quarter.  The first well was drilled to 1900 feet on the McComas lease.  Delays on the original cement job, due to terrain issues at the surface, were corrected and the well has now been cemented and is expected to be brought into production by late November. Completion operations have begun on the McComas A #20 well in late October, bond logs on the upper section of the Flippin Lime zone were run and we perforated the pay zone intervals in the Flippen Lime.  Similar wells in this formation have shown initial daily production of between 15 and 45 barrels per day.  We are expecting initial production from this well in mid-November, 2012.  We are in the process of permitting the next two locations and will commence drilling operations once all permits have been issued from the Texas State Railroad commission.

East Texas

After our meeting this week with our technical consultants,  it seems that the probability of large oil production is unlikely from these 3 laterals. We are estimating less than 20 barrels a day including the Lakeshore production. The gas production should come from all 3 legs and should be between 500,000 MCF ($1500.00) to 1,000,000 MCF ($3,000.00) a day.   We will have accurate estimates of future production shortly.   Although we do not consider this a great success, it is not a failure either. We plan to set this production on line and move on to our next well on our Eastern Texas Project.
 
 
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We have already chosen our location on our 81 acre Elora farm out next to the Sabine River.  Once the survey and permit are completed we will start (that should take about 2 weeks).  This drill will be approximately 3500 feet.  It will also be a horizontal drilling into the Fredricksburg zone.  A prior well owner drilled there in 2007, but only had the rights below 5000ft.  They wire-lined the entire well and we now have those logs in our possession and will drill where the existing pad is. This will allow us to avoid the pad setup expense.  Also having 50k worth of logs should allow us to navigate into the zone with success.  If we have a successful oil well (our goal) we will drill again from this pad into the Saratoga zone.

Belize:

The San Juan #1 and #2 wells have been drilled to total depths of 2240 ft. and 1293 ft.  Completion Operations are currently underway and once finalized the wells will be flow tested and placed on production.  Treaty is in the process of permitting two additional wells in the Stann Creek area, one of these wells is scheduled to be drilled in the fourth quarter with the second well to follow in the first quarter.  Lessons learned on the #1 and #2 wells should allow Treaty to drill and complete these next two wells more efficiently.

The Government of Belize has been very supportive throughout the exploration phase of this project.  Treaty has advanced its understanding and operational acumen since we were awarded the Joint Venture in 2010.  We recognize we are a visitor in Belize and are doing our upmost to make sure we remain a steward of the trust the Belize Government has placed in us to operate with the upmost focus on safety and environmental stewardship.
 
Financing
 
We have made arrangement for private lending on many of the projects currently in progress.  As we progress we expect to require additional funds for the purchase of additional equipment, leases, and 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.
 
 
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Our annual report on Form 10-K as of December 31, 2011 reported the following material weaknesses:

1.  
As of December 31, 2011, we did not maintain effective controls over the control environment.  Specifically we have not developed and effectively communicated to our employees its accounting policies and procedures.  This has resulted in inconsistent practices.  Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B.  Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute e a material weakness.

2.  
As of December 31, 2011, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness.
 
Management has been addressing these weaknesses during the three months ended September 30, 2012,  however, believe that the material weakness assessment is unchanged.
 
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 September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION
 
ITEM 1 – LEGAL PROCEEDINGS
 
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 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.

Several of the defendants in the lawsuit filed for bankruptcy protection.  On April 30, 2010, the case was moved to the US Bankruptcy Court for the Eastern District of Louisiana, Section B.

The lawsuit is currently in settlement discussions that continued past this report date.   The Company has established an escrow account funded with a balance that should meet or exceed the final liability.

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, 2011, filed June 13, 2012.

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 9 for a listing of shares issued during the three months ended September 30, 2012.
 
Options and Warrants
 
During the three months ended September 30, 2012, no options or warrants have been granted, expired or exercised.
 
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
 
None.
 
 
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ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
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).
     
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
 
Certification of Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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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: November 19, 2012
By:
/s/ Andrew V. Reid
 
   
Andrew V. Reid
Chief Executive Officer
 
 
 
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