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EX-32 - CERTIFICATION - Trimerica Energy Corp | teco_ex32.htm |
EX-31.1 - CERTIFICATION - Trimerica Energy Corp | teco_ex311.htm |
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - Trimerica Energy Corp | teco_ex211.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM 10-K
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the fiscal year ended December 31, 2009
Commission
file number 000-28015
TREATY
ENERGY CORPORATION
(Name
of Small Business Issuer in Its Charter)
NEVADA
|
86-0884116
|
|
(State or other jurisdiction of incorporation or organization) | (Employer Identification No.) | |
440
Louisiana, Suite 1400
Houston,
Texas 77002
(Address
of principal executive offices, including zip code.)
|
||
(713)425-5364
(Registrant's
telephone number, including area
code)
|
Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 past 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(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 Noþ
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common
equity. Based on the closing sale price on March 16, 2010, the
aggregate market value of the voting common stock held by non-affiliates is
$9,435,503.
State the number of shares outstanding of
each of the registrant’s classes of common stock as of March 23, 2009:
496,605,424.
Documents Incorporated by reference:
None.
TREATY
ENERGY CORPORATION
FORM
10-K
For
the Year Ended December 31, 2009
TABLE
OF CONTENTS
PART
1 – Financial Information
|
2 | |
Item 1.
Business Factors
|
2 | |
Item
1A. Risk Factors
|
5 | |
Item
1B. Unresolved Staff Comments
|
6 | |
Item 2.
Properties
|
7 | |
Item 3.
Legal Proceedings
|
7 | |
Item 4.
Submission of Matters to a Vote of Security Holders
|
7 | |
PART
II - Other Information
|
8 | |
Item 5.
Market for Common Equity and Related Stockholder
Matters
|
8 | |
Item 6.
Selected Financial Data
|
9 | |
Item 7
. Management’s Discussion and Analysis and Plan of
Operation
|
9 | |
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
|
12 | |
Item 8.
Financial Statements and Supplemental Data
|
13 | |
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
34 | |
Item
9A. Controls and Procedures
|
34 | |
Item
9B. Other Information
|
34 | |
PART
III
|
35 | |
Item
10. Directors, Executive Officers, Promoters and Control Persons and
Corporate Governance; Compliance with Section 16(a) Of The Exchange
Act
|
35 | |
Item
11. Executive Compensation
|
37 | |
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
38 | |
Item
13. Certain Relationships and Related Transactions, and
Director Independence
|
39 | |
Item
14. Principal Accountant Fees and Services
|
40 | |
Item
15. Exhibits, Financial Statement Schedules,
Signatures
|
40 |
1
PART
1 – Financial Information
Item
1. Business Factors
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, (“Treaty”, “the Company”, “we”, or “us”) was incorporated in
the State of Nevada in August, 1997. As explained in Note 10 in the
financial statements, in December, 2008, we merged with Treaty Petroleum, Inc.,
a Texas Corporation under a transaction commonly referred to as a reverse
merger.
At
December 31, 2009 we owned a 100% working interest and a 68% revenue interest in
two oil leases in Crockett Country, Texas. As is explained in Note 4
to the financial statements, we failed to hold these leases by
production.
Also, as
is explained in Note 4, on December 31, 2009, we entered into an arrangement to
with Town Oil Co. in Paola, Kansas, to acquire a 100% working interest in 54
leases containing 481 active producing wells and 135 injector wells producing
approximately 150 barrels per day. As of the date of this
report, we are still seeking financing for this acquisition. We are
currently seeking financing to close this deal.
We are a
crude oil and natural gas producing company.
Our
Business
Treaty is
in the business of acquiring oil and gas properties with production capabilities
and proven reserves.
Government
Regulation
Proposals
and proceedings that might affect the oil and gas industry are periodically
presented to Congress, the Federal Energy Regulatory Commission (“FERC”), the
Minerals Management Service (“MMS”), state legislatures and commissions and the
courts. We cannot predict when or whether any such proposals may become
effective. The natural gas industry is heavily regulated. There is no assurance
that the regulatory approach currently pursued by various agencies will continue
indefinitely. Notwithstanding the foregoing, we currently do not anticipate that
compliance with existing federal, state and local laws, rules and regulations,
will have a material or significantly adverse effect upon our capital
expenditures, earnings or competitive position. No material portion of our
business is subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the federal government.
2
Our
operations are subject to various types of regulation at the federal, state and
local levels. This regulation includes requiring permits for drilling wells,
maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing of wells,
the surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used or generated in
connection with operations. Our operations are also subject tovarious
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled and the unitization or pooling of oil and natural gas properties. In
addition, state conservation laws sometimes establish maximum rates of
production from oil and natural gas wells, generally prohibit the venting or
flaring of natural gas and impose certain requirements regarding the ratability
of production. The effect of these regulations may limit the amount of oil and
natural gas we can produce from our wells in a given state and may limit the
number of wells or the locations at which we can drill.
Currently, there are no federal, state or local laws that regulate the price for our sales of natural gas, natural gas liquids, crude oil or condensate. However, the rates charged and terms and conditions for the movement of gas in interstate commerce through certain intrastate pipelines and production area hubs are subject to regulation under the Natural Gas Policy Act of 1978, as amended. Pipeline and hub construction activities are, to a limited extent, also subject to regulations under the Natural Gas Act of 1938, as amended. While these controls do not apply directly to us, their effect on natural gas markets can be significant in terms of competition and cost of transportation services, which in turn can have a substantial impact on our profitability and costs of doing business. Additional proposals and proceedings that might affect the natural gas and crude oil extraction industry are considered from time to time by Congress, FERC, state regulatory bodies and the courts. We cannot predict when or if any such proposals might become effective and their effect, if any, on our operations. We do not believe that we will be affected by any action taken in any materially different respect from other crude oil and natural gas producers, gatherers and marketers with whom we compete.
State regulation of gathering facilities generally includes various safety, environmental and in some circumstances, nondiscriminatory take requirements. This regulation has not generally been applied against producers and gatherers of natural gas and crude oil to the same extent as processors, although natural gas and crude oil gathering may receive greater regulatory scrutiny in the future.
Our oil
and natural gas production and saltwater disposal operations and our processing,
handling and disposal of hazardous materials, such as hydrocarbons and naturally
occurring radioactive materials (“NORM”) are subject to stringent environmental
regulation. Compliance with environmental regulations is generally required as a
condition to obtaining drilling permits. State inspectors frequently inspect
regulated facilities and review records required to be maintained for document
compliance. We could incur significant costs, including cleanup costs resulting
from a release of hazardous material, third-party claims for property damage and
personal injuries, fines and sanctions, as a result of any violations or
liabilities under environmental or other laws. Changes in or more stringent
enforcement of environmental laws could also result in additional operating
costs and capital expenditures.
Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and natural gas exploration, development and production operations, and consequently may impact our operations and costs. These regulations include, among others, (i) regulations by the Environmental Protection Agency (“EPA”), and various state agencies regarding approved methods of disposal for certain hazardous and non-hazardous wastes; (ii) the Comprehensive Environmental Response, Compensation and Liability Act, and analogous state laws, which regulate the removal or remediation of previously disposed wastes (including wastes disposed of or released by prior owners or operators), property contamination (including groundwater contamination), and remedial plugging operations to prevent future contamination; (iii) the Clean Air Act and comparable state and local requirements, which may require certain pollution controls with respect to air emissions from our operations; (iv) the Oil Pollution Act of 1990, which contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States; (v) the Resource Conservation and Recovery Act, which is the principal federal statute governing the treatment, storage and disposal of hazardous wastes; and (vi) state regulations and statutes governing the handling, treatment, storage and disposal of NORM.
In the course of our routine oil and natural gas operations, surface spills and leaks, including casing leaks of oil or other materials may occur, and we may incur costs for waste handling and environmental compliance. It is also possible that our oil and natural gas operations may require us to manage NORM.
3
NORM are
present in varying concentrations in sub-surface formations, including
hydrocarbon reservoirs, and may become concentrated in scale, film and sludge in
equipment that comes in contact with crude oil and natural gas production and
processing streams. Some states, including Michigan and Texas, have enacted
regulations governing the handling, treatment, storage and disposal of NORM.
Moreover, we are able to control directly the operations of only those wells for
which we act as the operator. Despite our lack of control over wells owned by us
but operated by others, the failure of the operator to comply with the
applicable environmental regulations may, in certain circumstances, be
attributed to us under applicable state, federal or local laws or
regulations.
We are in the process of achieving substantial compliance with all currently applicable environmental laws and regulations. We believe that in order to complete our compliance efforts, we will be required to pay approximately $25,000. Since these laws and regulations are periodically amended, however, we are unable to predict the additional cost of compliance, if any. To our knowledge, there are currently no material adverse environmental conditions that exist on any of our properties and there are no current or threatened actions or claims by any local, state or federal agency, or by any private landowner against us pertaining to such a condition. Further, we are not aware of any currently existing condition or circumstance that may give rise to such actions or claims in the future.
Competition
We face
competition from other oil and natural gas companies in all aspects of our
business, including acquisition of producing properties and oil and natural gas
leases, marketing of oil and natural gas, and obtaining goods, services and
labor. Most of our competitors have substantially larger financial
and other resources than we have. Factors that affect our ability to acquire
producing properties include available funds, available information about
prospective properties and our limited number of
employees. Competition is also presented by alternative fuel sources,
including heating oil and other fossil fuels. Renewable energy sources may
become more competitive in the future.
The
availability of a ready market for and the price of any hydrocarbons produced
will depend on many factors beyond our control including, but not limited to,
the amount of domestic production and imports of foreign oil and liquefied
natural gas, the marketing of competitive fuels, the proximity and capacity of
natural gas pipelines, the availability of transportation and other market
facilities, the demand for hydrocarbons, the effect of federal and state
regulation of allowable rates of production, taxation, the conduct of drilling
operations and federal regulation of crude oil and natural gas. In addition, the
restructuring of the natural gas pipeline industry virtually eliminated the gas
purchasing activity of traditional interstate gas transmission pipeline buyers.
Producers of natural gas have therefore been required to develop new markets
among gas marketing companies, end users of natural gas and local distribution
companies. All of these factors, together with economic factors in the marketing
arena, generally affect the supply of and/or demand for oil and natural gas and
thus the prices available for sales of oil and natural gas.
Employees
Treaty
Energy Corporation has no employees. All services are currently done
through contracted vendors.
4
Item
1A. Risk Factors
An
investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors, other information included
in this annual report and information in our other periodic reports filed with
the SEC. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected.
Risks
Related to Our Business
Oil
Prices
Oil
prices are volatile. A substantial decrease in oil prices would significantly
affect our business and impede our growth.
Our
revenues, profitability and future growth depend upon prevailing oil prices.
Prices also affect the amount of cash flow available for capital expenditures
and our ability to borrow and raise additional capital. Lower prices may also
reduce the amount of oil that we can economically produce. It is possible that
prices will be low at the time periods in which the wells are most productive,
thereby reducing overall returns. It is possible that prices will drop so low
that production will become uneconomical. If production becomes uneconomical, we
may decide to discontinue production until prices improve.
Prices
for oil fluctuate widely. The prices for oil are subject to a variety of factors
beyond our control, including:
·
|
the
level of consumer product demand;
|
·
|
weather
conditions;
|
·
|
domestic
and foreign governmental
regulations;
|
·
|
the
price and availability of alternative
fuels;
|
·
|
political
conditions in oil producing
regions;
|
·
|
the
domestic and foreign supply of oil;
|
·
|
speculative
trading and other market uncertainty;
and
|
·
|
worldwide
economic conditions.
|
The
failure to develop reserves could adversely affect our production and cash
flows.
Our
success depends upon our ability to find, develop or acquire oil and natural gas
reserves that are economically recoverable. We will need to conduct successful
exploration or development activities or acquire properties containing proved
reserves, or both. The business of exploring for, developing or acquiring
reserves is capital intensive. We may not be able to make the necessary capital
investment to expand our oil and natural gas reserves from cash flows, and
external sources of capital may be limited or unavailable. Our drilling
activities may not result in significant reserves, and we may not have
continuing success drilling productive wells. Exploratory drilling involves more
risk than development drilling because exploratory drilling is designed to test
formations in which proved reserves have not been discovered. Additionally,
while our revenues may increase if prevailing gas prices increase significantly,
our finding costs for reserves also could increase, and we may not be able to
finance additional exploration or development activities.
We
may have difficulty financing our planned growth.
We will
require substantial additional financing to fund our planned growth. Additional
financing may not be available to us on acceptable terms or at all. If
additional capital resources are unavailable, we may be forced to curtail our
acquisition, development drilling and other activities or to sell some of our
assets on an untimely or unfavorable basis. We are in the process of evaluating
strategic alternatives as of the date of this report.
5
Our
current operating activity is concentrated in Kansas and Tennessee. As a result,
we may be disproportionately exposed to the impact of drilling and other delays
or disruptions of production from these regions caused by weather conditions,
governmental regulation, lack of field infrastructure, or other events which
impact this area.
We
may continue to incur losses.
We
reported a net loss for the years ended December 31, 2009 and 2008 of $1,202,190
and $241,514, respectively. There is no assurance that we will be
able to achieve and maintain profitability.
Our oil
and natural gas reserve data are estimates based on assumptions that may be
inaccurate and existing economic and operating conditions that may differ from
future economic and operating conditions.
·
|
Reservoir
engineering is a subjective and inexact process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact
manner and is based upon assumptions that may change from year to year and
vary considerably from actual results. Accordingly, reserve estimates may
be subject to downward or upward adjustment. Actual production, revenue
and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material. Information regarding
discounted future net cash flows should not be considered as the current
market value of the estimated oil and natural gas reserves that will be
attributable to our properties. Examples of items that may cause our
estimates to be inaccurate include, but are not limited to, the
following:
|
·
|
The
estimated discounted future net cash flows from proved reserves are based
on prices and costs as of the date of the estimate, while actual future
prices and costs may be materially higher or
lower;
|
·
|
Because
we have limited operating cost data to draw upon, the estimated operating
costs used to calculate our reserve values may be
inaccurate;
|
·
|
Actual
future net cash flows also will be affected by factors such as the amount
and timing of actual production, supply and demand for oil and natural
gas, increases or decreases in consumption, and changes in governmental
regulations or taxation;
|
·
|
Our
reserve report for our producing properties assumes that production will
be generated from each well for a period of 15 years. Because production
is expected for such an extended period of time, the probability is
enhanced that conditions at the time of production will vary materially
from the current conditions used to calculate future net cash flows;
and
|
·
|
The
10% discount factor, which is required by the Financial Accounting
Standards Board in Statement of Financial Accounting Standards No. 69 to
be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks that will be
associated with our operations or the oil and natural gas industry in
general.
|
We
may incur non-cash charges to our operations as a result of current and future
financing transactions.
Under
current accounting rules and requirements, we may incur additional non-cash
charges to future operations beyond the stated contractual interest payments
required under our current and potential future credit facilities. While such
charges are generally non-cash, they would impact our results of operations and
earnings per share and could be material.
Item
1B. Unresolved Staff Comments
The
registrant is not an accelerated filer and is therefore not required to complete
this section.
6
Item
2. Properties
Our
administrative offices are located at 440 Louisiana, Suite 1400, Houston, Texas,
77002. We pay approximately $3,400 per month and our lease runs
through October, 2010.
Item
3. Legal Proceedings
On
January 29, 2010, a lawsuit 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 monies owed for operations on the Crockett County leases prior to their
administration by Treaty Energy Corporation.
It is not
clear from the lawsuit what damages are being claimed by the
plaintiffs. Moreover, the Company’s legal counsel believes that the
22nd
Judicial District Court in the Parish of St. Tammany has no jurisdiction over a
lawsuit whose plaintiff and defendant both reside in Texas. The
Company has moved to have the lawsuit moved into the Federal Court
system.
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. Other than the litigation described above, 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.
Item
4. Submission of Matters to a Vote of Security Holders
There
were no matters submitted to the shareholders during the fourth quarter of
2009.
7
PART
II - Other Information
Item
5. Market for Common Equity and Related Stockholder Matters
Market
Information
Our
shares currently trade on the electronic OTC Bulletin Board (OTCBB), a regulated
quotation service, under the symbol "TECO." Prior to May
19, 2008 our shares were traded on the OTCBB, they were then subsequently
removed from trading the OTC BB for failure to file our annual report on Form
10-KSB for the year ended December 31, 2007 in a timely manner. As a result our
shares were traded on the Over the Counter Pink Sheets from May 21, 2008 to
November 24, 2008. We are currently trading again on the OTC
BB. Listed below are the highest and lowest bid prices for our common
stock for each calendar quarter for 2007 and 2008 as reported on the OTCBB, and
represents inter-dealer quotations, without retail markup, markdown, or
commission and may not be reflective of actual transactions.
Fiscal
quarter
|
High
|
Low
|
||||||
First
quarter, 2008
|
0.442 | 0.161 | ||||||
Second
quarter, 2008
|
0.185 | 0.076 | ||||||
Third
quarter, 2008
|
0.265 | 0.080 | ||||||
Fourth
quarter, 2008
|
0.096 | 0.040 | ||||||
First
quarter, 2009
|
0.150 | 0.028 | ||||||
Second
quarter, 2009
|
0.075 | 0.016 | ||||||
Third
quarter, 2009
|
0.028 | 0.010 | ||||||
Fourth
quarter, 2009
|
0.023 | 0.011 |
At
December 31, 2009, there were 496,605,424 shares of our common stock issued and
outstanding.
8
Holders
As of
December 31, 2009, we had approximately 1,154 holders of record, including
common shares held by brokerage clearing houses, depositories, or otherwise in
unregistered form.
Dividends
We have
not declared or paid cash dividends on our common stock since inception and do
not anticipate paying such dividends in the foreseeable future. The
payment of dividends may be made at the discretion of the Board of Directors and
will depend upon, among other factors, our operations, capital requirements, and
overall financial condition.
Securities
Authorized for Issuance under Equity Compensation Plans
On May
22, 2003 Treaty Energy’s predecessor management adopted a stock option plan that
is accounted for based on SFAS No. 123 (R) and related interpretations. The plan
allows the Company to grant options to persons employed or associated with the
Company, including, without limitation, any employee, director, general partner,
officer, attorney, accountant, consultant or advisor up to an aggregate of
5,000,000 common shares. On February 24, 2004 the Company increased
the number of shares to be issued under the plan to 15,000,000.
At
December 31, 2008, 352,313 options were granted, fully vested and
outstanding. During the twelve months ended December 31, 2009, all of
these options were either exercised or expired.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
During
the three months ended December 31, 2009, we issued the following unregistered
securities:
On
October 15, 2009, we issued 2,015,772 shares of common stock to our Chief
Executive Officer pursuant to his employment agreement and recognized $34,268 of
compensation expense.
On
November 30, 2009, we issued 3,000,000 shares to a director in return for
$39,000 in cash.
Item
6. Selected Financial Data
A smaller
reporting company is not required to provide the information required by this
item.
Item
7 . Management’s Discussion and Analysis and Plan of
Operation
The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto, and other financial
information included elsewhere in this Form 10-K. This report contains
forward-looking statements that involve risks and uncertainties. Actual results
in future periods may differ materially from those expressed or implied in such
forward-looking statements as a result of a number of factors, including, but
not limited to, the risks discussed under the heading "Risk Factors" and
elsewhere in this Form 10-K.
Overview
Critical
Accounting Policies, Estimates and New Accounting Pronouncements
Management's
discussion and analysis of its financial condition and plan of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that
we make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. At each balance sheet date, management evaluates its
estimates. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates and critical
accounting policies that are most important in fully understanding and
evaluating our financial condition and results of operations include those
stated in our financial statements and those listed below:
9
Going
Concern
The
accompanying financial statements have been prepared assuming that Treaty will
continue as a going concern. As shown in the accompanying financial statements,
we had negative cash flows from operations of $212,511 in 2009 and $240,286 in
2008, and a working capital deficit of $724,162 at December 31,
2009. 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.
Recently
Adopted Accounting Standards
In
September 2006, the Financial Accounting Standards Board issued guidance which
defines fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements (“Topic 820”). Topic 820 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company believes that adoption of this guidance on fair
value measurements will not have a significant impact on its statement of
operations and financial position.
The
Company has adopted guidance issued by the Financial Accounting Standards Board
regarding property, plant and equipment (“Topic 360”). This
pronouncement requires us to review for impairment long-lived assets 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 the years presented, the Company did not
recognize any impairment charges on long-lived assets arising from carrying
amount exceeding fair value.
In June,
2006, the Company adopted Financial Accounting Standards Board accounting
guidance governing accounting for conditional asset retirement
obligations. According to this guidance, 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
field’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 6 for a discussion of our estimated Asset Retirement Obligation.
In May
2008, the FASB issued The Hierarchy of Generally Accepted Accounting Principles.
This statement 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 statement 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.
10
Results
of Operations – Comparison of Years Ended December 31, 2009 versus
2008
Revenues
Our
revenues decreased dramatically for the twelve months ended December 31, 2009
versus 2008 ($423 in 2009 versus $33,226 in 2008). The leases lost in
Crockett County, Texas were not replaced by year end.
Expenses
Transportation
Costs and Production Taxes
Transportation
and production tax expenses were reduced almost to zero due to the loss of the
leases in Crockett County, Texas.
Depreciation,
Amortization and Depletion
Depreciation,
amortization and depletion decreased for the year ended December 31, 2009 versus
the same period in 2008. This decrease is due to the loss of the
leases in Crockett County, Texas.
Lease
Operating Expenses
Our lease
operating expenses were reduced to $42,996 in 2009 from $174,263 in
2008. This reduction is due to the loss of our leases in Crockett
County, Texas.
General
and Administrative Expenses
Our
general and administrative expenses increased from $70,408 for the twelve months
ended December 31, 2008 to $721,561 for the same period in 2009. This
increase resulted from increased officer and director stock-based compensation,
additional statutory compliance costs and certain consulting
activities.
Interest
Expense
Interest
expense increased slightly for the twelve months ended December 31, 2009
($23,757) versus the same period in 2008 ($22,929) owing from slightly higher
interest-bearing debt levels.
Net
Loss
Our net
loss increased for the year ended December 31, 2009 (a net loss of $1,202,190)
from the same period in 2008 (a net loss of $241,514) for the reasons set forth
above.
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, workover and
acquisition program by issuing additional common stock and through loans from
our shareholders. 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, 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.
11
Plan
of Operation
Over the
next twelve months we intend to develop the following initiatives:
Acquire
Financing for our Kansas Project
We hope
to acquire financing to effectively transfer title on the 54 leases in eastern
Kansas. We expect that the 100% working interest there will provide
the company with approximately $150,000 per month in cash flows before debt
service at a 150 barrel per day production level at $75 per barrel.
Kansas
Production Enhancement
Along
with the capital to acquire the Kansas leases, we hope to raise an additional $1
million to increase the production levels there. Many of the leases
have never been water-flooded and we expect that properly doing so could
increase production by 100% even before we begin drilling.
We
currently do not have adequate cash to undertake these plans.
Acquiring
Additional Oil and Gas Properties
We are
currently evaluating the acquisition of several oil and gas properties in
Kansas, Tennessee and Oklahoma. We hope to acquire one or more of
these properties before the end of 2010.
Financing
We hope
to finance our production enhancement, drilling and acquisition programs by
issuing additional common stock and taking shareholder loans.
There is
no guarantee that we can raise the required capital to acquire the Kansas
leases, make additional acquisitions, undertake the production enhancement
program, or drill any new wells or that undertaking such endeavors will make us
profitable or self-sustaining.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
A smaller
reporting company is not required to provide the information required by this
item.
12
Item
8. Financial Statements and Supplemental Data
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting
Firm…………………………………………
|
14
|
Balance
Sheets – December 31, 2009 and 2008…………………………………………………….
|
15
|
Results
of Operations for the years ended December 31, 2009 and 2008 and for the
period from re entry to the Exploratory Stage (July 1, 2009) to December
31, 2009………………………………...
|
16
|
Statement
of Changes in Stockholders’ Equity from December 31, 2007 to December 31,
2009…...
|
17
|
Statements
of Cash Flows for the years ended December 31, 2009 and 2008 and for the
period from re entry to the Exploratory Stage (July 1, 2009) to December
31, 2009……………………………..
|
18
|
Notes
to Financial Statements……………………………………………………………………….
|
20
|
13
To
the Board of Directors
Treaty
Energy Corporation
An
Exploratory Stage Company
We have
audited the accompanying balance sheets of Treaty Energy Corporation, an
Exploratory Stage Company as of December 31, 2009 and 2008 and the related
statements of operations, changes in stockholders' deficit, and cash flows for
the periods then ended, and for the period from re entry to the Exploratory
Stage (July 1, 2009) to December 31, 2009. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Treaty Energy Corporation as of
December 31, 2009 and 2008, and the results of its operations, changes in
stockholders' deficit and cash flows for the periods noted above in conformity
with accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company suffered a net loss from operations and has a net
capital deficiency, which raises substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters also are
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/
M&K CPAS, PLLC
Houston,
Texas
www.mkacpas.com
April 13,
2010
14
(An
Exploratory Stage Company)
Balance
Sheets
As
of December 31, 2009 and 2008
Dec
31, 2009
|
Dec
31, 2008
|
|||||||
ASSETS
|
||||||||
Cash
and equivalents
|
$ | - | $ | 971 | ||||
Accounts
receivable
|
- | 7,206 | ||||||
Total
current assets
|
- | 8,177 | ||||||
Oil
and gas properties (proved), net (successful efforts method of
accounting)
|
- | 68,846 | ||||||
Prepaid
expenses and other
|
6,678 | - | ||||||
TOTAL
ASSETS
|
$ | 6,678 | $ | 77,023 | ||||
LIABILITIES
|
||||||||
Accounts
payable and accrued liabilities
|
360,020 | 497,643 | ||||||
Asset
retirement obligation
|
- | 22,444 | ||||||
Notes
and accrued interest to related parties
|
201,641 | 213,781 | ||||||
Notes
and accrued interest payable
|
162,501 | - | ||||||
Total
current liabilities
|
724,162 | 733,868 | ||||||
TOTAL
LIABILITIES
|
724,162 | 733,868 | ||||||
STOCKHOLDERS'
DEFICIT
|
||||||||
Common
stock – par value $0.001, 500 million shares
authorized. 496,605,424 and 460,061,553 shares issued and
outstanding at December 31, 2009 and 2008, respectively.
|
496,605 | 460,062 | ||||||
Additional
paid in capital
|
475,688 | (629,320 | ) | |||||
Accumulated
loss - pre exploratory stage
|
(644,829 | ) | (487,587 | ) | ||||
Accumulated
loss - exploratory stage
|
(1,044,948 | ) | - | |||||
Total
stockholders' deficit
|
(717,484 | ) | (656,845 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 6,678 | $ | 77,023 |
The
accompanying notes are an integral part of these financial
statements.
15
(An
Exploratory Stage Company)
Statements
of Operations
For
the Years Ended December 31, 2009 and 2008
Year
Ended December 31,
|
From Re Entry to the Development Stage (Jul 1, 2009) to Dec 31, |
|||||||||||
2009
|
2008
|
2009
|
||||||||||
REVENUES
|
||||||||||||
Sales
of oil
|
$ | 423 | $ | 33,226 | $ | - | ||||||
Total
revenues
|
423 | 33,226 | - | |||||||||
EXPENSES
|
||||||||||||
Lease
operating expenses
|
42,996 | 174,263 | 15,183 | |||||||||
Transportation
costs
|
455 | 1,046 | (354 | ) | ||||||||
Production
taxes
|
14 | 1,808 | (352 | ) | ||||||||
Impairment
of oil and gas properties
|
411,412 | - | 411,412 | |||||||||
General
and administrative
|
721,561 | 70,408 | 612,503 | |||||||||
Depreciation,
depletion and amortization
|
1,520 | 2,623 | - | |||||||||
Accretion
of asset retirement obligation
|
898 | 1,663 | - | |||||||||
Interest
expense, related parties
|
23,757 | 22,929 | 6,556 | |||||||||
Total
expenses
|
1,202,613 | 274,740 | 1,044,948 | |||||||||
OPERATING
LOSS
|
(1,202,190 | ) | (241,514 | ) | (1,044,948 | ) | ||||||
NET
LOSS
|
$ | (1,202,190 | ) | $ | (241,514 | ) | $ | (1,044,948 | ) | |||
Net
loss per common shares - basic and diluted
|
$ | - | $ | - | ||||||||
Weighted
average common shares outstanding - basic and diluted
|
470,921,214 | 460,061,553 |
The
accompanying notes are an integral part of these financial
statements.
16
(An
Exploratory Stage Company)
Statement
of Changes in Stockholders’ Deficit
For
the Period from December 31, 2006 to December 31, 2008
Common
Stock
|
||||||||||||||||||||||||
Shares
|
Amount
|
Additional
Paid In Capital
|
Pre-Development
Stage Losses
|
Development
Stage 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 | ) | ||||||||||
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.
17
(An
Exploratory Stage Company)
Statements
of Cash Flows
For
the Years Ended December 31, 2009 and 2008
Year
Ended December 31,
|
From Re Entry to the
Development Stage (Jul 1, 2009) to Dec 31, |
|||||||||||
2009
|
2008
|
2009
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net
loss
|
(1,202,190 | ) | (241,514 | ) | (1,044,948 | ) | ||||||
Adjustments
to reconcile net loss to net cash provided by / (used in) operating
activities
|
||||||||||||
Depreciation,
depletion and amortization
|
1,520 | 2,623 | ||||||||||
Impairment
of oil and gas assets
|
411,412 | - | 411,412 | |||||||||
Stock
based compensation
|
377,117 | - | 377,117 | |||||||||
Amortization
of discount on related-party note
|
7,266 | 14,534 | - | |||||||||
Stock
compensation earned
|
- | - | - | |||||||||
Accretion
of asset retirement obligation
|
898 | 1,663 | - | |||||||||
Interest
imputed on related-party notes
|
10,090 | 5,240 | 3,906 | |||||||||
Gain
on early extinguishment of debt
|
- | - | - | |||||||||
- | - | |||||||||||
Changes
in operating assets and liabilities:
|
- | - | ||||||||||
Accounts
receivable
|
7,206 | 1,332 | - | |||||||||
Accounts
payable and accrued liabilities
|
5,883 | (24,384 | ) | 19,688 | ||||||||
Officer
and director liabilities
|
170,392 | 170,392 | ||||||||||
Interest
payable
|
4,573 | 220 | 2,340 | |||||||||
Prepaid
expenses
|
(6,678 | ) | - | (6,678 | ) | |||||||
- | ||||||||||||
Net
cash provided by / (used in) operating activities
|
(212,511 | ) | (240,286 | ) | (66,771 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Purchase
of oil and gas properties
|
- | - | - | |||||||||
Net
cash provided by / (used in) investing activities
|
- | - | - |
The
accompanying notes are an integral part of these financial
statements.
18
TREATY
ENERGY CORPORATION
(An
Exploratory Stage Company)
Statements
of Cash Flows
For
the Years Ended December 31, 2009 and 2008
(Continued)
Year
Ended December 31,
|
From Re Entry to the Development Stage (Jul 1, 2009) to Dec 31, | |||||||||||
2009
|
2008
|
2009
|
||||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Expenses
paid by related-parties-cash
|
61,822 | 222,945 | 2,275 | |||||||||
Expenses
paid by related-parties-stock
|
- | - | - | |||||||||
Borrowings
from related parties
|
8,700 | - | 8,700 | |||||||||
Cash
contributed by a related party
|
104,000 | - | 14,000 | |||||||||
Principal
payments on related-party notes payable
|
(1,982 | ) | (15,035 | ) | - | |||||||
Common
stock issued for cash
|
39,000 | - | 39,000 | |||||||||
Cash
contributed by related party
|
- | - | - | |||||||||
Proceeds
from note payable, net of discount
|
- | - | ||||||||||
Net
cash provided by / (used in) financing activities
|
211,540 | 207,910 | 63,975 | |||||||||
Net
increase / (decrease) in cash and cash equivalents
|
(971 | ) | (32,376 | ) | (2,796 | ) | ||||||
Cash
and cash equivalents, beginning of period
|
971 | 33,347 | 2,796 | |||||||||
Cash
and cash equivalents, end of period
|
- | 971 | - |
SUPPLEMENTAL
CASH FLOW INFORMATION
|
||||||||||||
Cash
paid for interest
|
1,518 | 2,967 | - | |||||||||
Cash
paid for income taxes
|
- | - | - | |||||||||
Stock
issued for retirement of debt
|
211,827 | - | 211,827 | |||||||||
Acquisitions
of oil and gas properties with stock
|
175,000 | - | 175,000 | |||||||||
Cashless
exercise of warrants
|
49 | - | - | |||||||||
Accrued
expenses acquired in reverse merger
|
5,000 | - |
The
accompanying notes are an integral part of these financial
statements.
19
(An
Exploratory Stage Company)
(Formerly
Alternate Energy Corp.)
Notes
to Financial Statements
Note
1 - Organization and Nature of Business
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.
As
explained in Note 10 in the financial statements, in December, 2008, 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.
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.
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.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an initial maturity of 3
months or less to be cash equivalents. The Company’s bank accounts periodically
exceed federally insured limits. The Company maintains its deposits with high
quality financial institutions and, accordingly, believes its credit risk
exposure associated with cash is remote. There were no cash
equivalents as of December 31, 2009 and 2008.
Accounts
Receivable
Accounts
receivable consists of amounts due for the sale of
oil. Accounts receivable are evaluated for collectability based
upon the financial condition of the customer and the age of the amount
due. We have no amounts due us for oil and gas sold at December 31,
2009.
Oil
Producing Properties
We
account for our oil producing property costs using the successful efforts
accounting method. Under the successful efforts method, lease acquisition costs
and intangible drilling and development costs on successful wells and
development dry holes are capitalized. Costs of drilling exploratory wells are
initially capitalized, but charged to expense if and when a well is determined
to be unsuccessful.
Capitalized
proved property acquisition costs are depleted on the unit-of-production method
on the basis of total estimated units of proved reserves. Development costs
relating to producing properties are depleted on the unit-of-production method
on the basis of total estimated units of proved developed reserves. When
significant development costs are incurred in connection with a planned group of
development wells before all of the planned wells have been drilled, it is
occasionally necessary to exclude a portion of those development costs in
determining the unit-of-production amortization rate until the additional
development wells are drilled. However, in no case are future development costs
anticipated in computing our amortization rate. Estimated dismantlement,
restoration and abandonment costs are taken into account in determining
depreciation, amortization and depletion provisions.
20
Expenditures
for repairs and maintenance are charged to expense as incurred; renewals and
betterments are capitalized. The costs and related accumulated depreciation,
depletion, and amortization of properties sold or otherwise retired are
eliminated from the accounts, and gains or losses on disposition are reflected
in the statements of operations.
We
perform a review for impairment of proved oil producing properties on a
depletable unit basis when circumstances suggest there is a need for such a
review. To determine if a depletable unit is impaired, we compare the carrying
value of the depletable unit to the undiscounted future net cash flows by
applying management’s estimates of future oil and gas prices to the estimated
future production of oil and gas reserves over the economic life of the
property. Future net cash flows are based upon our reservoir engineers’ estimate
of proved reserves. In addition, other factors such as probable and possible
reserves are taken into consideration when justified by economic conditions and
actual or planned drilling or other development activities. For a property
determined to be impaired, an impairment loss equal to the difference between
the carrying value and the estimated fair value of the impaired property will be
recognized. Fair value is estimated to be the present value of the
aforementioned expected future net cash flows. Any impairment charge incurred is
recorded in accumulated depreciation, depletion, impairment and amortization to
reduce our recorded basis in the asset. Each part of this calculation is subject
to a large degree of judgment, including the determination of the depletable
units’ reserves, future cash flows and fair value.
Costs
directly associated with the acquisition and evaluation of unproved properties
are excluded from the amortization base until the related properties are
developed. Unproved properties are assessed quarterly and any impairment in
value is charged to impairment expense. The costs of unproved properties which
are determined to be productive are transferred to proved oil and gas properties
and amortized on a unit-of-production basis.
Oil
Reserves
The
process of estimating quantities of natural gas and crude oil reserves is very
complex, requiring significant decisions in the evaluation of all available
geological, geophysical, engineering and economic data. The data may also change
substantially over time as a result of numerous factors including, but not
limited to, additional development activity, evolving production history and
continual reassessment of the viability of production under varying economic
conditions. As a result, material revisions to existing reserve estimates may
occur from time to time. Although every reasonable effort is made to ensure that
reserve estimates reported represent the most accurate assessments possible, the
subjective decisions and variances in available data for various fields make
these estimates generally less precise than other estimates included in the
financial statement disclosures. We use the unit-of-production method to
amortize our oil and gas properties. This method requires us to amortize the
capitalized costs incurred in developing a property in proportion to the amount
of oil and gas produced as a percentage of the amount of proved reserves
contained in the property. Accordingly, changes in reserve estimates as
described above will cause corresponding changes in depletion expense recognized
in periods subsequent to the reserve estimate revision. As of December 31, 2008,
100% of our reserves were prepared by independent petroleum engineers,
Huddleston & Co., Inc., Petroleum and Geological Engineers. See the
Supplemental Information (unaudited) in our financial statements for reserve
data related to our properties.
As is
discussed in Note 4 to the financial statements, at December 31, 2009, we had no
oil and gas reserves due to the loss of our leases in Crockett County,
Texas.
See Note
6 for a summary of the liabilities for our Asset Retirement Obligations at
December 31, 2009 and 2008.
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.
Earnings
Per Share
Basic
earnings per common share is computed by dividing net earnings or loss (the
numerator) by the weighted average number of common shares outstanding during
each period (the denominator). Diluted earnings per common share is similar to
the computation for basic earnings per share, except that the denominator is
increased by the dilutive effect of stock options outstanding and unvested
restricted shares and share units, computed using the treasury stock
method. There are currently no common stock
equivalents.
21
Income
Taxes
We
recognize deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates that are expected to be in effect when the differences are expected to
be recovered. We provide a valuation allowance for deferred tax
assets for which we do not consider realization of such assets to be more likely
than not.
See Note
8 for our reconciliation of income tax expense and deferred income taxes as of
and for the years ended December 31, 2009 and 2008.
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
|
Amount
|
|||
Level
1:
|
$ | - | ||
Level
2: Notes payable and accrued interest to related parties
|
116,592 | |||
Level
3: Notes payable, long term and short term, net of
discount
|
85,049 | |||
Totals
|
201,641 |
Accounting
for the Disposal of Long-Lived Assets
The
Company has adopted the guidance contained in Codification Topic 360, “Property,
Plant and Equipment”. This pronouncement 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. During 2009, the Company impaired $411,412 of
assets for costs incurred relating to the acquisitions of producing properties
which, as of the date of this report, have not been consummated.
Accounting
for Conditional Asset Retirement Obligations
In June,
2006, the Company adopted the accounting guidance with respect to 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.
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 6 for a discussion of our estimated Asset
Retirement Obligation.
At
December 31, 2009, we had no asset retirement obligations because we had no
producing assets.
22
In May
2008, the FASB issued “The Hierarchy of Generally Accepted Accounting
Principles”, which 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 statement 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 does not expect any other recent accounting pronouncements to have a
material impact on its financial statements.
Note
3 – Going Concern
The
accompanying financial statements have been prepared assuming that Treaty will
continue as a going concern. As shown in the accompanying financial statements,
we had negative cash flows from operations of $212,511 in 2009 and $240,286 in
2008, and a working capital deficit of $724,162 at December 31,
2009. 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
4 – Oil Producing Properties
Leases
in Crockett County, Texas
Previous
to the incorporation of Treaty Petroleum, Inc. (the merger partner with Treaty
Energy – see Note 10), the shareholders were members of Phoenix Oil and Gas,
LLC, a Tennessee Limited Liability Company (“Phoenix”). One of the
members of Phoenix purchased the working interest in the oil wells located in
Crockett County for $60,000 in cash. The working interest was
subsequently conveyed to Phoenix by the member, who took a note in exchange (see
Note 5) in the amount of $1 million.
Upon
incorporation of Treaty Petroleum, Inc. the working interest was assigned by
Phoenix to Treaty Petroleum, Inc. and a $1 million note to be paid by an
overriding royalty interest in the form of a production payment was assigned to
the member. Since the member, upon transferring the working interest,
was a related party, Treaty Petroleum, Inc. recorded his interest at the
historical cost of the related party – the $60,000 cash payment. We
therefore established this as the cost basis of the producing properties in
Treaty Energy due to the common control nature of the
transaction. Additionally in 2006, we estimated the present value of
the oil producing properties’ asset retirement obligation at $19,242 using a
15-year life discounted at 8%. We are depreciating this value using
the straight-line method over the life of the properties.
In
December, 2008, Treaty Petroleum, Inc. merged with Treaty Energy Corporation
(see Note 10), transferring the producing assets and certain liabilities to
Treaty Energy Corporation.
During
September, 2009 we received notice that David Hallin, the previous Corporate
Secretary of the Company acting as Corporate Secretary for Treaty Petroleum,
Inc. (the Texas corporation from which the two Crockett County, Texas leases
were assigned to Treaty Energy Corporation) executed a “Release of Lease”,
surrendering all rights to the two Crockett County leases. We also
received notice that Mr. Hallin, along with Ronda Hyatt, the previous Company
President, acting as President of High Ground, Inc., the operator of record of
the leases, executed a “Release and Indemnification Agreement” with a
representative of the lessors of the leases whereby Treaty Petroleum, Inc. (the
Texas Corporation) was indemnified of all liabilities to the
lessors.
These
leases no longer are available to Treaty Energy Corporation for production or
development. We therefore have impaired the net asset value of the
leases in their entirety.
In
recording the loss of the Crockett Country leases, we wrote off the oil and gas
properties, net of accumulated amortization, of $67,326 and removed the related
asset retirement obligation of $23,342, and recorded a loss of
$43,984.
Loss
of Vago #1 Project
On July
30, 2009, we entered into an agreement to purchase the Vago #1 lease in West
Texas from High Ground, Inc in West Texas. The acquisition was
completed with delivery of the purchase price of seven million shares of Company
common stock and valued the shares at the closing price on the date of the
agreement, or $175,000.
23
We were
unable to obtain due diligence information from High Ground on this
acquisition. We have impaired this property in its entirety and are
evaluating our options with respect to the return of the seven million
shares.
Converse,
Louisiana Loss
On
October 29, 2009 we entered into a letter of intent to acquire 56 wells on 600
acres near Converse, Louisiana. In order to hold the property while
the company sought financing, an affiliate posted 10 million shares as
collateral. We were subsequently unable to obtain the financing, and
the seller foreclosed on the 10 million shares. We valued the shares
at the closing price on the date of the letter of intent ($0.013 for a value of
$130,000) and recorded a loss of $178,036 which included legal fees incurred for
closing.
Morgan
County, Tennessee
On
December 12, 2009, we entered into an agreement with Green Light Energy, a
Florida LLC, to acquire four wells in Morgan County, Tennessee for $260,000,
offering as consideration a promissory note due February 1, 2010. As
of the date of this report, we have been unsuccessful at obtaining financing to
pay the promissory note and the seller has not transferred title to these
assets. The seller has excused the obligation on the promissory note
due February 1, 2010. Although the seller has indicated a
continued willingness to sell the properties to the Company, the properties have
not been recorded as of December 31, 2009. Additionally, since
financing was not obtained and the properties were not transferred, the Company
was under no obligation to pay the seller $260,000 at December 31,
2009.
We
incurred certain non-cash costs totaling $14,392 relating to obtaining financing
which we have expensed.
A summary
of the effect on income of the oil and gas impairments is as
follows:
Loss
on Impairment
|
||||
Crockett
County Leases
|
$ | 43,984 | ||
Vago
#1
|
175,000 | |||
Converse,
Louisiana
|
178,036 | |||
Morgan
County, Tennessee
|
14,392 | |||
Impairment
of oil and gas properties
|
$ | 411,412 |
Agreement
with Town Oil Company, Kansas
On
December 31, 2009, we entered into an agreement with Town Oil Company, Inc. in
Paola, Kansas to acquire a 100% working interest in 54 leases containing 481
active producing wells and 135 injector wells producing approximately 150
barrels per day.
Under the
arrangement, the Company has until December 31, 2010 to arrange
financing. Since the leases have not conveyed, and since the revenues
are not accruing to the Company until the financing is arranged, we have not
recognized these assets in the Company books.
We are
actively seeking financing for this project.
Note
5 – Notes Payable to Related Parties
Note
Payable for Conveyance of Oil Producing Properties
On March
2, 2005, Phoenix Oil and Gas, LLC purchased the working interest in the
producing properties in Crockett County, Texas by issuing a $1 million note with
the following terms:
·
|
A
production payment of 2% of revenues received by Phoenix (net of taxes
accrued by Phoenix) is to be paid up to a limit of $1
million.
|
·
|
In
the event that Phoenix shall dissolve or assign its working interest in
the lease, the fees will be due immediately out of the proceeds of the
sale or secured by the establishment of a 2% production
royalty.
|
·
|
In
the event the lease becomes invalid, the note holder would receive from
the other members $150,000 less monies already received via the production
payments. Payments are due 60 days from the date insolvency is
declared and, if not paid within that time, interest at 10% per annum will
accrue.
|
·
|
The
note is personally guaranteed by Phoenix’s Corporate Secretary who is now
Treaty Energy’s Corporate
Secretary.
|
24
On
October 20, 2006, Phoenix Oil and Gas, LLC assigned a 2% production payment to
the member and assigned the lease to Treaty Petroleum, Inc. The
aggregate of the new production payments were established at $990,000 since
Phoenix had paid $10,000 to that date. Phoenix Oil and Gas, LLC was
dissolved at the end of 2006.
Treaty
Energy Corporation, upon merging with Treaty Petroleum, agreed to service the
liability while the lease was assigned to Treaty Energy Corporation (see Note
4). The note was recorded net of a discount of $918,634 and $933,168
at December 31, 2008 and 2007, respectively. The net note reflected
in Treaty Energy’s financial statements as of December 31, 2008 was
$77,943.
As is
discussed above and in Note 4, 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.
Notes
Payable for Working Capital
During
2008, we made principal and interest payments to our then Corporate Secretary of
$993 and $1,007, respectively and accrued additional interest of
$1,139. During 2009, we made no principal and interest payments and
accrued an additional interest of $1,161. At December 31, 2009,
principal and interest due on this note was $48,747.
During
2008, we accrued $49,010 to our then operator, High Ground, LLC in connection
with their service contract with the Company. We made principal and
interest payments on this note of $13,040 and $1,960,
respectively. During 2009, we accrued an additional $24,000 relating
to the operating agreement, and made principal and interest payments of $275 and
$1,475, respectively. At December 31, 2009, principal and interest
due on this note was $113,754.
On
January 29, 2010, a lawsuit was filed in the 22nd
Judicial District Court, Parish of St. Tammany, Louisiana naming Treaty Energy
Corporation, among others, as a defendant. The notes references in
the previous two paragraphs are part of the basis of the
lawsuit. With respect to these notes and the lawsuit, Treaty Energy
recognizes the liability owed to Mr. Hallin. However, the amounts
owed to High Ground, LLC, our previous operator on the Crockett County, Texas
leases is the subject of a countersuit filed by the Company in the United States
District Court, Eastern Division of Louisiana.
Note
6 – Asset Retirement Obligation
In June,
2006, the Company adopted accounting guidance relating to 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
field’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.
Our Asset
Retirement obligation at December 31, 2008 was $22,444 and was zero at December
31, 2009 owing to the loss of the Crockett County leases (see Note
4). We were relieved from all liabilities associated with this
property.
25
Note
7 – Shareholders’ Equity
In April,
2008, we amended our articles of incorporation to increase the number of shares
authorized from 250 million to 500 million.
Private Placement
Memorandum
In
December 2006, Treaty Petroleum, Inc. offered in a Private Placement Memorandum,
to sell financing units at $50,000 per unit to accredited investors, each unit
consisting of 500,000 shares of Treaty Petroleum, Inc’s common stock and
warrants to purchase 250,000 additional shares at $0.40. The
warrants have an exercise period that begins on the day the Company’s common
stock is traded on any exchange and expires 18 months thereafter, or June 12,
2010. The Company retains the right to sell fractional
units.
For the
years ended December 31, 2008 and 2007, we sold the following
units:
Units
Sold
|
Shares
Issued
|
Warrants
Issued
|
Cash
Received
|
|||||||||||||
Balance,
1/1/07
|
0.2500 | 125,000 | 62,500 | $ | 12,500 | |||||||||||
Units
sold - year ended 12/31/07
|
1.9950 | 997,500 | 498,750 | 99,750 | ||||||||||||
Units
sold - year ended 12/31/08
|
- | - | - | - | ||||||||||||
Totals
through December 31, 2009
|
2.2450 | 1,122,500 | 561,250 | $ | 112,250 |
No units
were sold during 2008 or 2009.
Options
and Warrants
Pursuant
to the Private Placement Memorandum described above, the Company issued warrants
to purchase 561,250 shares of common stock. The warrants are not
exercisable until the first day that the Company’s common stock is traded on a
recognized exchange. They expire 18 months from that date, or June
12, 2010.
As a
result of the Reverse Merger explained in Note 10, the exercise period for these
warrants began on December 12, 2008. In March, 2009, we issued 49,148
shares upon cashless exercise of 74,695 options by a consultant to Alternate
Energy Corp. No other options or warrants have been exercised through
December 31, 2009.
Although
the original warrants were written conveying an option to purchase shares in
Treaty Petroleum, Inc. (the predecessor of Treaty Energy Corporation), Treaty
Energy intends to honor the warrants as options to purchase the common stock of
Treaty Energy Corporation.
Total
Potentially Dilutive Securities
In
addition to the warrants issued by Treaty Petroleum, Inc. described above,
Treaty Energy also inherited certain options and warrants outstanding at the
merger date (for a description of the merger, see Note 10). At
December 31, 2008 and 2009, the number of warrants and options that we inherited
that were outstanding at December 31, 2008 was 2,687,419 and 352,313,
respectively. At December 31, 2009 warrants and options outstanding
were 2,687,419 and zero, respectively, all options inherited from Alternate
Energy Corp and outstanding at December 31, 2008 having expired..
The
following table summarizes all potentially dilutive securities outstanding at
December 31, 2008.
Description
|
Outstanding
at 12/31/08
|
Outstanding
at 12/31/09
|
||||||
Warrants
issued during 2007 and 2008 pursuant to Treaty Petroleum private placement
and outstanding at 12/31/08. All expire August 12,
2010.
|
561,250 | 561,250 | ||||||
Warrants
inherited from Alternate Energy Corp. and outstanding at
12/31/08
|
2,687,419 | 2,687,419 | ||||||
Options
inherited from Alternate Energy Corp. and outstanding at
12/31/08
|
352,313 | - | ||||||
Total
potentially dilutive securities
|
3,600,982 | 3,248,669 |
The
warrants issued in connection with the Treaty Petroleum December, 2006 private
placement contain an exercise price of $0.40 and expire June 12,
2010.
26
The
warrants inherited from Alternate Energy Corp. and which are outstanding at
December 31, 2008 contain exercise prices and expiry dates as
follows:
Strike
Price
|
Date
Granted
|
Term
|
Expiry
Date
|
Warrants
Outstanding 12/31/08
|
|||||||
$ | 0.08 |
06/22/05
|
7
yr
|
06/22/12
|
124,492 | ||||||
$ | 0.08 |
06/22/06
|
7
yr
|
06/22/07
|
138,435 | ||||||
$ | 0.08 |
06/22/07
|
7
yr
|
06/22/14
|
124,492 | ||||||
$ | 0.08 |
12/24/08
|
7
yr
|
12/24/15
|
2,300,000 | ||||||
Totals
|
2,687,419 |
The
options inherited from Alternate Energy Corp. and which are outstanding at
December 31, 2008 have all expired during 2009.
27
Shareholder
Contribution of Capital
During
2008, an affiliate paid expenses totaling $169,648 on behalf of the Company and
elected to have those expenses treated as a contribution of
capital. We recorded the expenses and with an offsetting credit to
Additional Paid In Capital in that amount.
During
2009, the affiliate paid expenses of the Company of $224,517, of which $61,822
was paid in cash and $162,695 was paid in common stock of the Company. We
recorded the expenses and with an offsetting credit to Additional Paid In
Capital in that amount.
2009
Issuances of Common Stock
In March,
2009, we issued 49,148 shares upon cashless exercise of 74,695 options by a
consultant to Alternate Energy Corp.
On August
8, 2009, we issued 7 million shares of Company common stock to Highground, Inc.
(“Highground”) to acquire the Vago #1 project on the eastern shelf of the
Permian Basin in West Texas. When Highground failed to provide
necessary due diligence to complete the required statutory filings, the Company
rescinded the deal and requested the return of the shares rendered for
consideration. We therefore impaired the entire property and recorded
an impairment expense of $175,000.
On August
17, 2009, we paid a consulting firm 4 million shares. We valued the
shares at the grant date of $0.0131 per share and recorded expense of
$52,400.
On August
26, September 8 and October 15, 2009, we paid our Chief Executive Officer
4,221,519 shares, 1,649,485 shares and 2,015,772 shares,
respectively. We valued the shares on the grant date and collectively
valued the shares at $84,296. The unearned portion of the issuance at
December 31, 2009 is $27,000 and will be earned over future
periods.
On
September 30, 2009, we issued 14,607,947 shares to Blaine Froats, the
previous Chief Executive Officer of the Company (then Alternate Energy
Corporate) to extinguish the liability the Company recognized to him from the
previous operations. We reduced the debt to him ($211,827) to
zero. We recognized no gain or loss on the retirement since Mr.
Froats was a related party.
On
November 30, 2009, we issued 3 million shares to a director for cash in the
amount of $39,000.
At
December 31, 2009, we have 496,605,424 shares issued and
outstanding.
Note
8 – Income Taxes
Deferred
income taxes reflect the tax consequences on future years of differences between
the tax bases:
2009
|
2008
|
|||||||
Deferred
tax asset
|
459,431 | 71,667 | ||||||
Valuation
allowance
|
(459,431 | ) | (71,667 | ) | ||||
Net
future income tax asset
|
- | - |
In
assessing the realizability of future tax assets, management considers whether
it is more likely than not that some portion or all of the future tax assets
will not be realized. The ultimate realization of future tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of future tax liabilities, projected future
taxable income and tax planning strategies in making this
assessment. Management has provided for a valuation allowance on all
of its losses as there is no assurance that future tax benefits will be
realized.
Our tax
loss carry-forward of $1,312,660 generated during 2008 will begin to expire in
2021.
28
Note 9 –
Supplemental Information on Oil Producing Properties (Unaudited)
Supplemental
Reserve Information
The
information set forth below on our proved oil reserves is presented in pursuant
to the disclosure requirements of Statement of Financial Accounting Standards
No. 69. The Company emphasizes that reserve estimates are inherently
imprecise. Our reserve estimates were generally based upon extrapolation of
historical production trends, analogy to similar properties and volumetric
calculations. Accordingly, these estimates are expected to change and such
changes could be material and occur in the near term as future information
becomes available.
The
Company retained the service of an independent petroleum consultant Huddleston
& Co., Inc. for estimating proved reserves at December 31, 2008 and none in
2009 since the Company did not have any proved reserves.
The
following table sets forth a summary of changes in estimated reserves for 2009
and 2008:
Year
Ended December 31,
|
||||||||
Change
of reserve quantity information (Bbls)
|
2009
|
2008
|
||||||
Proved
reserves at beginning of year
|
10,943 | 26,268 | ||||||
Revisions
of previous estimates
|
- | (14,675 | ) | |||||
Dispositions
of properties
|
(10,943 | ) | ||||||
Production
|
- | (650 | ) | |||||
Proved
reserves at end of year
|
- | 10,943 |
Standardized
Measure of Discounted Future Net Cash Flow Relating to Proved Oil
Reserves
The
following information has been developed utilizing procedures prescribed by SFAS
No. 69 and based on oil reserve and production volumes estimated by the
Company’s independent reserve engineers. It may be useful for certain comparison
purposes but should not be solely relied upon in evaluating the Company or its
performance. Further, information contained in the following table should not be
considered as representative of realistic assessments of future cash flows nor
should the Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
The
future cash flows presented below are computed by applying year-end prices to
year-end quantities of proved oil and natural gas reserves. Future production
and development costs are computed by estimating the expenditures to be incurred
in producing the Company’s proved reserves based on year-end costs and assuming
continuation of existing economic conditions. It is expected that material
revisions to some estimates of oil and natural gas reserves may occur in the
future, development and production of the reserves may occur in periods other
than those assumed, and actual prices realized and costs incurred may vary
significantly from those used.
Management
does not rely upon the following information in making investment and operating
decisions. Such decision are based upon a wide range of factors, including
estimates of proved reserves, and varying price and cost assumptions are
considered more representative of a range of possible economic conditions that
may be anticipated.
We had no
oil and gas producing properties at December 31, 2009.
29
The
following table sets forth our future net cash flows relating to proved oil
reserves based on the standardize measure prescribed in SFAS 69:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Future
cash inflows
(1)
|
$ | - | $ | 488,047 | ||||
Future
production costs
(2)
|
- | (241,099 | ) | |||||
Future
income tax expenses
|
- | (38,086 | ) | |||||
Future
net cash flows
|
- | 208,863 | ||||||
10%
annual discount for estimated timing of cash flows
|
- | (83,220 | ) | |||||
Standardized
measure of discounted future net cash flows relating to proved oil
reserves
|
$ | - | $ | 125,643 |
1.
|
Oil
revenues are based on year-end prices (see table below). There is no
consideration of risks associated with future production of proved
reserves.
|
2.
|
Based
on economic conditions at year-end and does not include administrative,
general, or financing costs.
|
3.
|
Future
income taxes are computed by applying the statutory tax rate to future net
cash flows reduced by the tax basis of the
properties.
|
The
following table summarizes the year-end prices used to estimate reserves and
future net cash flows in accordance with SEC guidelines.
Year
end oil price information
|
2009
|
2008
|
||||||
Year-end
oil price per barrel
|
n/a | 44.60 |
Changes
in Standardized Measure of Discounted Future Cash Flows
The
following table sets forth the principal sources of change in the standardized
measure of discounted future net cash flows:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Beginning
balance
|
$ | 125,643 | $ | 471,246 | ||||
Net
change in accretion of discount
(1)
|
- | 14,808 | ||||||
Sales
of oil net of production costs
|
- | (110,831 | ) | |||||
Development
cost changes
|
- | - | ||||||
Dispositions
of oil and gas properties (See Note 4)
|
(125,643 | ) | - | |||||
Revisions
in previous quantity estimates
(2)
|
- | (230,527 | ) | |||||
Net
changes in prices and production costs
(3)
|
- | (311,227 | ) | |||||
Changes
in estimated future income taxes
|
- | 230,745 | ||||||
Timing
and other
(4)
|
- | 61,429 | ||||||
Net
change in standardized measure of discounted cash flows
|
(125,643 | ) | (345,603 | ) | ||||
Ending
balance
|
$ | - | $ | 125,643 |
1.
|
“Accretion
to the discount” – this item is computed using the industry-recognized
method as a computation of the 10% of the pre-tax present value of the
prior year reserve report.
|
2.
|
“Revisions
in quantity estimated” – quantity estimated varied significantly between
2006, 2007 and 2008, principally due to changes in year-end prices (see
table above). Additionally, certain changes occurred due to
shutting in of several wells in December,
2008.
|
3.
|
“Net
changes in prices and production costs” – Our reserves consist exclusively
of oil. A significant change in oil price between reporting periods
resulted in differences between 2006, 2007 and 2008. Our
production costs per barrel increased significantly during 2008 because
much of our costs are fixed and, due to the shutting in of several oil
wells during the fourth quarter of 2008, production was greatly
diminished.
|
4.
|
“Other”
– This line item reflects reconciling amounts which is made available to
capture those timing and other
differences.
|
30
Capitalized
Costs Related to Oil Producing Activities
The
following table sets forth the capitalized costs relating to the Company’s oil
and natural gas producing activities:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Proved
properties
|
$ | - | $ | 79,242 | ||||
Unproved
properties
|
- | - | ||||||
Total
oil producing properties
|
- | 79,242 | ||||||
Less:
accumulated depletion
|
- | (10,396 | ) | |||||
Oil
producing properties, net
|
$ | - | $ | 68,846 |
Costs
Incurred in Oil Producing Activities
We
acquired no additional oil producing properties during the years ended December
31, 2009 and 2008.
Results
of Operations
The
Company’s results of operations related to oil and natural gas activities are
set forth below. The following table includes revenues and expenses associated
directly with our oil and natural gas producing activities. It does not include
any interest costs, general and administrative costs or provision for income
taxes due to the net operating loss carry-forward, and therefore, is not
necessarily indicative of the contribution to consolidated net operating results
of our oil and natural gas operations.
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Sales
of oil
|
$ | 423 | $ | 33,226 | ||||
Lease
operating expenses
|
42,996 | 174,263 | ||||||
Transportation
costs
|
455 | 1,046 | ||||||
Production
taxes
|
14 | 1,808 | ||||||
Depreciation,
depletion and amortization
|
1,520 | 2,623 | ||||||
Accretion
of asset retirement obligation
|
898 | 1,663 | ||||||
Results
of producing activities
|
$ | (45,460 | ) | $ | (148,177 | ) |
Note
10 - Reverse Merger of Treaty Petroleum, Inc. and Treaty Energy
Corporation.
Entities
Referred to in This Paragraph
Treaty
Energy Corporation – formerly Alternate Energy Corp. This company is
a Nevada Corporation and is the filer on whom this 10-K filing is
prepared. We refer to this entity in this note as “Treaty Energy” or
“the Nevada Corporation”.
Treaty
Petroleum, Inc. – a Texas corporation with whom the Nevada Corporation merged
through a reverse merger explained in this paragraph. We refer to
this entity in this note as “Treaty Petroleum” or “the Texas
Corporation”.
ARGY
Merger Sub, Inc. – a Nevada corporation formed to effect the reverse
merger. It is a wholly owned subsidiary of Treaty
Energy. We refer to this entity in this note as “ARGY Merger Sub,
Inc.”
The
Merger
On
December 12, 2008, Treaty Energy, formerly Alternate Energy Corp., entered into
a definitive agreement whereby Treaty Petroleum, merged with a wholly owned
subsidiary of Treaty Energy, ARGY Merger Sub, Inc.. The merger of Treaty
Petroleum and Treaty Energy was completed on December 24, 2008. In
the agreement, the shareholders of Treaty Petroleum surrendered all of their
shares in return for a 90% interest in Treaty Energy.
31
Treaty
Energy agreed to assume $500,000 in debts of Alternate Energy as part of the
agreement and the management of Alternate Energy forgave $449,392 in
debt. Additionally, immediately before the merger, Alternate Energy
reverse-split its stock on the basis of 8.032633:1 and thereafter
issued 414,000,000 post split shares to shareholders of Treaty, for a total of
460,000,000 shares outstanding immediately post merger. The
historical equity transactions in these financial statements are those of Treaty
Petroleum, Inc., retroactively restated to reflect shares of Treaty Energy
Corporation.
Upon
assuming control of management and the board of directors, the Company changed
its name from Alternate Energy Corp. to Treaty Energy Corporation and changed
its trading symbol from ARGY to TECO. The assets and liabilities of the former
Alternate Energy were spun off to a private company except for the $500,000
liabilities assumed by Treaty Energy. This transaction has been
accounted for as a reverse merger as the company acquired maintains control of
the acquiring company immediately after the merger. The transaction
has been accounted for as a recapitalization as ARGY did not meet the definition
of a business so no step up in fair value is allowed. The historical
financial information in this form 10-K is that of the accounting
acquirer.
Treaty is
in the business of acquiring oil and gas properties with production capabilities
and proven reserves. Treaty owns 743 acres in a previously established oil and
gas field. It contains 116 proven productive acres.
Income
Statement of Alternate Energy Corp.
The
following is an unaudited income statement of Alternate Energy Corp. , the legal
acquirer in the reverse merger, from January 1, 2008 to the date of the merger,
December 12, 2008.
January
1, 2008 to December 12, 2008
|
||||
REVENUE
|
- | |||
TOTAL
REVENUE
|
- | |||
EXPENSES
|
||||
Administrative
|
220,432 | |||
Consulting
fees
|
1,424,128 | |||
Professional
fees
|
56,339 | |||
Research
and development
|
62,538 | |||
Financing
expense
|
58,714 | |||
Depreciation
|
14,539 | |||
NET
LOSS FROM OPERATIONS
|
(1,836,690 | ) | ||
OTHER
INCOME / (EXPENSES)
|
||||
Other
income
|
6,254 | |||
Gains/(losses)
on settlements
|
(868,237 | ) | ||
NET
LOSS
|
(2,698,673 | ) | ||
COMPREHENSIVE
GAINS/(LOSSES)
|
||||
Unrealized
foreign currency translation gains/(losses)
|
27,034 | |||
Unrealized
investments gains/(losses)
|
(26,056 | ) | ||
COMPREHENSIVE
LOSS
|
(2,697,695 | ) |
Note
11 – Related-Party Transactions
As is
discussed in Note 5, we partially funded our working capital throughout 2009 and
2008 with loans from shareholders, accruing interest payable to them, and paying
interest and principal.
Also as
discussed in Note 5, we made payments to a shareholder related to the promissory
note that arose from the conveyance of the oil producing properties that we
acquired from this shareholder.
As is
discussed in Note 7, during 2009, a shareholder paid $61,822 in cash expenses on
behalf of the Company, $162,695 of expenses by transferring common
stock of the Company to certain vendors and trading partners, and contributed
$104,000 in cash to the Company. During 2008, the same shareholder
paid expenses totaling $169,648. The shareholder elected to have all
of above treated as contributed capital.
During 2009, our CEO loaned the Company $8,700.
32
Note
13 – Subsequent Events
On March
2, 2009, our President and direct, Joe Grace, resigned from the board of
directors and from his position as officer of the Company, citing health
reasons. Mr. Grace remains as a consultant to the
Company.
On
February 1, 2009, our Chief Executive Officer, Randall Newton, loaned the
Company an additional $5,932.
The
Company has evaluated subsequent events through the date these financial
statements were issued.
Note
14 – Commitments and Contingencies
We have
leased office space at the Lyric Center in Houston, Texas on a lease which
expires October 31, 2010. We will pay approximately $40,071 during
2010 until the end of the lease. Thereafter Treaty has no continuing
obligation.
33
Item
9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item
9A. 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 and principal
financial 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 principal 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 and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Our
management, including our principal executive officer and principal financial
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.
Management’s
Report on Internal Control over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act, as amended. Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2009. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in Internal Control-Integrated Framework. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. We have identified the
following material weaknesses.
|
1.
|
As
of December 31, 2009, 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, 2009, 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.
|
Because
of these material weaknesses, management has concluded that the Company did not
maintain effective internal control over financial reporting as of December 31,
2009, based on the criteria established in "Internal Control-Integrated
Framework" issued by the COSO.
Change
In Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during our last fiscal year that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
Attestation
Report of the Registered Public Accounting Firm
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual
report.
Item
9B. Other Information
None
34
PART
III
Item
10. Directors, Executive Officers, Promoters and Control Persons and Corporate
Governance; Compliance with Section 16(a) Of The Exchange Act
As of
December 31, 2009, the directors and executive officers and their positions, are
as follows:
Name
|
Position
|
|
Randall
Newton
|
Chairman
and Chief Executive Officer
|
|
Joe
Grace
|
Corporate
Secretary and Director
|
|
Dan
Olson
|
Director
|
None of
our directors or executive officers is currently a director of any company that
files reports with the SEC, except as described below. None of our
directors have been involved in any bankruptcy or criminal proceeding (excluding
traffic and other minor offenses), nor has been enjoined from engaging in any
business. Our directors are elected at the annual meeting of
stockholders and hold office until their successors are duly elected and
qualified. Officers are appointed by our Board of Directors and serve
at the pleasure of the Board and are subject to employment agreements, if any,
approved and ratified by the Board.
Randall
Newton, Chairman and Chief Executive Officer
Randall
Newton is a CPA with a background in corporate finance, SEC filings, strategic
planning, mergers and acquisition modeling and analysis, corporate governance
and compliance under Sarbanes-Oxley that is complemented by early experience in
the financial side of oilfield transportation and international joint ventures
in oil & gas exploration.
From 1998
to present Mr. Newton has been the principal of Newton Collaboration, LLC, a
Houston Texas-based firm that provides accounting, governance and information
systems consulting services to private and public companies, and provided such
services to Treaty Energy since its inception. Prior to 1998, Mr. Newton served
as corporate controller of Peak USA Energy Services Ltd. of Houston, where he
created the Finance Department for a spin-off oilfield transportation joint
venture for Nabors Drilling, the world's largest land-rig company and Chesapeake
Energy.
Randall
Newton received a BBA degree in Accounting and Finance from the University of
Texas, and is fluent in Russian, Spanish and French.
Joe
Grace, President and Director
Joe Grace
has over 40 years of business experience beginning with six years at Gulf Oil.
After Gulf, Mr. Grace worked for 15 years in banking beginning with Texas
Commerce Bancshares (now Chase), followed by ten years of private company
ownership, and three years of public company leadership.
Mr. Grace
has been a bank president, CEO of two personally owned companies, CEO and
Chairman of one public company and CEO of a second public company. His business
interests range from oil and gas, banking and finance, corporate data centers,
integrated security centers, digital imaging, specialty engineered products, and
wireless broadband services.
35
In
addition, Mr. Grace has assisted companies with business strategies, capital
formation, investor relations, marketing concepts, contract development,
business development, and personnel evaluations through consulting agreements
with several private and public companies for the last ten years. He has also
served on the Board of Directors of several companies.
Dan
Olson, Director
Dan Olson
has over 30 years of experience in both public and private business, and was a
co-founder of Small Cap Consulting, LLC in 2004.
Mr.
Olson's focus over the years has been on start-up and developmental companies.
His ability to guide companies on achievable goals and then see those goals
completed has taken him into various business sectors. The implementation of his
management strategies has led many companies from concept to
reality.
Mr. Olson
has managed, owned, and served as a director in both private and public
companies. He has also spent a portion of his career in mentoring Chief
Executive Officers. He holds a post graduate degree in Economics from North
Dakota State University.
Board
of Directors and Committees
Our Board
of Directors presently consists of three members: Randall Newton, Joe Grace and
Dab Olson. Our Bylaws generally provide for majority approval of
directors in order to adopt resolutions. The Board of Directors may
be expanded in the future. All executive officer compensation,
including payroll expenditures, salaries, stock options, stock incentives, and
bonuses, must be approved by the unanimous consent of the Board of
Directors. The entire Board of Directors acts as the Audit Committee
and the Compensation Committee.
On
compensation matters, the Board considers and recommends payroll expenditures,
salaries, stock options, stock incentive and bonus proposals for our
employees. Acting in its audit committee function, the Board reviews,
with our independent accountants, our annual financial statements prior to
publication, and reviews the work of, and approves non-audit services performed
by, such independent accountants. The Board appoints the independent
public accountants for the ensuing year. The Board also reviews the
effectiveness of the financial and accounting functions and the organization,
operation and management of our Company.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 and the rules there under require
our officers and directors, and persons who beneficially own more than ten
percent of our common stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and to furnish us with
copies.
Based on
our reviews of the copies of the Section 16(a) forms received by it, or written
representations from certain reporting persons, we believe that, during the last
fiscal year, none of our directors or executive officers satisfied their Section
16(a) filing requirements. Such persons are in the process, with the
assistance of counsel, to file all required and missing reports.
Code
of Ethics
On March
12, 2004, the Board of Directors adopted a written Code of Ethics designed to
deter wrongdoing and promote honest and ethical conduct, full, fair and accurate
disclosure, compliance with laws, prompt internal reporting and accountability
to adherence to the Code of Ethics. This Code of Ethics has been
filed with the Securities and Exchange Commission as an Exhibit to this Form
10-K. The new Board of Directors has ratified this
code. We will provide a copy of our Code of Ethics to any shareholder
without charge upon a written request.
Procedure
for Nominating Directors
We have
not made any material changes to the procedures by which security holders may
recommend nominees to our board of directors.
The board
does not have a written policy or charter regarding how director candidates are
evaluated or nominated for the board. Additionally, the board has not created
particular qualifications or minimum standards that candidates for the board
must meet. Instead, the board considers how a candidate could contribute to the
Company's business and meet the needs of the Company and the
board.
36
The board
will consider candidates for director recommended by our shareholders.
Candidates recommended by shareholders are evaluated with the same methodology
as candidates recommended by management or members of the board. To refer a
candidate for director, please send a resume or detailed description of the
candidate's background and experience with a letter describing the candidate's
interest in the Company to 440 Louisiana, Suite 1400, Houston, Texas 77002. All
candidate referrals are reviewed by at least one current board
member.
Item
11. Executive Compensation
Summary
Compensation
The
following table shows the compensation paid or accrued during the fiscal years
ended December 31, 2009 and 2008, to our officers and directors.
SUMMARY COMPENSATION TABLE | ||||||||||||
NAME
AND PRINCIPAL POSITION
|
Year
Ended
December
31,
|
Base
Salary
|
Option
Awards
|
Dollar
Value
of
Total
Compensation
for
the Covered
Fiscal
Year
|
||||||||
|
|
|
|
|
|
|
|
|
||||
Randall
Newton
Chairman
and CEO
|
2009
|
$
|
167,455
|
$
|
-
|
$
|
167,455
|
|||||
2008
|
-
|
-
|
-
|
|||||||||
Joe
Grace
President
and Director
|
2009
|
209,600
|
-
|
209,600
|
||||||||
2008
|
-
|
-
|
-
|
|||||||||
Dan
Olson
Director
|
2009
|
19,650
|
-
|
19,650
|
||||||||
2008
|
-
|
-
|
-
|
|||||||||
Ronda
Hyatt
Former
CEO and Director
|
2009
|
-
|
-
|
-
|
||||||||
2008
|
-
|
-
|
-
|
|||||||||
Gary
Dunham
Former
CFO and Director
|
2009
|
-
|
-
|
-
|
||||||||
2008
|
-
|
-
|
-
|
|||||||||
David
Hallin,
Former
Secretary and Director
|
2009
|
-
|
-
|
-
|
||||||||
2008
|
-
|
-
|
-
|
·
|
Includes
$140,455 of salary accrued or paid and 6 months of earned signing bonus of
$27,000.
|
·
|
Mr.
Grace’s salary was paid in common stock of the Company by an affiliate,
but recognized by the Company as a corporate
expense.
|
·
|
Mr.
Olson’s salary was paid in common stock of the Company by an affiliate,
but recognized by the Company as a corporate
expense
|
Narrative
to Summary Compensation Table
Employment
Agreements of Named Executive Officers
Randall
Newton, Joe Grace and Dan Olson currently have compensation agreements with the
Company.
Mr.
Newton’s agreement provides for a monthly payment of $20,833 payable in cash or
in stock at the Company’s option.
Mr.
Grace’s agreement provides for a one-time payment of 16 million shares for one
year of service which began October 20, 2009. As is discussed in Note
13 to the financial statements, Mr. Grace resigned from this position as an
officer and director of the Company on March 2, 2009 citing health
reasons. The Company entered into a two-year consulting agreement
with Mr. Grace under which he will earn the remainder of his one-time
payment.
Mr.
Olson’s agreement provides for a one-time payment of 1.5 million shares for one
year of service which began October 20, 2009.
37
Long-term
Incentive Plans
We do not
have any long-term incentive plans, pension plans or any similar compensatory
plans for any of our directors or executive officers. Nor do we currently have
any intention to initiate any such plans in the near future.
Outstanding
Equity Awards at Fiscal Year End
None of
our current officers or directors have outstanding equity awards as December 31,
2009.
Retirement
Benefits
We do not
have any material terms or plans that provide for the payment of retirement
benefits, or benefits that will be paid primarily following retirement,
including but not limited to tax-qualified defined benefit plans, supplemental
executive retirement plans, tax-qualified defined contribution plans and
nonqualified defined contribution plans.
Nonqualified
Deferred Compensation
We do not
have any nonqualified defined contribution plans or other deferred compensation
plans
Potential
Payments Upon Termination or Change of Control
We do
not, as of December 31, 2008, have any material terms , contracts, agreements,
plans or arrangements, written or unwritten, that provides for payment(s) to a
CEO at, following, or in connection with the resignation, retirement or
termination of a CEO, or a change in control of the company or a change in the
CEO’s responsibilities following a change in control, with respect to each
CEO.
Director
Compensation
The
following table sets forth a summary of the compensation earned by our directors
and/or paid to certain of our directors pursuant to certain agreements we have
with them in 2009 and 2008.
Director
Compensation Table (2008)
Name
|
Fees
Earned
or
paid in cash
|
Stock
awards
|
Option
Awards
|
Non-equity
deferred
comp. earnings |
Non-qualified
deferred comp. earnings
|
All
other
|
Total
|
|||||||||||||||||||||
Randall
Newton
|
$ | - | $ | 116,499 | $ | - | $ | - | $ | - | $ | - | $ | 116,499 | ||||||||||||||
Joe
Grace
|
- | 209,600 | - | - | - | - | 209,600 | |||||||||||||||||||||
Dan
Olson
|
- | 19,650 | - | - | - | - | 19,650 | |||||||||||||||||||||
Ronda
Hyatt
|
- | - | - | - | - | - | - | |||||||||||||||||||||
David
Hallin
|
- | - | - | - | - | - | - | |||||||||||||||||||||
Gary
Dunham
|
- | - | - | - | - | - | - |
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following table sets forth information as to the record ownership of our common
stock by our (i) directors and executive officers, (ii) all of the officers and
directors as a group and (iii) each person who owns more than 5% or more of our
common stock. The persons named in this table possess the sole voting
and investment power with respect to the shares of common stock shown unless
otherwise indicated. In general, beneficial ownership includes those shares that
a person has the power to vote, sell, or otherwise dispose. Beneficial ownership
also includes that number of shares, which an individual has the right to
acquire within 60 days (such as stock options) of the date this table was
prepared. Two or more persons may be considered the beneficial owner of the same
shares. The inclusion in this section of any shares deemed beneficially owned
does not constitute an admission by that person of beneficial ownership of those
shares. All ownership of securities is direct ownership unless otherwise
indicated.
Name of beneficial owner
|
Address of beneficial owner
|
Amount and nature of beneficial
ownership
|
% of class (1)
|
|||||||
TK
Holdings, LLC
|
310
North Willis, Suite 212, Abilene, Texas 79603
|
270,924,062 | 58.89 | % | ||||||
Reza
M. Amanollahi
|
310
North Willis, Suite 212, Abilene, Texas 79603
|
28,333,333 | 6.16 | % | ||||||
Directors
and officers as a group (3 persons) (2)
|
310
North Willis, Suite 212, Abilene, Texas 79603
|
14,136,200 | 3.07 | % |
(1)
|
Applicable
percentage owned is based on 460,061,553 shares outstanding at December
31, 2008.
|
(2)
|
Includes
shares owned by corporations controlled by our officers and
directors.
|
38
Item
13. Certain Relationships and Related Transactions, and Director
Independence
Certain
Relationships and Related Transactions
As is
discussed in Note 5 to the financial statements, we partially funded our working
capital throughout 2009 and 2008 with loans from shareholders, accruing interest
payable to them, and paying interest and principal.
Also as
discussed in Note 5 to the financial statements, we made payments to a
shareholder related to the promissory note that arose from the conveyance of the
oil producing properties that we acquired from this shareholder.
As is
discussed in Note 7 to the financial statements, during 2009 a shareholder paid
expenses totaling $61,822, contributed $104,000 in cash and paid expenses
totaling $162,695 in personal holdings of common stock. During 2008,
that shareholder paid expenses of $169,648. This shareholder elected
to have all of these contributions treated as paid in capital.
Our Chief
Executive Officer loaned the company $14,659 during 2009.
Director
Independence
During
the year ended December 31, 2008, Ronda Hyatt, Gary Dunham and David Hallin
served as our directors.
On July
8, 2009, shareholders representing seventy four percent (74%) of the voting
power of Treaty Energy Corporation (the “Company”) took certain corporate action
by written consent of shareholders pursuant to Nevada corporate law. The
shareholders voted to elect Randall Newton a director and as Chairman of the
Board of Directors of the Company, and simultaneously voted to remove Ronda
Hyatt, David Hallin, and Gary Dunham as directors of the Company. After these
actions, Randall Newton remained as the only director of the
Company.
On July
8, 2009, shareholders representing seventy four percent (74%) of the voting
power of Treaty Energy Corporation (the “Company”) took certain corporate action
by written consent of shareholders pursuant to Nevada corporate law. The
shareholders voted to elect Randall Newton a director and as Chairman of the
Board of Directors of the Company, and simultaneously voted to remove Ronda
Hyatt, David Hallin, and Gary Dunham as directors of the Company. After these
actions, Randall Newton remained as the only director of the
Company.
On
September 19, 2009, the three former officers, Ronda Hyatt, David Hallin and
Gary Dunham submitted their resignations.
On
October 20, 2009 the Company appointed Joe Grace and Dan Olson to the Board of
Directors.
As our
common stock is currently traded on the OTC Bulletin Board, we are not subject
to the rules of any national securities exchange which require that a majority
of a listed company’s directors and specified committees of the board of
directors meet independence standards prescribed by such rules.
39
Item
14. Principal Accountant Fees and Services
We paid
M&K, CPAS, PLLC audit and review fees of $28,400 for 2009. For
2008 audit fees, we have paid $25,000 for audit and audit-related
fees.
Tax Fees. We have not paid any
money for tax related services.
All Other
Fees. We have not paid any money for other
fees.
Audit Committee pre-approval policies
and procedures. The entire Board of Directors, which acts as our audit
committee, approved the engagement of M&K, CPAS, PLLC.
Item
15. Exhibits, Financial Statement Schedules, Signatures
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 President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
32.1
|
Certification
of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
40
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:
April 15, 2010
|
By:
/s/ Randall
Newton
|
Randall
Newton
|
|
Chairman
and Chief Executive Officer
|
41