UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 2011
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number: 000-54328
EFL OVERSEAS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 26-3062721 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
333 N. Sam Houston Parkway East, Suite 600, Houston, Texas 77060
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (281) 260-1034
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No 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.
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | þ |
| (Do not check if a smaller reporting company) | | | |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o No þ
As of January 12, 2012, the registrant had 7,243,178 outstanding shares of common stock.
FORWARD LOOKING STATEMENTS
The information contained in this Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties. Any statement which does not contain an historical fact may be deemed to be a forward-looking statement. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. In evaluating forward looking statements, you should consider various factors outlined in our latest Form 10-K filed with U.S. Securities Exchange Commission (“SEC”) on November 29, 2011 and, from time to time, in other reports we file with the SEC. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements.
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EFL OVERSEAS, INC.
(An Exploration Stage Company)
BALANCE SHEETS
| | | November 30, | | | August 31, | |
| | | 2011 | | | 2011 | |
| | | (Unaudited) | | | (Audited) | |
| ASSETS |
| | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash | | $ | 327,175 | | | $ | 487,017 | |
| Prepaids | | | 13,125 | | | | 21,875 | |
| Other | | | 3,436 | | | | 3,436 | |
| Total current assets | | | 343,736 | | | | 512,328 | |
| | | | | | | | | |
| Total assets | | $ | 343,736 | | | $ | 512,328 | |
| | | | | | | | | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 401,739 | | | $ | 299,701 | |
| Notes payable | | | 70,000 | | | | 72,500 | |
| Asset retirement obligation | | | 80,000 | | | | 80,000 | |
| Total current liabilities | | | 551,739 | | | | 452,201 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| Capital Stock | | | | | | | | |
| Authorized: | | | | | | | | |
| 75,000,000 common shares, par value $0.001 per share | | | | | | | | |
| Issued and outstanding: | | | | | | | | |
| 7,196,870 common shares at November 30, 2011 and August 31, 2011 | | | 7,197 | | | | 7,197 | |
| Additional paid-in capital | | | 1,683,890 | | | | 1,683,890 | |
| Deficit accumulated during the exploration stage | | | (1,899,090 | ) | | | (1,630,960 | ) |
| Total stockholders' equity (deficit) | | | (208,003 | ) | | | 60,127 | |
| | | | | | | | | |
| Total liabilities and stockholders' equity (deficit) | | $ | 343,736 | | | $ | 512,328 | |
The accompanying notes are an integral part of these unaudited financial statements.
EFL OVERSEAS, INC.(An Exploration Stage Company)STATEMENTS OF OPERATIONS(Unaudited)
| | | Cumulative results | | | | | | | |
| | | from July 22, 2008 | | | | | | | |
| | | (inception) to | | | Three Months Ended November 30, | |
| | | November 30, 2011 | | | 2011 | | | 2010 | |
| OPERATING EXPENSES | | | | | | | | | |
| Office, travel and general | | $ | 112,777 | | | $ | 19,632 | | | $ | 3,488 | |
| Management fees | | | 273,548 | | | | 75,000 | | | | 15,000 | |
| Consulting | | | 413,279 | | | | 66,428 | | | | 84,500 | |
| Professional fees | | | 225,492 | | | | 62,735 | | | | 10,205 | |
| Oil and gas property impairment | | | 879,994 | | | | 44,335 | | | | - | |
| | | | (1,905,090 | ) | | | (268,130 | ) | | | (113,193 | ) |
| OTHER INCOME | | | | | | | | | | | | |
| Gain on forgiveness of accounts payable | | | 6,000 | | | | - | | | | - | |
| NET LOSS | | $ | (1,899,090 | ) | | $ | (268,130 | ) | | $ | (113,193 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| BASIC AND DILUTED NET LOSS PER COMMON SHARE | | | | | | $ | (0.04 | ) | | $ | (0.02 | ) |
| | | | | | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF BASIC | | | | | | | | | | | | |
| AND DILUTED COMMON SHARES OUTSTANDING | | | | | | | 7,196,870 | | | | 6,600,000 | |
The accompanying notes are an integral part of these unaudited financial statements.
EFL OVERSEAS, INC.(An Exploration Stage Company)STATEMENTS OF CASH FLOWS(Unaudited)
| | | Cumulative results | | | | | | | |
| | | from July 22, 2008 | | | | | | | |
| | | (inception) to | | | Three Months Ended November 30, | |
| | | November 30, 2011 | | | 2011 | | | 2010 | |
| | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
Net loss | | $ | (1,899,090 | ) | | $ | (268,130 | ) | | $ | (113,193 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | | | | | |
| used in operating activities: | | | | | | | | | | | | |
| Gain on forgiveness of accounts payable | | | (6,000 | ) | | | - | | | | - | |
| Oil and gas property impairment | | | 879,994 | | | | 44,335 | | | | - | |
| Changes in working capital items - | | | | | | | | | | | | |
| Prepaids and other | | | (16,561 | ) | | | 8,750 | | | | - | |
| Accounts payable and accrued liabilities | | | 332,244 | | | | 57,703 | | | | 49,003 | |
| Net cash used in operating activities | | | (709,413 | ) | | | (157,342 | ) | | | (64,190 | ) |
| | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | |
| Expenditures on oil and gas properties | | | (724,500 | ) | | | - | | | | - | |
| Cash used by investing activities | | | (724,500 | ) | | | - | | | | - | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
| Common stock and warrants sold for cash, net of fees | | | 1,656,851 | | | | - | | | | - | |
| Common stock redeemed for cash | | | (100 | ) | | | - | | | | - | |
| Proceeds from notes payable | | | 554,500 | | | | - | | | | 57,000 | |
| Repayments of notes payable | | | (484,500 | ) | | | (2,500 | ) | | | - | |
| Loans from related parties | | | 34,337 | | | | - | | | | 10,000 | |
| Net cash provided by (used in) financing activities | | | 1,761,088 | | | | (2,500 | ) | | | 67,000 | |
| | | | | | | | | | | | | |
| INCREASE (DECREASE) IN CASH | | | 327,175 | | | | (159,842 | ) | | | 2,810 | |
| | | | | | | | | | | | | |
| CASH, BEGINNING OF PERIOD | | | - | | | | 487,017 | | | | 4,758 | |
| | | | | | | | | | | | | |
| CASH, END OF PERIOD | | $ | 327,175 | | | $ | 327,175 | | | $ | 7,568 | |
| | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE: | | | | | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | - | | | $ | - | |
| Cash paid for income taxes | | $ | - | | | $ | - | | | $ | - | |
| Forgiveness of debt | | $ | 9,337 | | | $ | - | | | | - | |
| | | | | | | | | | | | | |
| NON-CASH ACTIVITIES: | | | | | | | | | | | | |
| Accrued expenditures on oil and gas properties | | $ | 75,494 | | | $ | 44,335 | | | $ | - | |
| Common stock issued as repayment of note payable | | $ | 25,000 | | | $ | - | | | $ | - | |
| Asset retirement obligation | | $ | 80,000 | | | $ | - | | | $ | - | |
The accompanying notes are an integral part of these unaudited financial statements.
EFL OVERSEAS, INC.
(An Exploration Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
November 30, 2011
(Unaudited)
1. BASIS OF PRESENTATION
Unaudited Interim Financial Statements
The unaudited interim financial statements of EFL Overseas, Inc. (the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). They do not include all information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended August 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC. The unaudited interim financial statements should be read in conjunction with those financial statements included in the Form 10-K. In the opinion of management, all adjustments considered necessary for fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three month period ended November 30, 2011 are not necessarily indicative of the results that may be expected for the year ending August 31, 2012.
Recent Accounting Pronouncements
The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations or cash flows.
2. OIL AND GAS PROPERTIES
San Miguel Oil Project
On March 31, 2011, the Company initiated oil and gas operations by entry into a Farmout and Participation Agreement (the “Agreement”) which provided for its acquisition of a net working interest ranging from 21.25% to 42.5%, in a 2,629 acre oil and gas lease known as the Matthews Lease, insofar as that lease covers from the surface to the base of the San Miguel formation (the “Lease”). The Lease is located in Zavala County, Texas, is unproven and has no current production. As such, the costs capitalized in connection with that property are not currently subject to depletion.
During April and May 2011, the Company drilled and completed the a test well on the Lease (the “Test Well”), performed injection operations and earned its initial interest in the Lease. The Test Well was drilled into the San Miguel heavy oil zone to a depth of 3,168 feet. The well encountered oil and was completed as a San Miguel producer. After completion, it was determined that the oil was subject to significant viscosity changes related to temperature reductions from formation to recovery at surface. The Test Well was stimulated with nitrified hydrochloric acid and placed on production. To date, however, oil viscosity has prohibited economic operation. As a result of the application of a full cost pool "ceiling test", the Company determined that the book value of the Lease was impaired to the extent of its carrying value. Accordingly, during August 2011 and November 2011, the Company recognized losses on the impairment of oil and gas assets of $835,659 and $44,335, respectively. The carrying value of oil and gas properties was likewise reduced to reflect the impairment of the Lease.
The Company continues to investigate various methods to improve production from the Test Well.
3. SUBSEQUENT EVENTS
As of November 30, 2011, the Company has accrued stock-based compensation totaling $86,774 under the terms of a consulting services agreement with an entity controlled by its Chief Executive Officer. During December 2011 the Company issued 22,974 shares of its restricted common stock, at a weighted average conversion price of $3.78 per share, in satisfaction of that liability under the agreement.
During December 2011, the Company retired $70,000 in non-interest bearing notes payable to an unrelated party. In exchange for the notes, the Company issued 23,334 investment units to the noteholder. The investment units were priced at $3.00 each and consisted of one share of the Company’s common stock, and one stock purchase warrant. Each stock purchase warrant entitles the holder to purchase one share of the Company’s common stock at a price of $4.50 per share until November 5, 2013.
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
EFL Overseas, Inc. is a development stage company incorporated in the State of Nevada on July 22, 2008. We are engaged in the acquisition, exploration and development of oil and gas properties in the United States and Canada. We were originally organized to recruit amateur instructors to teach English in Japan and Brazil. We were unable, however, to identify a sufficient number of instructors to fulfill our business plan.
Prior to March 2011, we were relatively inactive. During March 2011, we initiated oil and gas operations by entry into a Farmout and Participation Agreement (the “Agreement”) with Dyami Energy LLC and Eagleford Energy Inc. (jointly the “Farmor”). The Agreement provided for our acquisition of a net working interest, ranging from 21.25% to 42.5%, in a 2,629 acre oil and gas lease known as the Matthews Lease, insofar as that lease covers from the surface to the base of the San Miguel formation (the “San Miguel Lease”). The San Miguel Lease is located in Zavala County, Texas, and has no current production.
We are also engaged in the pursuit of an acquisition of working interests in the Kotaneelee Gas Project (the “KGP”).
As of January 12, 2012 we did not have any proven reserves, and had not generated any revenue.
On April 20, 2010 a former officer and director sold 4,835,000 shares of common stock (on a pre-forward split basis) to us for $100. The shares were cancelled following their purchase.
On April 28, 2010, shareholders owning a majority of our outstanding shares approved a 20 for 1 forward split of our common stock. The stock split was based on market conditions and upon a determination by our Board of Directors that the stock split was in our best interests and in the best interests of our shareholders. The amendment to our Articles of Incorporation pertaining to the forward stock split was filed with the Nevada Secretary of State on May 3, 2010. The forward stock split became effective on the OTC Bulletin Board on June 30, 2010. Prior to the forward stock split, we had 330,000 outstanding shares of common stock. Subsequent to the forward stock split we had 6,600,000 outstanding shares of common stock.
Financial Condition and Results of Operations
Oil and Gas Operations - Zavala County, Texas
Under our Agreement with Dyami Energy LLC and Eagleford Energy Inc. we may spend up to $1,050,000 on the exploration and development of oil and/or gas from the San Miguel Lease. To earn our initial 21.25% working interest (net revenue interest 15.94%), we were obligated to drill and complete a vertical Test Well in the San Miguel shale formation. We were also obligated to perform an injection operation on the Test Well. If the Test Well was prospective for production in commercial quantities, we were required to equip the Test Well and place it on production. If we determine that the Test Well is not prospective for production in commercial quantities, we are responsible for the abandonment of the Test Well.
During April and May 2011, we drilled and completed the Test Well, performed injection operations and earned our initial interest in the San Miguel Lease. The Test Well was drilled into the San Miguel heavy oil zone to a depth of 3,168 feet. The well encountered oil and was completed as a San Miguel producer. After completion, it was determined that the oil was subject to significant viscosity changes related to temperature reductions from formation to recovery at surface. The Test Well was stimulated with nitrified hydrochloric acid and placed on production. To date, however, oil viscosity has prohibited economic operation. Although we continue to investigate various methods to improve production from the Test Well, we cannot estimate what cost, if any, will be associated with future production efforts on the Lease. We have no current plans to expend the funds necessary to earn an additional interest in the San Miguel Lease.
As a result of the application of a full cost pool "ceiling test", we determined that the book value of the San Miguel Lease was impaired to the extent of its carrying value. Accordingly during the year ended August 31, 2011 and the three months ended November 30, 2011, we recognized a losses on the impairment of oil and gas assets of $835,659 and $44,335, respectively. The carrying value of oil and gas properties was likewise reduced to reflect the impairment of the Lease.
Kotaneelee Gas Project
Beginning in early fiscal 2011, we began pursuit of an acquisition of up to a 65% working interest in the KGP. The KGP covers 30,188 gross acres in the Yukon Territory in Canada. At January 10, 2012 the KGP had; two (2) gas wells producing approximately 4.5 MMCFD, three (3) suspended gas wells, one (1) disposal well, and a gas processing facility with capacity of 70 MMCFD. The KGP has a fully developed gas sales and delivery infrastructure, airstrip, storage tanks, barge dock and permanent camp facilities. We believe the KGP has significant conventional and shale gas potential and is supported by an environment of growing investment in gas exploration, processing and export in the Pacific Northwest.
Consulting, travel and legal expenses incurred during the three months ended November 30, 2011 in connection with our pursuit of the acquisition of the KGP totaled approximately $80,000.
Other
At November 30, 2010, we were relatively inactive. Our assets and liabilities totaled $7,568 and $185,346, respectively, and our accumulated deficit was $196,965. The $113,193 in expenses incurred during the three months ended November 30, 2010 related to our initial investigation of the KGP and the costs required to support strategic planning and regulatory compliance.
During the fiscal year ended August 31, 2011, we raised $1,709,401 through debt and equity financings and invested approximately $1,191,000 in the exploration of the San Miguel Lease and our pursuit of the acquisition of the KGP.
During the three months ended November 30, 2011, we expended approximately $122,000 in the exploration of the San Miguel Lease and our pursuit of the acquisition of the KGP. Our residual general and administrative expense for the three months ended November 30, 2011 (approximately $146,000) resulted from costs incurred to support our executive team, professional resources, and our accounting and administrative infrastructure.
At November 30, 2011, our current liabilities ($551,739) exceeded current assets ($343,736) by $208,003. Our current liabilities include accounts payable and accrued liabilities of $401,739 and non-interest bearing demand notes totaling $70,000 incurred in the normal course of business. We also had an $80,000 asset retirement obligation related to the San Miguel Test Well. All of our oil and gas assets were written-off in connection with the impairment of the San Miguel Lease. During December 2011, the demand notes totaling $70,000 were retired in exchange for shares of our common stock.
As of November 30, 2011, we had not generated any revenues.
We expect our expenses will continue to increase as we expand operations. We are actively seeking additional capital to fund those expenditures.
During the remainder of fiscal 2012 we plan to identify, investigate and complete asset acquisition(s) and pursue joint venture agreements with third parties to explore for natural resources in Canada, the United States or other parts of the world.
Liquidity and Capital Resources
The oil and gas industry is cyclical in nature and tends to reflect general economic conditions. The pattern of historic price fluctuations in oil and gas has resulted in additional uncertainty in capital markets. Our access to capital, as well as that of our partners and contractors, has been limited due to tightened credit markets. These limitations may inhibit the size and timing of formation of exploration ventures.
We plan to generate profits by drilling productive oil or gas wells or improving the production of existing wells. We will, however, need to raise the funds we require through the sale of our securities, from loans from third parties or by joint venturing operations with third parties which will pay a portion of the costs required to explore for oil and gas in the area covered by our leases.
Any wells which we may drill may not produce oil or gas in commercial quantities. We plan to report losses from our operations until such time, if ever, we begin to generate significant revenue from oil and gas sales.
Other than the obligations associated with our oil and gas leases, our material future contractual obligations as of November 30, 2011 are shown below.
| | Payments due by period | |
| Contractual Obligations | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | |
| | | | | | | | | | | | | | | | |
| Loans and Advances | | $ | 70,000 | | | $ | 70,000 | | | | — | | | | — | | | | — | |
During December 2011, we retired $70,000 in non-interest bearing notes payable to an unrelated party. In exchange for the notes, we issued 23,334 investment units to the noteholder. The investment units were priced at $3.00 each and consisted of one share of our common stock, and one stock purchase warrant. Each stock purchase warrant entitles the holder to purchase one share of our common stock at a price of $4.50 per share until November 5, 2013.
As of November 30, 2011, we have accrued stock-based compensation totaling $86,774 under the terms of a consulting services agreement with an entity controlled by our Chief Executive Officer. During December 2011 we issued 22,974 shares of our restricted common stock, at a weighted average conversion price of $3.78 per share, in satisfaction of that liability under the agreement.
During May 2011, we sold 120,000 investment units. The investment units were priced at $3.00 each and consisted of one share of our common stock and one stock purchase warrant. Each stock purchase warrant entitles the holder to purchase one share of our common stock at a price of $4.50 per share until April 15, 2013. Proceeds from the private placement totaled $360,000, all of which was paid in cash. We paid $2,400 in finder’s fees in connection with the sale of the units. Our Chief Executive Officer acquired 50,000 investment units in this private placement.
During April 2011, we sold 390,000 investment units at a price of $3.00 per unit. Each unit consisted of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $4.50 per share until April 1, 2013. Proceeds from the private placement totaled $1,170,000, all of which was paid in cash. We paid $46,800 in finder's fees in connection with the sale of the units.
During December 2010, we sold 86,870 investment units at a price of $2.30 per unit. Each unit consisted of one share of our common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock at a price of $3.50 per share until December 29, 2012. Proceeds from the private placement totaled $191,100 (net of $8,700 in fees) of which $166,100 was paid in cash and $25,000 was a repayment of a loan.
The trends and factors that will most significantly affect our results of operations include; (i) our ability to satisfy our capital requirements, (ii) our ability to effectively acquire oil and gas properties, (iii) our exploration success and the marketability of future production, if any, (iv) competition from other companies, and (vi) future fluctuations in the prices of oil and gas.
During the year ended August 31, 2011, we borrowed $134,500, and repaid $82,000 in notes payable to unrelated parties. During October 2010, notes payable to our largest shareholder increased by $10,000 and during December 2010, we issued common stock and stock purchase warrants as repayment of $25,000 in notes payable to that shareholder.
In connection with the Agreement with Dyami Energy LLC and Eagleford Energy Inc., we obtained $400,000 in temporary financing from our largest shareholder. This financing was subject to a non-interest bearing demand note payable. The entire $400,000 note balance was repaid from proceeds of a private placement of investment units during April 2011.
We may acquire an interest in the KGP. If we proceed with the transaction, we will have significant capital commitments which we will need to fund. During the twelve month period ending January 1, 2013, early estimates indicate that investment in the KGP, including cash, the absorption of liabilities, and year one exploration costs may range from $30,600,000 to $36,600,000. We are attempting to raise the capital needed to implement our business plan.
We believe our plan of operations, exclusive of costs associated with additional acquired assets, will require from $1,000,000 to $1,500,000 in financing over the twelve-month period ending January 1, 2013.
If we are unable to raise the financing we need, our business plan may fail and our stockholders could lose their investment. There can be no assurance that we will be successful in raising the capital we require, or that if the capital is offered, it will be subject to terms we consider acceptable. Investors should be aware that even if we are able to raise the funds we require, there can be no assurance that we will succeed in our acquisition, exploration or production plans and we may never be profitable.
As of January 12, 2012 we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity or capital resources.
Critical Accounting Policies and Estimates
Measurement Uncertainty
The process of preparing financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements; accordingly, actual results may differ from estimated amounts. Our estimates and assumptions are based on current facts, historical experience and various other factors we believe to be reasonable under the circumstances. The most significant estimates with regard to the financial statements included with this report relate to carrying values of oil and gas properties, determination of fair values of stock based transactions, and deferred income tax rates and timing of the reversal of income tax differences.
These estimates and assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
Petroleum and Natural Gas Properties
We utilize the full cost method to account for our investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. If we commence production from established proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Costs of unproved properties are not amortized until the proved reserves associated with the projects can be determined or until impairment occurs. If an assessment of such properties indicates that properties are impaired, the amount of impairment is added to the capitalized cost base to be amortized.
The capitalized costs included in the full cost pool are subject to a "ceiling test" (based on the average of the first-day-of-the-month prices during the twelve-month period prior to August 31, 2011 pursuant to the SEC’s “Modernization of Oil and Gas Reporting” rule), which limits such costs to the aggregate of the (i) estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions, (ii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, (iii) the cost of properties not being amortized, less (iv) income tax effects related to differences between the book and tax basis of the cost of properties not being amortized and the cost or estimated fair value of unproved properties included in the costs being amortized. If net capitalized costs exceed this limit, the excess is charged to expense in the current period. At August 31, 2011, all of our oil and gas interests were impaired and expensed.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the statement of operations.
Asset Retirement Obligations
We record the fair value of an asset retirement obligation as a liability in the period in which we incur an obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The estimated fair value of the asset retirement obligation is based on the current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate. This liability is capitalized as part of the cost of the related asset and amortized over its useful life.
Fair Value of Financial Instruments
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, other receivables, accounts payable, accrued liabilities and demand notes payable approximates their carrying value due to their short-term nature.
For purposes of the statements of cash flows, we consider all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents. Cash and cash equivalents totaled $327,175 and $487,017 at November 30, 2011 and August 31, 2011, respectively.
Stock Based Compensation
We record compensation expense for stock based payments using the fair value method. The fair value of stock based compensation to directors and employees is determined using the Black-Scholes option valuation model at the time of grant. Fair value for common shares issued for goods or services rendered by non-employees is measured based on the fair value of the goods and services received. Share-based compensation is expensed with a corresponding increase to share capital. Upon the exercise of the stock options, the consideration paid is recorded as an increase in share capital.
Income Taxes
We follow the asset and liability method of accounting for future income taxes. Under this method, future income tax assets and liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized.
Earnings per share
We present both basic and diluted earnings (loss) per share (EPS) on the face of the statements of operations. Basic EPS is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Diluted EPS figures are equal to those of basic EPS for each period since we have no dilutive stock options and warrants.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out 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 of the end of the period covered by this report on Form 10-Q. Disclosure controls and procedures are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and is communicated to our management, including our Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our management concluded that, as of November 30, 2011, our disclosure controls and procedures were effective.
Change in Internal Control over Financial Reporting
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
| Exhibit Number | | Exhibit Name |
| | | |
| 3.1.1 | | Articles of Incorporation(1) |
| | | |
| 3.1.2 | | Amendment to Articles of Incorporation(2) |
| | | |
| 3.2 | | Bylaws(3) |
| | | |
| 10.1 | | Farmout and Participation Agreement dated March 31, 2011(4) |
| | | |
| | Rule 13a-14(a) Certifications |
| | | |
| | Rule 13a-14(a) Certifications |
| | | |
| | Section 1350 Certifications |
| | | |
| 101.INS | | XBRL Instance Document |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
____________
| (1) | Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 dated November 12, 2008. |
| (2) | Incorporated by reference to Exhibit 3.1 to the Company’s 8-K report dated April 28, 2010. |
| (3) | Incorporated by reference to Exhibit 3.2 to the Company’s 8-K report dated April 28, 2010. |
| (4) | Incorporated by reference to Exhibit 10.1 to the Company’s 8-K report dated April 6, 2011. |
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | EFL OVERSEAS, INC. | |
| | | | |
| Dated: January 16, 2012 | BY: | /s/ Keith Macdonald | |
| | | Keith Macdonald, | |
| | | Principal Executive Officer | |
| | | | |
| | | | |
| | BY: | /s/ Herbert Schmidt | |
| | | Herbert Schmidt, | |
| | | Principal Financial and Accounting Officer | |
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