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EX-31.2 - CERTIFICATION - EFLO ENERGY, INC.eflo_312.htm
EX-31.1 - CERTIFICATION - EFLO ENERGY, INC.eflo_311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: February 29, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ____________
 
Commission file number:  000-54328
 
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 April 16, 2012, the registrant had 7,253,989 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.
 
 
2

 

PART 1 – FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS
 
EFL OVERSEAS, INC.
(An Exploration Stage Company)
BALANCE SHEETS
 
   
February 29,
   
August 31,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS
             
CURRENT ASSETS
           
Cash
  $ 174,695     $ 487,017  
Prepaids
    4,375       21,875  
Other
    5,604       3,436  
Total current assets
    184,674       512,328  
                 
Total assets
  $ 184,674     $ 512,328  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                 
CURRENT LIABILITIES
               
Accounts payable and accrued liabilities
  $ 303,326     $ 299,701  
Notes payable
    -       72,500  
Asset retirement obligation
    80,000       80,000  
Total current liabilities
    383,326       452,201  
                 
STOCKHOLDERS' EQUITY (DEFICIT)
               
Capital Stock
               
Authorized:
               
75,000,000 common shares, par value $0.001 per share
               
Issued and outstanding:
               
7,253,989 and 7,196,870 common shares at February 29, 2012  and August 31, 2011, respectively
    7,254       7,197  
Additional paid-in capital
    1,870,607       1,683,890  
Deficit accumulated during the exploration stage
    (2,076,513 )     (1,630,960 )
Total stockholders' equity (deficit)
    (198,652 )     60,127  
                 
Total liabilities and stockholders' equity (deficit)
  $ 184,674     $ 512,328  
 
The accompanying notes are an integral part of these unaudited financial statements.
 
 
3

 
 
EFL OVERSEAS, INC.
(An Exploration  Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
 
                           
Cumulative results
 
   
Three Months Ended,
   
Six Months Ended,
   
from July 22, 2008 to
 
   
February 29, 2012
   
February 28, 2011
   
February 29, 2012
   
February 28, 2011
   
February 29, 2012
 
OPERATING EXPENSES
                             
Office, travel and general
  $ 9,848     $ 12,419     $ 29,480     $ 15,907     $ 122,625  
Management fees
    75,000       15,000       150,000       30,000       348,548  
 Consulting
    46,825       24,550       113,253       109,050       460,104  
 Professional fees
    45,750       4,700       108,485       14,905       271,242  
Oil and gas property impairment
    -       -       44,335       -       879,994  
      (177,423 )     (56,669 )     (445,553 )     (169,862 )     (2,082,513 )
OTHER INCOME (EXPENSE)
                                       
Gain on forgiveness of accounts payable
    -       -       -       -       6,000  
NET LOSS
  $ (177,423 )   $ (56,669 )   $ (445,553 )   $ (169,862 )   $ (2,076,513 )
                                         
                                         
                                         
BASIC AND DILUTED NET LOSS PER COMMON SHARE
  $ (0.02 )   $ (0.01 )   $ (0.06 )   $ (0.03 )        
                                         
WEIGHTED AVERAGE NUMBER OF BASIC
                                       
  AND DILUTED COMMON SHARES OUTSTANDING
    7,230,066       6,659,844       7,213,468       6,629,757          
 
The accompanying notes are an integral part of these unaudited financial statements.
 
 
4

 
 
EFL OVERSEAS, INC.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
 
               
Cumulative results
 
   
Six Months Ended,
   
from July 22, 2008 to
 
   
February 29, 2012
   
February 28, 2011
   
February 29, 2012
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
  $ (445,553 )   $ (169,862 )   $ (2,076,513 )
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
    44,335       -       879,994  
Changes in working capital items -
                       
Prepaids and other
    15,332       (3,500 )     (9,979 )
Accounts payable and accrued liabilities
    87,264       12,321       361,805  
Net cash used in operating activities
    (298,622 )     (161,041 )     (850,693 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Expenditures on oil and gas properties
    (11,200 )     -       (735,700 )
Cash used by investing activities
    (11,200 )     -       (735,700 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Common stock and warrants sold for cash, net of fees
    -       166,100       1,656,851  
Common stock redeemed for cash
    -       -       (100 )
Proceeds from notes payable
    -       99,500       554,500  
Repayments of notes payable
    (2,500 )     (82,000 )     (484,500 )
Loans from related parties
    -       10,000       34,337  
Net cash (used in) provided by financing activities
    (2,500 )     193,600       1,761,088  
                         
INCREASE (DECREASE) IN CASH
    (312,322 )     32,559       174,695  
                         
CASH, BEGINNING OF PERIOD
    487,017       4,758       -  
                         
CASH, END OF PERIOD
  $ 174,695     $ 37,317     $ 174,695  
                         
SUPPLEMENTAL DISCLOSURE:
                       
Cash paid for interest
  $ -     $ -     $ -  
Cash paid for income taxes
  $ -     $ -     $ -  
Forgiveness of debt
  $ -     $ -     $ 9,337  
NON-CASH INVESTING ACTIVITIES:
                       
Accrued expenditures on oil and gas properties
  $ 33,135     $ -     $ 64,294  
Asset retirement obligation
  $ -     $ -     $ 80,000  
NON-CASH FINANCING ACTIVITIES
                       
Common stock issued as repayment of note payable
  $ 70,000     $ -     $ 95,000  
Common stock issued for services
  $ 116,774     $ -     $ 116,774  
 
The accompanying notes are an integral part of these unaudited financial statements.
 
 
5

 

EFL OVERSEAS, INC.
(An Exploration Stage Company)
 
NOTES TO THE FINANCIAL STATEMENTS
February 29, 2012
(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 and six month periods ended February 29, 2012 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.

During April and May 2011, the Company drilled and completed 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.  COMMON STOCK
 
On December 26, 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. Using the Black-Scholes option pricing model, the Company recognized $22,211 as the fair value of the stock purchase warrants.

Under the terms of a consulting agreement with an entity controlled by the Company's Chief Executive Officer, the Company pays certain monthly fees in shares of its restricted common stock. As of November 30, 2011, the Company had accrued stock-based compensation under the consulting agreement totaling $86,774. During December 2011 the Company issued 22,974 shares of its common stock, at a weighted average price of $3.78 per share, in satisfaction of that liability. During the three months ended February 29, 2012, the Company incurred an additional $30,000 in stock-based compensation under the consulting agreement. Effective February 29, 2012, the Company issued an additional 10,811 shares of its common stock, at a weighted average price of $2.78 per share, in satisfaction of that liability. In each instance, the weighted average price was calculated using the average closing price of the Company’s common stock on the last trading-day of the applicable monthly earning period.
 
 
6

 
 
ITEM 2.   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.

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 April 16, 2012 we did not have any proven reserves, and had not generated any revenue.
 
Financial Condition and Results of Operations

Oil and Gas Operations - Zavala County, Texas

Under our Agreement with Dyami Energy LLC and Eagleford Energy Inc. 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 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. We have made no additional expenditures on the San Miguel Lease since November 30, 2011.
 
 
7

 
 
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 April 16, 2012 the KGP had; two (2) producing gas wells, 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 processing and export in the Pacific Northwest. Current declines in natural gas prices, however, have resulted in delays in our capital formation related to natural gas exploration.
 
Other

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.
 
Our general and administrative expense for the three and six months ended February 29, 2012 increased by $120,754 (213%) from $56,669 to $177,423 and $275,691 (162%) from $169,861 to $445,553, respectively, when compared to the same periods during the prior year. Of those increases approximately $95,562 and $220,335, respectively, was expended in connection with our exploration of the San Miguel Lease and our pursuit of the acquisition of the KGP. The residual increase in our general and administrative expense during these periods resulted from costs incurred to support our executive team, professional resources, and our accounting and administrative infrastructure.
 
We recognized no revenues during the six months ended February 29, 2012 or from our inception to date.

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. These limitations may inhibit the size and timing of exploration ventures.
 
 
8

 
 
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, we have no material future contractual obligations as of February 29, 2012.
 
At February 29, 2012, our current liabilities ($383,326) exceeded current assets ($184,674) by $198,652. Our current liabilities include accounts payable and accrued liabilities of $303,326 and 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, 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 had accrued stock-based compensation totaling $86,774 under the terms of a consulting 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 price of $3.78 per share, in satisfaction of that liability. During the three months ended February 29, 2012, we  incurred an additional $30,000 in stock-based compensation under this consulting agreement. Effective February 29, 2012, we issued an additional 10,811 shares of our common stock, at a weighted average price of $2.78 per share, in satisfaction of that liability.

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.
 
 
9

 

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) the current decline in the price of natural gas.
 
In connection with the San Miguel Farmout Agreement, 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 May 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 May 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 April 16, 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.
 
 
10

 
 
The capitalized costs included in the full cost pool are subject to a "ceiling test" (based on the average of 12-month  first-day-of-the-month prices), 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 February 29, 2012, 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.

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 $174,695 and $487,017 at February 29, 2012 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 stock options, the consideration paid is recorded as an increase in share capital.
 
 
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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 and we are in a loss position.
 
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 February 29, 2012, 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.
 
 
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PART II - OTHER INFORMATION

ITEM 2.    UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS.

See Part I, Item 2 of this report for information concerning securities we sold during the fiscal quarter ended February 29, 2012.

We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 in connection with the issuance of these securities. We did not pay any underwriting discounts or sales commissions in connection with the issuance of these shares.
 
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.
 
 
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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:  April 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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