Avalon Oil & Gas, Inc. - Recent Material Event
<![CDATA[Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No[X]
The issuer's revenues for its most recent fiscal year were $249,856
The aggregate market value of the Company's common stock held by non-affiliates
of the Company on July 10, 2008 was approximately $4,535,687 computed by
reference to the average of the closing bid and ask prices as quoted on that
date.
Check whether the Company has filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Securities Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [X] No [ ]
The Company has one class of common stock outstanding, $0.001 par value per
share (the "Common Stock"). On March 31, 2008, there were 31,767,463 shares
outstanding. As of May 17, 2007, our common shares were subject to a 20 for 1
reverse split. All references to our shares in this Form 10-KSB include the
effect of this reverse split of our common stock. The Company is also authorized
to issue 1,000,000 shares of Preferred Stock, par value $0.10 per share, of
which 100 Class A Convertible Preferred Shares have been issued. See "Item 5
Market for the Company's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities."
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AVALON OIL & GAS, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 5
Item 2. Description of Property 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II 10
Item 5. Market for Common Equity and Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities 10
Item 6. Management's Discussion and Analysis or Plan of Operation 13
Item 7. Financial Statements 17
Item 8. Changes In and Disagreements with Accountants On Accounting
and Financial Disclosure 17
Item 8A. Controls and Procedures 17
Item 8B. Other Information 17
PART III 17
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) Of the Exchange Act 17
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 21
Item 12. Certain Relationships and Related Transactions, and Director
Independence 22
Item 13. Exhibits 22
Item 14. Principal Accountant Fees and Services 24
SIGNATURES 25
FINANCIAL STATEMENTS F-1 - F-22
3
EXHIBITS
3.1 Restated Articles of Incorporation *
3.2 Restated Bylaws *
3.3 Articles of Incorporation for the State of Nevada *
3.4 Articles of Merger for the Colorado Corporation and the Nevada
Corporation *
3.5 Bylaws of the Nevada Corporation *
4.1 Specimen of Common Stock *
31.1 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
* Incorporated by reference.
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PART I
References in this document to "us," "we," the "Registrant," or the "Company"
refer to Avalon Oil & Gas, Inc., and its predecessors.
Statements contained in the Form 10-KSB discuss future expectations and plans
which are considered forward-looking statements as defined by Section 27 (a) of
the Securities and Exchange Act of 1934, as amended. Sentences which incorporate
words such as "believes," "intends," "expects," "predicts," "may," "will,"
"should," "contemplates," "anticipates," or similar statements are based on our
beliefs and expectations using the most current information available to us. In
view of the fact that our discussions in the Form 10-KSB are based on upon
estimates and beliefs concerning circumstances and events which have not yet
occurred, the anticipated results are subject to changes and variations as
future operations and events actually occur and could differ materially from
those discussed in forward-looking statements. Moreover, although we reasonably
expect, to the best of our knowledge and belief, that the results to be achieved
by us will be as set forth in the following discussion, the following discussion
is not a guarantee and there can be no assurance that any of the potential
results which are described will occur. Furthermore, there will usually be
differences between the forecasted and actual results because events and
circumstances frequently do not occur as expected, and the difference may be
material.
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
We were originally incorporated in Colorado in April 1991 under the name Snow
Runner (USA), Inc. We were the general partner of Snow Runner (USA) Ltd., a
Colorado limited partnership to sell proprietary snow skates under the name
"Sled Dogs" which was dissolved in August 1992. In late 1993, we relocated our
operations to Minnesota and in January 1994 changed our name to Snow Runner,
Inc. In November 1994 we changed our name to the Sled Dogs Company. On November
5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
In September 1998, we emerged from protection of Chapter 11 of the U.S.
Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and
our name to XDOGS.COM, Inc. In August 2000, following our bankruptcy, we made a
decision to re-focus to a traditional wholesale to retail distributor, and
obtained the exclusive North American rights to distribute high-end European
outdoor apparel and equipment. We first intended to exploit these rights over
the Internet under the name XDOGS.COM, Inc. However, due to the general economic
conditions and the ensuing general downturn in e-commerce and internet-based
businesses, we decided that to best preserve our core assets we would need to
adopt a more traditional strategy. Thus, we abandoned this approach and to
better reflect our new focus, we changed our name to XDOGS, Inc. On July 22,
2005, the Board of Directors and a majority of the Company's shareholders
approved an amendment to our Articles of Incorporation to change the Company's
name to Avalon Oil & Gas, Inc. ("Avalon"), and to increase the authorized number
of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares,
par value of $0.001, and engage in the acquisition of producing oil and gas
properties.
Acquisition Strategy
Our strategy is to acquire oil and gas producing properties that have proven
reserves and established in-field drilling locations with a combination of cash,
debt, and equity. We believe that acquisition of such properties minimizes our
risk, allows us to generate immediate cash flow, and provides in-field drilling
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locations to expand production within the proven oil and gas fields. We will
aggressively develop these low cost/low risk properties in order to enhance
shareholder value. In addition, Avalon's technology group acquires oil
production enhancing technologies. Through its strategic partnership with UTEK
Corporation, (UTK: ASE) a transfer technology company, Avalon is building an
asset portfolio of innovative technologies in the oil and gas industry to
maximize enhancement opportunities at its various oil and gas properties.
In furtherance of the foregoing strategy, we have engaged in the following
transactions during the last three years:
On August 29, 2005 we acquired a one hundred percent (100%) working interest,
seventy-eight percent (78%) net revenue interest, in 2,400 acres located in
Canadian County, Oklahoma ("The Oklahoma Properties"), from Sooner Trend Leasing
LLC, payable by delivering 48,000,000 authorized, but previously un-issued,
shares of the Company's common stock. On February 13, 2005, the Company returned
The Oklahoma Properties to Sooner Trend Leasing LLC, and sent a letter to our
transfer agent canceling the 48,000,000 shares of stock issued to Sooner Trend
Leasing LLC. On October 20, 2006, the District Court for the Fourth Judicial
District, State of Minnesota, issued a judgment canceling the 48,000,000 shares
issued to Sooner Trend Leasing, LLC. On May 4, 2007, the judgment issued by the
District Court for the Fourth Judicial District, State of Minnesota was filed
with the County Clerk in Tulsa County, Oklahoma.
On May 17, 2006, we signed a strategic alliance agreement with UTEK Corporation,
a technology transfer company to develop a portfolio of new technologies for the
oil and gas industry.
On June 15, 2006, we acquired a fifty percent (50%) working interest in the J.C.
Kelly wellbore, a 121.9 acre lease in Wood County, Texas, in addition to the
E.A. Chance #1 and #2 wellbores, a 40 acre lease in Camp County, Texas and all
of the surface equipment for the properties, from KROG Partners LLC. The J. C.
Kelly well produces from the Paluzy Interval and the Change # 1 and #2 wells
produce from the Sub-Clarksville zone, within an active waterflood area.
On July 17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc., ("UMTI")
a wholly owned subsidiary of UTEK Corporation (AMEX: UTK). UMTI holds the
exclusive worldwide license for the mitigation of paraffin wax deposition from
crude oil using ultrasonic waves. Varying ultrasonic transducers are positioned
in production tubing walls as a means to inhibit the wax from attaching to the
pipes. The use of this technology helps prevent precipitates from forming on
pipes, and also breaks wax bonds thereby increasing flow rates and production
efficiency. This technology was developed at the University of Wyoming by Dr.
Brian Towler.
On August 11, 2006, we acquired a fifty percent (50%) working interest in the
Dixon Heirs #1, Deltic Farms & Timber #1 and the Gunn #1 wells and associated
units and leases, in Miller County, Arkansas. These are mature wells with stable
production, and were originally drilled in the early 1980's.
On November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT") a
wholly owned subsidiary of UTEK Corporation (AMEX: UTK). IWT holds a license for
borehole casing technology developed by researchers at Lawrence Livermore
National Laboratory. The technology uses a densely spaced network of sensors
which are installed along and outside of the oil well casings before they are
grouted into place. The sensors monitor critical parameters in the subsurface
oil reservoir. Data from multiple sensors provides real-time information
regarding the status of the reservoir and the primary and secondary oil recovery
process. Sensors located deep within the reservoir are much more sensitive than
sensors located on the surface. The type of sensors that can be installed
include seismic sensors, electrical resistance tomography electrodes,
electromagnetic induction tomography coils and thermocouples.
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On November 15, 2006, we acquired a ten percent (10%) working interest in 13
wellbores, which include six (6) producing oil wells, three (3) salt water
disposal wells, three (3) shut-in or marginally producing wells, and one (1)
well that has been plugged and abandoned since the effective date, located in
Upshur County, Texas. These wells produce from the Woodbine interval. Avalon is
currently working on optimization/workover opportunities with the goal of
enhancing operations and production from the shut-in wellbores.
On March 29, 2007, we acquired Leak Location Technologies, Inc., ("LLT") a
wholly owned subsidiary of UTEK Corporation (AMEX: UTK). LLT owns an exclusive
license to a system for determining the presence and location of leaks in
underground pipes. The technology was developed by researchers at Rensselaer
Polytechnic Institute. The system uses a series of acoustic sensors to monitor
changes in pipeline acoustic emissions, and has been proven in field application
with a large multinational petroleum company. The lead scientist in charge of
that project is currently under contract to Avalon to manage the technology
design refresh and prototype development for commercialization.
On May 22, 2007, we acquired a fifteen percent (15%) working interest in the
Janssen #1A prospect in Karnes County, Texas. The Janssen Prospect will be
re-completed in the existing vertical wellbore by a sidetrack drilling procedure
at a depth of approximately 10,500 feet, and test the Wilcox sand. Total
potential reserves are estimated to be 75,000 to 100,000 barrels of condensate
and 3 to 4 BCF (billion cubic feet) of gas.
On May 31, 2007 we announced the purchase of a 15% stake in the oil wells in the
Janssen Prospect, Karnes County, Texas (the "Janssen Well").
On October 31, 2007, we announced in a press release that we closed upon the
acquisition of non-operated production in the Lake Washington Field in
Plaquemines Parish, Louisiana. Since its discovery in the 1930, the Lake
Washington Field has produced approximately 350 million barrels of oil. We hold
approximately a .7% working interest in 3 units that are currently producing
over 1000 barrels of oil per day.
On April 7, 2008 we announced in a press release our acquisition in December
2007 of a 5% working interest in the 1,280 Waters prospect. The first well is
being drilled between two gas wells that the produced over 500 million cubic
feet of natural gas in the two years they have been in production. Estimated
recoverable reserves from the Waters well are projected to exceed 1.3 billion
cubic feet of natural gas.
On July 2, 2008, we announced in a press release dated July 2, 2008 that we have
signed a letter agreement to acquire all of the oil and gas producing assets
owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County,
Oklahoma. We will increase our current interest in the Grace #2 well and acquire
working interests in four other producing wells in the East Chandler Field, the
Grace #1, Grace #3, Grace #5A and Grace #6 wells, as follows:
o We are increasing our working interest in the Grace #2 from 2.5% to
7.5%; and increased our net revenue interest in the Grace #2 to
11.95%. We initially acquired our working interest in the Grace #2
well in June, 2008.
o We are acquiring a 10% working interest and 13.825% net revenue
interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells.
o We are acquiring a salt water disposal well and offset and development
acreage in the two quarter sections of the East Chandler Field.
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On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra
Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing
our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora
Block. Pursuant to the non-binding letter of intent, we are required to pay
$1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at
this time our management does not believe that the terms of the non-binding
letter of intent will be complied with, or that we will enter into a definitive
agreement.
We plan to raise additional capital during the coming fiscal year, but currently
have not identified additional funding sources. Our ability to continue
operations is highly dependent upon our ability to obtain additional financing,
or generate revenues from our acquired oil and gas leasehold interests, none of
which can be guaranteed.
Ultimately, our success is dependent upon our ability to generate revenues from
our acquired oil and gas leasehold interests, and to achieve profitability,
which is dependent upon a number of factors, including general economic
conditions and the sustained profitability resulting from the operation of the
acquired oil and gas leaseholds. There is no assurance that even with adequate
financing or combined operations, we will generate revenues and be profitable.
PATENTS, TRADEMARKS, AND PROPRIETARY RIGHTS
On May 17, 2006, The Company signed a strategic alliance agreement with UTEK
Corporation, a technology transfer company to develop a portfolio of new
technologies for the oil and gas industry.
On July 17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc. ("UMTI").
UMTI holds the exclusive worldwide license for the mitigation of paraffin wax
deposition from crude oil using ultrasonic waves. This technology was developed
at the University of Wyoming by Dr. Brian Towler.
On November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT"). IWT
holds a license for borehole casing technology developed by researchers at
Lawrence Livermore National Laboratory.
On March 29, 2007, we acquired Leak Location Technologies, Inc., ("LLT"). LLT
owns an exclusive license to a system for determining the presence and location
of leaks in underground pipes.
On May 17, 2007, The Company renewed its strategic alliance agreement with UTEK
Corporation, a technology transfer company to develop a portfolio of new
technologies for the oil and gas industry.
On August 13, 2007, The Company received notice that the U.S. Patent and
Trademark Offices approved the patent application for Avalon's paraffin wax
mitigation system, being marketed as Ultrasonic Mitigation Solutions(TM) (the
"Patent"). Currently available solutions to paraffin wax deposits and build-up
in oil production rely upon chemical solvents, which not only require repeated
mechanical pigging operation and costly workovers to maintain production
capacity, but also can also result in environmental liabilities. In contrast,
the Patent utilizes ultrasonic waves to fragment current paraffin deposits in
the production's tubing and prevent future wax formation in an environmentally
safe process.
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On August 16, 2007, Kent Rodriguez, the Company's President and CEO, presented a
proposal to the Board of Directors to spin-off Oiltek, which specializes in oil
and gas recovery technology to Avalon's shareholders. The oil and gas technology
include, but are not limited, to the Patent; a system to detect hazardous gas
leaks including small leaks in natural gas pipelines; and a system for
intelligent drilling and completion sensors to provide real-time oil reservoir
monitoring of subsurface information.
Ultimately, our success is dependent upon our ability to generate revenues from
our acquired oil and gas leasehold interests and licensed technology, and to
achieve profitability, which is dependent upon a number of factors, including
general economic conditions and the sustained profitability resulting from the
operation of the acquired oil and gas leaseholds. There is no assurance that
even with adequate financing or combined operations, we will generate revenues
and be profitable.
On September 22, 2007 the Company entered into an agreement with respect to its
purchase of a 75.6% interest in Oiltek, Inc. ("Oiltek") for $50,000 and the
right of Oiltek to market Avalon's intellectual property.
ENVIRONMENTAL MATTERS
During the last three fiscal years, compliance with environmental laws and
regulations did not have a specific impact on the Company's operations. The
Company does not anticipate that it will incur any material capital expenditures
for environmental control facilities for environmental facilities during the
next fiscal year.
EMPLOYEES
As of March 31, 2008 we had two full time employees consisting of our President,
Mr. Kent Rodriguez, and Vice President, Ms. Jill Allison. The Board has retained
William Anderson, Glen Harrod, Mark Oliver, William Graham, Thomas Bugbee, Gary
Browning and Bruce Merrifield, as advisors. We do not have any part time
employees at this time.
RESEARCH AND DEVELOPMENT
During the last three fiscal years, we did not incur research and development
expenses.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate office is located at 7808 Creekridge Circle, Suite 105,
Minneapolis, MN 55439. This office space is leased from an unaffiliated third
party on three year lease, which ends on December 1, 2009, for a monthly rental
of $3,100.00.
On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra
Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing
our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora
Block. Pursuant to the non-binding letter of intent, we are required to pay
$1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at
this time our management does not believe that the terms of the non-binding
letter of intent will be complied with, or that we will enter into a definitive
agreement.
9
On July 2, 2008 , we announced in a press release dated July 2, 2008 that we
have signed a letter agreement to acquire all of the oil and gas producing
assets owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County,
Oklahoma. We will increase our current interest in the Grace #2 well and acquire
working interests in four other producing wells in the East Chandler Field, the
Grace #1, Grace #3, Grace #5A and Grace #6 wells, as follows:
o We are increasing our working interest in the Grace #2 from 2.5% to
7.5%; and increasing our net revenue interest in the Grace #2 to
11.95%. We initially acquired our working interest in the Grace #2
well in June, 2008.
o We are acquiring a 10% working interest and 13.825% net revenue
interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells.
o We are acquiring a salt water disposal well and offset and development
acreage in the two quarter sections of the East Chandler Field.
ITEM 3. LEGAL PROCEEDINGS
Avalon Oil & Gas is not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(a) Principal Market or Markets
Effective with the close of business on June 19, 1997, our Common Stock was
delisted from the NASDAQ Small Cap Market. In June of 1997, our Common Stock
began trading on the NASD Over-the-Counter Bulletin Board ("OTCBB"). Market
makers and other dealers provided bid and ask quotations of our Common Stock. We
trade under the symbol "AOGN.OB".
The table below represents the range of high and low bid quotations of our
Common Stock as reported during the reporting period herein. The following bid
price market quotations represent prices between dealers and do not include
retail markup, markdown, or commissions; hence, they may not represent actual
transactions. For the purposes of the Fiscal Year Ended March 31, 2008, the
prices have been modified to reflect the one-for-twenty (1:20) reverse stock
split effectuated May 15, 2007.
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High Low
Fiscal Year Ended
March 31, 2008
First Quarter $ 0.70 $ 0.33
Second Quarter 0.85 0.45
Third Quarter 0.62 0.27
Fourth Quarter 0.41 0.09
High Low
Fiscal Year Ended
March 31, 2007
First Quarter $ 3.00 $ 0.20
Second Quarter 4.00 2.60
Third Quarter 2.60 1.20
Fourth Quarter 1.20 .40
(b) Approximate Number of Holders of Common Stock
As of June 30, 2008, 38,954,802 shares of our Common Stock were outstanding and
the number of holders of record of our Common Stock at that date was
approximately 947. However, we estimate that there are a significantly greater
number of shareholders because a substantial number of our shares are held in
nominee names by brokerage firms.
(c) Dividends
No dividends on the Common Stock were paid by us during the fiscal year ended
March 31, 2008, or the fiscal year ended 2007, nor do we anticipate paying
dividends on Common Stock in the foreseeable future. Holders of Common Stock are
entitled to receive such dividends as may be declared by our Board of Directors.
(c) Securities Authorized for Issuance Under Equity Compensation Plans.
We have not established an Equity Compensation Plan and have not authorized the
issuance of any securities under such plan.
(d) Preferred Stock.
Our Articles of Incorporation authorize us to issue up to 1,000,000 shares of
$0.10 par value preferred stock, with such classes, series and preferences as
our Board of Directors may determine from time to time. In June 2002, our Board
of Directors authorized the issuance of 100 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock"). Our Board further agreed to
issue all of the Series A Preferred Stock to our Chairman and President, Kent
Rodriguez, in satisfaction of $500,000 in loans made by Mr. Rodriguez.
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The Series A Preferred Stock accrues dividends at the rate of 8% per annum on
the original purchase price for the shares. If declared by the Board of
Directors, these dividends are payable quarterly, beginning in September 2002.
We are prohibited from paying any dividends on our Common Stock until all
accrued dividends are paid on our Series A Preferred Stock.
If we liquidate or dissolve, and after payment of our debts, the holders of the
Series A Preferred Stock are entitled to a preference payment before we make any
distributions to our Common Stockholders. The preference amount is equal to the
original purchase price for the Series A Preferred shares plus accrued, but
unpaid dividends.
The Series A Preferred Stock is convertible at anytime into 40% of the then
outstanding shares of Common Stock and securities convertible into Common Stock
on a fully diluted basis. However, conversion is limited to the number of shares
of Common Stock available for issuance under our articles of incorporation.
Regardless of whether or not the Series A Preferred Stock has been converted to
our Common Stock, the Series A Preferred Stockholder is entitled to vote, at all
times, on an as-if converted basis. The Preferred Stockholder, Mr. Rodriguez,
has the right to vote the Series A Preferred Stock together with his other
holdings in the Company.
Other than the Series A Preferred Stock, no preferred stock has been issued. See
Item *11, Security Ownership of Certain Beneficial Owners and Management".
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The Company does not have any securities authorized for issuance under equity
compensation plans.
RECENT SALES OF UNREGISTERED SECURITIES
The Company has sold the following unregistered securities between January 1,
2008 and March 31, 2008:
During the year ended March 31, 2008 the Company issued 2,813,320 shares of
common stock valued at $1,570,084 for consulting services.
During the year ended March 31, 2008, 4,994,739 shares of common stock with cash
proceeds of $965,418 were sold pursuant to a Regulation S Stock Purchase
Agreement.
During the year ended March 31, 2008 the Company issued warrants with a life of
five years to purchase 50,000 shares of common stock at $0.075; 50,000 shares of
common stock at $1.00; 50,000 shares of common stock at $1.25 and 50,000 shares
of common stock at $1.50. These warrants were valued using a Black-Sholes model
at $30,325 and included in these financial statements as "Stock-based
compensation". These warrants were cancelled on October 1, 2007
All other unregistered securities sold by the Company during the past three
years, but prior to January 1, 2008, have been included in the Company's 10-QSB
filings.
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All of the unregistered securities sold were issued directly by the Company, and
no commissions or fees were paid in connection with any of these transactions.
The transactions were private, and the Company endeavored to comply both with
Regulation D, and also Section 4(2) of the Securities Act of 1933, as amended,
as exemption(s) from registration. The Company exercised reasonable care to
assure that the purchasers of the securities are not underwriters and were
"accredited investors" under Regulation D and/or sophisticated investors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS AND PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with out
financial statements and notes related thereto. The discussion of results,
causes and trends should not be construed to infer conclusions that such
results, causes or trends necessarily will continue in the future.
Operations
As of March 31, 2008, we had current and total assets of $335,148, and total
current liabilities of $220,147. We had oil and gas sales of $249,856, for the
year ended March 31, 2008. During this period, lease operating expense was
$150,136, our selling, general, and administrative expenses $1,225,206, our
interest income was $17,253 and our stock-based consulting and compensation
expense relating to stock issued for services was $1,747,860.
As of March 31, 2007, we were acquiring oil and gas producing properties with a
combination of cash, debt, and equity. In addition, we have, through our
strategic alliance with UTEK, Inc., acquired three innovative oil and gas
technologies. We had current assets of $1,040,360, total assets of $2,993,201
and total liabilities of $201,672. We had oil and gas sales of $49,671, for the
year ended March 31, 2007. During this period, lease operating expense was
$54,318, our selling, general, and administrative expenses $743,137, our
interest expense was $123,333 and our stock-based consulting and compensation
expense relating to stock issued for services was $2,054,541.
Liquidity and Capital Resources
Cash balance amounted to $108,688 and $900,537 as of March 31, 2008 and March
31, 2007, respectively.
Operating activities
Net cash used by operating activities for the year ended March 31, 2008 was
$1,080,401 compared to $815,992 provided in the year ended March 31, 2007.
The Company had a net loss of $3,234,710 for the year ended March 31, 2008
compared to a net loss of $3,440,222 for the year ended March 31, 2007. Net
accounts receivable for the year ended March 31, 2008 was $11,830 compared to
$11,643 for the year ended March 31, 2007.
Investing activities
For the twelve months ended March 31, 2008 we used ($715,300) in investing
activities compared to $137,303 provided in the twelve months ended March 31,
2007.
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Financing activities
Our financing activities for the period ended March 31, 2008 provided cash of
$1,003,852 as compared to $1,539,867 for the period ended March 31, 2007. We
plan to raise additional capital during the coming fiscal year.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Material Commitments
We have no material commitments during the next twelve (12) months.
Purchase of Significant Equipment
During the twelve months ended March 31, 2008, we used $10,672 for the purchase
of equipment, compared to $37,282 in equipment for the year ended March 31,
2007.
Our ability to continue operations is highly dependent upon our ability to
obtain immediate additional financing, or generate revenues from our acquired
oil and gas leasehold interests, and to achieve profitability, which is
dependent upon a number of factors, including general economic conditions and
the sustained profitability resulting from the operation of the acquired oil and
gas leaseholds.
There can be no assurance that, even with adequate financing or combined
operations, we will generate sufficient revenues to be profitable.
Our success is largely dependent upon our ability to generate revenues from our
acquired oil and gas leasehold interests and from the income from the oil and
gas enhancement technology we have acquired from UTEK, Inc.
Acquisition Strategy
On May 17, 2007, we renewed our strategic alliance agreement with UTEK
Corporation, a technology transfer company to develop a portfolio of new
technologies for the oil and gas industry.
On May 22, 2007, we acquired a fifteen percent (15%) working interest in the
Janssen #1A prospect in Karnes County, Texas. The Janssen Prospect will be
re-completed in the existing vertical wellbore by a sidetrack drilling procedure
at a depth of approximately 10,500 feet, and test the Wilcox sand. Total
potential reserves are estimated to be 75,000 to 100,000 barrels of condensate
and 3 to 4 BCF (billion cubic feet) of gas.
On October 31, 2007, we announced in a press release that we closed upon the
acquisition of non-operated production in the Lake Washington Field in
Plaquemines Parish, Louisiana. Since its discovery in the 1930, the Lake
Washington Field has produced approximately 350 million barrels of oil. We hold
approximately a .7% working interest in 3 units that are currently producing
over 1000 barrels of oil per day.
On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra
Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing
our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora
Block. Pursuant to the non-binding letter of intent, we are required to pay
$1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at
this time our management does not believe that the terms of the non-binding
letter of intent will be complied with, or we will enter into a definitive
agreement.
On April 7, 2008 we announced in a press release our acquisition in December
2007 of a 5% working interest in the 1,280 Waters prospect. The first well is
being drilled between two gas wells that the produced over 500 million cubic
feet of natural gas in the two years they have been in production. Estimated
recoverable reserves from the Waters well are projected to exceed 1.3 billion
cubic feet of natural gas.
14
On July 2, 2008, we announced in a press release dated July 2, 2008 that we
have signed a letter agreement to acquire all of the oil and gas producing
assets owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County,
Oklahoma. We will increase our current interest in the Grace #2 well and acquire
working interests in four other producing wells in the East Chandler Field, the
Grace #1, Grace #3, Grace #5A and Grace #6 wells, as follows:
o We are increasing our working interest in the Grace #2 from 2.5% to
7.5%; and increased our net revenue interest in the Grace #2 to
11.95%. We initially acquired our working interest in the Grace #2
well in June, 2008.
o We are acquiring a 10% working interest and 13.825% net revenue
interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells.
o We are acquiring a salt water disposal well and offset and development
acreage in the two quarter sections of the East Chandler Field.
We have been funding our obligations through the issuance of our Common Stock
for services rendered or for cash in private placements. We may seek additional
funds in the private and public equity or debt markets in order to execute our
plan of operation and business strategy. There can be no assurance that we will
be able to attract capital or obtain such financing when needed or acceptable
terms, in which event our ability to execute out business strategy will be
impaired.
RISK FACTORS
Any investment in our securities is highly speculative. You should not purchase
our shares if you cannot afford to lose your entire investment. You should
consider the following risks before acquiring any of our shares.
We have never been, and may never be, profitable.
During the past several years, we have attempted, without success, to generate
revenues and profits. For the year ended March 31, 2008, we incurred a net loss
of $3,234,710. We cannot assure that we will ever be profitable.
We need additional capital.
We need additional financing to continue operations. The amount required depends
upon our business operations, and the capital needs of our acquisition of the
certain oil and gas leasehold interests. We may be unable to secure this
additional required financing on a timely basis, under terms acceptable to us,
or at all. To obtain additional financing, we will likely sell additional equity
securities, which will further dilute shareholders' ownership in us. Ultimately,
if we do not raise the required capital, we may need to cease operations.
We are dependent upon our key personnel.
We are highly dependent upon the services of Kent A. Rodriguez, our President
and Chief Executive Officer. If he terminated his services with us, our business
would suffer.
15
There is only a limited trading market for our securities.
Our Common Stock is traded on the OTC Bulletin Board. The prices quoted may not
reflect the price at which you can resell your shares. Because of the low price
of our stock, we are subject to particular rules of the U.S. Securities and
Exchange Commission that make it difficult for stock brokers to solicit
customers to purchase our stock. This reduces the number of potential buyers of
our stock and may reduce the value of your shares. There can be no assurance
that a trading market for our stock will continue or that you will ever be able
to resell your shares at a profit, or at all.
No dividends are anticipated to be paid.
We presently pay no dividends. We have never paid any cash dividends and do not
expect to do so in the future. If you need current income, you should not
purchase our stock.
Our management controls us.
Our current officers and directors own approximately 42% of our outstanding
stock and are able to affect the election of the members of our Board of
Directors and make corporate decisions. Mr. Rodriguez, by his ownership of Class
A Preferred Stock, has the right to vote 40% of our voting securities.
Accordingly, even if we issue additional shares to third parties, Mr. Rodriguez
will continue to control at least 40% of our voting securities. This voting
concentration may also have the effect of delaying or preventing a change in our
management or control or otherwise discourage potential acquirers from
attempting to gain control of us. If potential acquirers are deterred, you may
lose an opportunity to profit from a possible acquisition. See "Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters" and "Market for Common Equity and Related Stockholder Matters".
A significant number of shares will become eligible for public sale, potentially
depressing our stock price.
Under the SEC's Rule 144, shares issued in issuances which are not registered
with the SEC generally first become eligible for public resale after six months.
Shareholders who are affliates of us generally may resell only a limited number
of their privately acquired shares after six months. After six months,
stockholders who are not affiliated with us may resell any number of their
privately acquired shares pursuant to Rule 144. The resale of the shares we have
privately issued, or the potential for their future public resale, may depress
our stock price.
Our governing documents and Nevada law may discourage the potential acquisitions
of our business.
Our Board of Directors may issue additional shares of capital stock and
establish their rights, preferences and classes, in most cases without
stockholder approval. In addition, we may become subject to anti-takeover
provisions found in Section 89.378-78.379 of the Nevada Business Corporation Act
which may deter changes in control of our management which have not been
approved by our Board of Directors.
16
ITEM 7. FINANCIAL STATEMENTS.
Our audited Financial Statements are attached as a Schedule.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 24, 2007 Murrell Hall McIntosh & Co., PLLP ("MHM"), resigned as our
independent certified accountant for business reasons unrelated to any
disagreement between MHM and us or our management
As reported on the Form 8-K filed on September 27, 2007, we engaged Bernstein &
Pinchuk, LLP ("B&P") as our certifying accountant to audit our financial
statements.
ITEM 8A. CONTROLS AND PROCEDURES
Our principal executive and financial officers, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the most
recently completed quarter covered by this report, have concluded that as of the
end of the most recently completed quarter, our disclosure controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act (i) is accumulated and communicated to our management, including
our Chief Executive Officer, as appropriate to allow timely decisions regarding
required disclosure, and (ii) is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms.
There have been no changes in our internal controls or in other factors that
could affect these controls during or subsequent to the end of the most recently
completed quarter.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our Directors and Executive Officers are shown below:
Name Age Position
---- --- --------
Kent Rodriguez 48 Chief Executive Officer, President,
Chief Financial Officer, Secretary,
Director
Jill Allison 40 Vice President
Douglas Barton 67 Director
Menno Wiebe 60 Director
Stephen Newton 56 Director
17
Each Director is serving a term of office, which will continue until the next
annual meeting of shareholders and until the election and qualification of his
respective successor.
KENT A. RODRIGUEZ
Mr. Rodriguez joined the Company as Chief Executive Officer, President, and
Chief Executive Officer in January, 1997. Since 1995, he has been the Managing
Partner of Weyer Capital Partners, a Minneapolis-based venture capital
corporation. From 1985 to 1995, he was employed by the First National Bank of
Elmore, Elmore, Minnesota, in various capacities. He has a B.A. degree from
Carleton College, and an Executive MBA from the Harvard Business School.
JILL ALLISON
Ms. Allison has over 20 years of diversified management experience in business
development and technology commercialization. Prior to joining Avalon, she
managed a technology strategy consulting practice with focus in the market
convergence of physical and IT security industries. Her venture development
background includes market leadership positions with Monsanto, Iridian
Technologies, Pinkertons and Cylink Corporation. She holds a B.A. in Economics
from Gustavus Adolphus College; a Master's in International Management (MIM) in
Marketing from the American Graduate School of International Management
(Thunderbird), Glendale, AZ; and an MBA in Strategic and Entrepreneurial
Management from the Wharton School of the University of Pennsylvania, where she
focused on strategic alliances and management of technology.
DOUGLAS BARTON
Mr. Barton has served as a Director of the Company since November, 1998. From
1987 to the present, he has been the President and sole owner of Venture
Communications, Inc., a private promotion, development, and marketing consulting
firm. He has a B.S. degree in Economics/History from the University of
Minnesota.
MENNO WIEBE
Since 2006, Menno Wiebe has been serving as Canadian Heavy Oil Aggregator at
Surge Global Energy, and has also been working on private client initiation and
funding. He holds a Bachelors of Science in Geology from the University of
Manitoba, Canada, and a Masters of Business Administration from the University
of Warwick, England. He is a member of the American Association of Petroleum,
the Geologists' Geological Society of England and the Petroleum Exploration
Society of Great Britain. Mr. Wiebe served as Chief Operating Officer and as a
Member of the Board of Directors at Deep Well Oil and Gas from 2003-2005, and
was Vice President of Exploration of Adulis Resources from 2000-2006. In
addition, prior to being owner of Jacobean Resources from 2002-2004, where he
served as consultant to various Energy companies around the world, Mr. Wiebe was
the Chief Executive Officer of Pertacal Energy, Inc from 2000-2002.
18
STEPHEN NEWTON
Stephen Newton has been working as an Independent Energy Consultant, serving
companies who wish to invest in Latin America since March 2007. He received his
Bachelors in Engineering in Mining and Petroleum at the University of
Queensland, Brisbane, Australia, and his Masters of Science in Petroleum
Engineering at the University of London, United Kingdom. He is a member of the
Society of Petroleum Engineers, and is the founding President of the Colombian
Petroleum Association (ACP). From 2004-2007, Mr. Newton served as Chief
Executive Officer and President of Solana Petroleum Exploration Colombia, as
well as serving as a Member of the Board of Directors. He served as Vice
President and Member of the Board of Directors for Solana Petroleum Exploration
from 2002-2004. Mr. Newton also worked as President and General Manager of AEC
Colombia and Ecuador. Prior to this position, Mr. Newton served in various
positions with Occidental Petroleum Corporation from 1974-1999, eventually
becoming President of OXY Colombia and subsequently Vice President of Worldwide
Engineering and Technical Services.
The Company's Directors will serve in such capacity until the next annual
meeting of the Company's shareholders and until their successors have been
elected and qualified. There are no family relationships among the Company's
officers and directors, nor are there any arrangements or understanding between
any of the directors or officers of the Company or any other person pursuant to
which any officer or director was or is to be selected as an officer or
director. The Directors took action eight (8) times by written consent during
the fiscal year ended March 31, 2008.
In 1999, the Board of Directors established a Compensation Committee. It is
currently comprised of Messrs. Barton Wiebe and Newton The Compensation
Committee held one meeting in fiscal 2008.
In May 2000, the Board of Directors established an Audit Committee. It is
currently comprised of Messrs. Barton Wiebe and Newton.. The Audit Committee
held one meeting in fiscal 2008.
We have adopted a Code of Ethics which is designed to ensure that our directors
and officers meet the highest standards of ethical conduct. The Code of Ethics
requires that our directors and officers comply with all laws and other legal
requirements, conduct business in an honest and ethical manner and otherwise act
with integrity and in our best interest.
Involvement in Legal Proceedings
We are not aware that any of our officers and directors were, or have been
involved in any material legal proceedings which would have any effect upon the
Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act") requires our
officers and directors and persons owning more than ten (10%) percent of our
Common Stock to file initial reports of ownership and changes in ownership with
the Securities and Exchange Commission ("SEC"). Additionally, Item 405 of
Regulation S-B under the 34 Act requires us to identify in our Form 10-KSB and
proxy statement those individuals for whom one of the above referenced reports
was not filed on a timely basis during the most recent fiscal year or prior
fiscal years. Given these requirements, we have the following report to make
under this section. None of our officers or directors, and all persons owning
more than ten percent of its shares have filed the subject reports, if required,
on a timely basis during the past fiscal year.
19
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ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF BOARD OF DIRECTORS
Members of the Board of Directors receive no cash compensation for their service
on the Board of Directors, the Compensation Committee or the Audit Committee but
are reimbursed for any out-of-pocket expenses incurred by them in connection
with our business. The Company has issued Mr. Barton warrant(s) to purchase
100,000 shares of The Company's Common Stock at $0.01 per share and warrants to
purchase 50,000 shares of the Company's Common Stock at $.50 per share. These
warrants have been exercised pursuant to a cashless exercise, and Mr. Barton was
issued 107,547 shares on May 17, 2007.
On October 30, 2007, in conjunction with Menno Wiebe and Stephen Newton becoming
directors of the Company, each was granted 100,000 fully paid and non-assessable
shares of Common Stock of the Company for their services as Directors of the
Company over the next twelve months.
There are no further material plans, contracts or other arrangements (or
amendments thereto) to which Mr. Barton, Mr. Wiebe or Mr. Newton is a party, or
in which either person participates, that was entered into or amended, in
connection with Mr. Barton Mr. Wiebe or Mr. Newton continuing as or being
appointed as a director of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for the three fiscal
years ended March 31, 2008, 2007 and 2006, by the Company's Chief Executive
Officer (the "Named Executive Officer"). No executive officer of the Company
received in excess of $100,000 during that period. Compensation does not include
minor business-related and other expenses paid by us for our officers. Such
amounts in the aggregate do not exceed $10,000.
SUMMARY COMPENSATION TABLE
Nonqualified
Name and Stock Option Non-Equity Deferred All Other
principal Salary Bonus Awards Awards Incentive Plan Compensation Compensation Total
position Year ($) ($) ($) ($) Compensation ($) Earnings ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
-------- ---- --- --- --- --- ---------------- ------------ --- ---
Kent Rodriguez 2008 84,000 84,000
CEO and President 2007 84,000 84,000
2006 84,000(1) 84,000
(1) Effective on May 31, 2005, Mr. Rodriguez became subject to an employment
agreement pursuant to which he is paid $7,000 per month in wages. Said
employment agreement has since expired.
20
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Mr. Rodriguez did not receive any other annual compensation, or other
compensation during the Company's fiscal years ended March 31, 2008, 2007 or
2006.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant any options to purchase any equity securities of the
Company during its fiscal ending March 31, 2008.
EMPLOYMENT AGREEMENTS
We do not currently have employment agreement with any of our employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding ownership of our
Common Stock as of June 30, 2008 by (i) each person known by us to be the
beneficial owner of more than five (5%) percent of our outstanding Common Stock;
(ii) each director of our Company; and (iii) all executive officers and
directors of our Company as a group. As of June 30, 2008, we had a total of
38,954,802 common shares issued and outstanding.
Names and Addresses Beneficial Percent
of Beneficial Owner Ownership of Class
------------------- --------- --------
Kent Rodriguez 26,793,945 (1) 41.29%
7808 Creekridge Circle, Suite 105
Minneapolis, MN 55439
Douglas Barton 300,000 0.46%
7808 Creekridge Circle, Suite 105
Minneapolis, MN 55439
Jill Allison 300,000 0.46%
7808 Creekridge Circle, Suite 105
Minneapolis, MN 55439
Menno Wiebe 300,000 0.46%
7808 Creekridge Circle, Suite 105
Minneapolis, MN 55439
Stephen Newton 300,000 0.46%
7808 Creekridge Circle, Suite 105
Minneapolis, MN 55439
UTEK Corporation 3,505,157 5.40%
202 South Wheeler Street
Plant City, FL 33563
Officers and Directors 27,093,945(1) 43.13%
as a Group
(1) Includes 10,100 shares of Common Stock owned by Weyer Capital Corporation,
an affiliate of Mr. Rodriguez, and 25,936,535 shares of Common Stock issuable
upon conversion of 100 shares of Series A Preferred Stock.
21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party - Notes Payable
As of March 31, 2005, the Company owed an officer two promissory notes totaling
$229,960. The $145,120 note carried a 10 percent interest rate and matured in
June 2004. The $84,840 note also carried a 10 percent interest rate and matured
in July 2004. Accrued interest payable on the notes totaled 22,996 at June 29,
2005. On June 29, 2005, the officer transferred the rights to the debts and the
debts were subsequently cancelled in exchange for 16,000,000 shares of the
Company's common stock on June 29, 2005.
On February 11, 2008, the Company borrowed $75,000 from an officer of the
Company evidenced by a promissory note. The note carries a 10% interest rate and
matured on March 31, 2008. The note was not extended and is currently past due.
On May 8, 2005, a shareholder loaned the Company $100,000 for working capital in
exchange for a promissory note. The note carries a 10% interest rate and matured
on November 8, 2006. The Company entered into an agreement with the noteholder
to extend the due date until May 8, 2007. The note holder has the right to
convert the note and accrued interest at the rate of $0.01 per share. The value
of this conversion feature was treated as a loan discount for the full $100,000
of the loan and is being amortized to interest expense over the life of the
loan. Amortization of $100,000 was included in interest expense for the year
ended March 31, 2007.
Related Party - Preferred Stock
The 100 shares of Series A Preferred Stock, issued to an officer/director as
payment for $500,000 in promissory notes, are convertible into the number of
shares of common stock sufficient to represent 40 percent (40%) of the fully
diluted shares outstanding after their issuance. The Series A Preferred Stock
pays an eight percent (8%) dividend. The dividends are cumulative and payable
quarterly. The Series A Preferred Stock carries liquidating preference, over all
other classes of stock, equal to the amount paid for the stock plus any unpaid
dividends. The Series A Preferred Stock provides for voting rights on an "as
converted to common stock" basis.
During the year ended March 31, 2008, the Company incurred $30,000 in preferred
stock dividends.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
23.1 Consent Berstein & Pinchuk, LLP *
31.1 Certification
32.1 Certification
(b) Reports on Form 8-K. During the fiscal year ended March 31, 2008, and
through July 14, 2008, we filed the following on Form 8-K:
22
Form 8-K
1. Filed September 28, 2007, on September 24, 2007 Murrell Hall McIntosh & Co.,
PLLP ("MHM"), resigned as the independent certified accountant of Avalon Oil &
Gas, Inc. (the "Registrant") for business reasons unrelated to any disagreement
between MHM and the Registrant or its management. On September 27, 2007, the
Registrant engaged Bernstein & Pinchuk, LLP ("B&P") as its certifying accountant
to audit the Registrant's financial statements.
2. Filed September 28, 2007, Avalon announced in a press release dated August
16, 2007, that Kent Rodriguez, Avalon's President and CEO, presented a proposal
to the Board of Directors to create wholly owned subsidiary which would focus
upon oil and gas recovery technology; and plans to spin-off such subsidiary to
Avalon's shareholders. The oil and gas technology include, but are not limited,
to the Patent; a system to detect hazardous gas leaks including small leaks in
natural gas pipelines; and a system for intelligent drilling and completion
sensors to provide real-time oil reservoir monitoring of subsurface information.
3. Filed September 28, 2007, Avalon announced in a press releases dated August
20, 2007 and August 30, 2007 that it has executed and entered into an exclusive
licensing agreement with Oiltek, Inc. ("Oiltek"), whereby Oiltek acquired the
exclusive rights to market Avalon's portfolio of intellectual property and fifty
thousand ($50,000) dollars, in exchange for approximately eighty (80%) percent
or ten million (10,000,000) of Oiltek's common stock. Oiltek is a majority owned
subsidiary of Avalon, but Avalon intends to spin-off its shares to Avalon's
shareholders. Oiltek is currently preparing to register its shares of common
stock with the U.S. Securities and Exchange Commission ("SEC"), and will seek a
listing of Oiltek's shares on the Over-the-Counter Bulletin Board ("OTCBB") upon
the registration statement becoming effective.
4. Filed September 27, 2007, Avalon announced in a press release dated August
27, 2007 that it had acquired a sixteen (16%) percent working interest in the
Hughs #1 well, located in Noble County, Oklahoma. When the well was drilled and
completed in 1988, it was tested to have a capacity of four (4) million cubic
feet per day.
5. Filed on October 23, 2007, on October 22, 2007, the stockholders (the
"Stockholders") of Avalon Oil & Gas, Inc. (the "Company") acting by written
consent, in accordance with Sections 78.320 and 78.335 of the Nevada Revised
Statutes, terminated the directorship of Thad Kaplan. The Stockholders also
directed the Company to terminate the directorship Mr. Kaplan from Oiltek, Inc.
("Oiltek"), a majority owned subsidiary of the Company. On October 22, 2007, the
Stockholders acting by written consent appointed Jill Allison as a director of
the Company, and directed the Company to appoint Ms. Allison as a director of
Oiltek.
6. Filed October 31, 2007, on October 30, 2007, the Board of Directors acting by
resolution appointed Menno Wiebe and Stephen Newton as directors of the Company.
7. Filed November 2, 2007, on October 17, 2007, Avalon Oil & Gas, Inc.
("Avalon") signed a non-binding letter of intent with Gran Tierra Energy
Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing Avalon's
intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora
Block.
23
8. Filed July 2, 2008, the Avalon announced that it had entered into a letter
agreement to acquire all of the oil and gas producing assets owned by Bedford
Energy, Inc. in the East Chandler Field, Lincoln County, Oklahoma.
9. Filed November 13, 2007, Avalon provided additional details with respect to
the oil properties which were the subject of a Letter of Intent which was
detailed in the Company's Current Report on Form 8-K filed on November 2, 2007.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
1. AUDIT FEES.
Our audit fees for the years ended March 31, 2008 and 2007 were as follows:
2008 2007
------------- -------------
$ 71,389.00 $ $45,104
2. TAX FEES.
Our tax return fees for the years ended March 31, 2008 and 2007 were as follows:
2008 2007
------------- -------------
$ 10,000 $ N/A
3. ALL OTHER FEES.
2008 2007
------------- -------------
$ 0.00 $ 0.00
24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July 15, 2008
/s/ Kent Rodriguez
------------------
Kent Rodriguez,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Company in the
capacities and on the dates indicated.
/s/ Kent Rodriguez July 15, 2008
------------------------
Kent Rodriguez,
President and Chief Executive Officer, Director
/s/ Jill Allison July 15, 2008
------------------------
Jill Allison, Vice President, Director
/s/ Douglas Barton July 15, 2008
------------------------
Douglas Barton, Director
/s/ Stephen Newton July 15, 2008
------------------------
Stephen Newton, Director
/s/ Menno Wiebe July 15, 2008
------------------------
Menno Wiebe, Director
25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Avalon Oil & Gas, Inc.
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year ended March 31, 2008
Commission File Number 1-12850
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to Registration Statement on Form SB-2, Registration No.
33-74240C).*
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form SB-2, Registration No. 33-74240C). *
3.3 Articles of Incorporation for the State of Nevada. (Incorporated by
reference to Exhibit 2.2 to Form 10-KSB filed February 2000) *
3.4 Articles of Merger for the Colorado Corporation and the Nevada
Corporation (Incorporated by reference to Exhibit 3.4 to Form 10-KSB
filed February 2000) *
3.5 Bylaws of the Nevada Corporation (Incorporated by reference to Exhibit
3.5 to Form 10-KSB filed February 2000) *
4.1 Specimen of Common Stock (Incorporated by reference to Exhibit to
Registration Statement on Form SB-2, Registration No. 33-74240C). *
31.1 Certification
32.1 Certification
* Incorporated by reference to a previously filed exhibit or report.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Avalon Oil & Gas, Inc.
We have audited the accompanying consolidated balance sheet of Avalon Oil & Gas,
Inc. ("the Company") and subsidiary as of March 31, 2008 and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. 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 the Company as of March 31,
2008 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Bernstein & Pinchuk LLP
New York, New York
July 15, 2008
F-1
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AVALON OIL AND GAS, INC.
CONSOLIDATED BALANCE SHEETS
Assets
MARCH 31,
----------------------------
2008 2007
------------ ------------
Current assets:
Cash and cash equivalents $ 108,688 $ 900,537
Marketable securities -- 31,047
Accounts receivable 23,473 11,643
Deposits 3,138 3,138
Notes receivable 90,000 65,000
Prepaid expenses 109,849 28,995
------------ ------------
Total current assets 335,148 1,040,360
------------ ------------
Property and equipment
Equipment, net of depreciation of $7,923 and $1,502 at
March 31, 2008 and 2007, respectively 41,105 37,156
Unproved oil and gas properties 339,417 --
Producing oil and gas properties, net of depletion of $125,347 and $23,335
and impairment of $93,999 at March 31, 2007 801,496 546,471
------------ ------------
Total property and equipment 1,182,018 583,627
Goodwill 33,943 --
Intellectual property rights, net of amortization of $272,336 and $51,514
and impairment of $371,925 at March 31, 2007 1,183,392 1,369,214
------------ ------------
$ 2,734,501 $ 2,993,201
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 81,869 $ 43,749
Due to related party 12,404 13,367
Notes payable - related party 124,500 100,000
Accrued liabilities 1,374 44,646
------------ ------------
Total current liabilities 220,147 201,762
------------ ------------
Accrued ARO liability 52,458 29,841
Minortiy interest in subsidary -- --
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, Series A, $0.10 par value, 1,000,000 shares authorized,
100 shares issued and outstanding, including beneficial conversion feature 500,000 500,000
Common stock, $0.001 par value, 50,000,000 shares authorized,
31,767,463 and 17,073,706 shares issued and outstanding
at March 31, 2008 and 2007, respectively 31,768 17,038
Additional paid-in capital 24,446,046 21,529,910
Stock subscription receivable -- (34,500)
Accumulated other comprehensive income -- (4,459)
Accumulated deficit (22,515,918) (19,246,391)
------------ ------------
Total shareholders' equity 2,461,896 2,761,598
------------ ------------
$ 2,734,501 $ 2,993,201
============ ============
F-2
AVALON OIL AND GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
----------------------------
2008 2007
------------ ------------
Oil and Gas Sales $ 249,856 $ 49,671
Operating expenses:
Lease operating expense, serverance taxes and
ARO accretion 150,136 54,318
Selling, general and administrative expenses 1,225,206 743,137
Stock-based compensation 1,747,860 2,054,541
Depreciation, depletion and amortization 329,363 76,299
------------ ------------
Total operating expenses 3,452,565 2,928,295
------------ ------------
Loss from operations (3,202,709) (2,878,624)
Other Income (Expenses)
Interest income 17,253 27,659
Property impairments -- (465,924)
Realized losses on marketable securites (11,523) --
Interest expense:
Related party (37,731) (123,333)
------------ ------------
Loss before income taxes (3,234,710) (3,440,222)
Provision (benefit) for income taxes -- --
------------ ------------
Net loss before minority interest (3,234,710) (3,440,222)
Minority interest in loss of subsidary 5,183 --
------------ ------------
Net loss (3,229,527) (3,440,222)
Preferred Stock Dividend (40,000) (40,000)
------------ ------------
Loss attributable to common stock
after preferred stock dividends $ (3,269,527) $ (3,480,222)
============ ============
Basic and diluted loss per common share $ (0.15) $ (0.32)
============ ============
Basic and diluted weighted average
common shares outstanding 22,020,104 10,917,440
============ ============
The components of other comprehensive income:
Net loss $ (3,229,527) $ (3,440,222)
Unrealized losses on available-for-sale
marketable securites -- (4,459)
------------ ------------
Comprehensive income (loss) $ (3,229,527) $ (3,444,681)
============ ============
F-3
AVALON OIL AND GAS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Stock, Series A Common Stock Stock
--------------------------- ---------------------------- Subscription
Shares Par Value Shares Par Value Receivable
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2006 100 $ 500,000 9,128,261 $ 9,128 $ (832,000)
Common stock issued in exchange for
consulting services -- -- 3,479,513 3,480 0
Common stock issued in exchange for
assumption of liabilities -- -- 20,000 20 (34,500)
Common stock issued for cash -- -- 1,936,906 1,937 --
Common stock issued for property acquisitions -- -- 4,073,026 4,073 --
Cancellation of stock subscription -- -- (1,600,000) (1,600) 832,000
Warrants issued in exchange for
director services -- -- -- -- --
Warrants issued in exchange for
services -- -- -- -- --
Syndication fees -- -- -- -- --
Beneficial conversion feature of loan -- -- -- -- --
Unrealized loss on investments held for sale -- -- -- -- --
Dividends on preferred stock -- -- -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, March 31, 2007 100 500,000 17,037,706 17,038 (34,500)
Stock subscription received -- -- -- -- 34,500
Common stock issued in exchange for
consulting services -- -- 2,813,320 2,813 --
Common stock issued in exchange for
director services -- -- 400,000 400 --
Common stock issued for cash -- -- 4,994,739 4,995 --
Common stock issued for property acquisitions -- -- 250,000 250 --
Common stock issued in exchange for
conversion of notes payable and accrued interest -- -- 6,050,000 6,050 --
Warrants issued in exchange for
services -- -- -- -- --
Warrants exercised -- -- 221,698 222 --
Syndication fees -- -- -- -- --
Beneficial conversion feature of loan -- -- -- -- --
Realized loss on investments held for resale -- -- -- -- --
Dividends on preferred stock -- -- -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
100 $ 500,000 31,767,463 $ 31,768 $ --
============ ============ ============ ============ ============
Table continues below.
Additional Other
Paid-in Comprehensive Accumulated
Capital Income Deficit Total
------------ ------------ ------------ ------------
Balance, March 31, 2006 $ 16,034,072 $ -- $(15,766,169) $ (54,969)
Common stock issued in exchange for
consulting services 2,013,726 -- 0 2,017,206
Common stock issued in exchange for
assumption of liabilities 34,480 -- 0 --
Common stock issued for cash 1,512,589 -- 0 1,514,526
Common stock issued for property acquisitions 2,677,130 -- -- 2,681,203
Cancellation of stock subscription (830,400) -- -- --
Warrants issued in exchange for
director services 33,187 -- -- 33,187
Warrants issued in exchange for
services 4,148 -- -- 4,148
Syndication fees (74,660) -- -- (74,660)
Beneficial conversion feature of loan 125,638 -- -- 125,638
Unrealized loss on investments held for sale -- (4,459) -- (4,459)
Dividends on preferred stock -- -- (40,000) (40,000)
Net Loss -- -- (3,440,222) (3,440,222)
------------ ------------ ------------ ------------
Balance, March 31, 2007 21,529,910 (4,459) (19,246,391) 2,761,598
Stock subscription received -- -- -- 34,500
Common stock issued in exchange for
consulting services 1,567,271 -- -- 1,570,084
Common stock issued in exchange for
director services 219,600 -- -- 220,000
Common stock issued for cash 960,423 -- -- 965,418
Common stock issued for property acquisitions 45,750 -- -- 46,000
Common stock issued in exchange for
conversion of notes payable and accrued interest 73,702 -- -- 79,752
Warrants issued in exchange for
services 30,325 -- -- 30,325
Warrants exercised (222) -- -- --
Syndication fees (6,565) -- -- (6,565)
Beneficial conversion feature of loan 25,852 -- -- 25,852
Realized loss on investments held for resale -- 4,459 -- 4,459
Dividends on preferred stock -- -- (40,000) (40,000)
Net Loss -- -- (3,229,527) (3,229,527)
------------ ------------ ------------ ------------
$ 24,446,046 $ -- $(22,515,918) $ 2,461,896
============ ============ ============ ============
F-4
AVALON OIL AND GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
--------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $(3,234,710) $(3,440,222)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation 6,529 1,450
Depletion 102,012 23,335
Amortization 220,822 51,514
Impairment of properties -- 465,924
Amortization of loan discount to interest expense -- 100,000
Stock-based compensation 1,820,410 2,054,541
Changes in operating assets and liabilities
Marketable securities 35,506 (31,047)
Accounts receivable (11,830) (11,643)
Prepaid expenses (55,002) 11,643
Deposits -- (3,138)
Accounts payable and other accrued expenses 32,470 (39,077)
Asset retirement obligation 3,392 728
----------- -----------
Net cash used in operating activities $(1,080,401) $ (815,992)
----------- -----------
Cash flows from investing activities:
(Purchase) Proceeds of Leak Location Technologies (5,000) 99,999
Purchase of BIO-CAT license (10,000) --
Proceeds from UMTI stock purchase -- 269,650
Proceeds from Intell-well stock purchase -- 202,500
Purchase of Oiltek (13,593) --
Issuance of notes receivable (35,000) (65,000)
Payments on notes receivable 10,000 --
Purchase of fixed assets (10,672) (37,282)
Proceeds from disposal of fixed assets 194 --
Proceeds from disposal of oil and gas properties 35,000 --
Additions to oil and gas properties (686,229) (332,564)
----------- -----------
Net cash provided by (used in) investing activities (715,300) 137,303
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 965,417 1,514,527
Preferred stock dividends (30,000) --
Syndication fees paid (6,565) (74,660)
Proceeds from issuance of note payable 75,000 100,000
----------- -----------
Net cash provided by financing activities 1,003,852 1,539,867
----------- -----------
Effect of unrealized gains on marketable
securities held for resale -- (4,459)
Net increase (decrease) in cash
and cash equivalents (791,849) 856,719
Cash and cash equivalents,
Beginning of period 900,537 43,818
----------- -----------
Cash and cash equivalents,
End of period $ 108,688 $ 900,537
=========== ===========
F-5
AVALON OIL AND GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended March 31, 2008 and 2007
2008 2007
----------- ----------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ -- $ --
=========== ==========
Income taxes $ -- $ --
=========== ==========
Non-cash investing and financing transactions:
Common stock issued in exchange for consulting services $ 1,570,085 $2,017,206
=========== ==========
Common stock issued for directors' fees $ 220,000 $ --
=========== ==========
Preferential conversion feature of loan $ 25,852 $ --
=========== ==========
Warrants issued in exchange for services $ 30,325 $ 4,180
=========== ==========
Warrants issued in exchange for directors' fees $ -- $ 161,153
=========== ==========
Common stock issued for accrued liabilites $ -- $ 34,500
=========== ==========
Common stock issued for acquisition of oil and
gas properties $ -- $ 301,400
=========== ==========
Common stock issued for technologies acquired $ 20,000 $2,379,803
=========== ==========
Common stock issued on conversion of notes payable $ 63,000 $ --
=========== ==========
F-6
</TABLE>
AVALON OIL & GAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is currently in the process of raising funds to acquire oil and gas
properties and related oilfield technologies, which the Company plans to develop
into commercial applications.
On July 7, 2006, the Company purchased all the outstanding shares of Ultrasonic
Mitigation Technologies, Inc. (UMTI) from UTEK Corporation for 16,250,000 shares
of the Company's Common Stock valued at $695,500. The shares were valued at the
average sales price received in private placements for sales of restricted
common stock for cash. UMTI became a wholly owned subsidiary of the Company as
of the date of acquisition. UMTI holds the technology license of a patented
process for paraffin wax mitigation from crude oil using ultrasonic waves
developed by the University of Wyoming.
On November 8, 2006, the Company purchased all the outstanding shares of
Intelli-Well Technologies, Inc. (IWTI) from UTEK Corporation for 20,000,000
shares of the Company's common stock valued at $594,000. The shares were valued
at the average sales price received in private placements for sales of
restricted common stock for cash. ITWI became a wholly owned subsidiary of the
Company as of the date of acquisition. IWTI holds a non-exclusive license in the
United States for a borehole casing technology developed by the Regents of the
University of California (the "Regents") through its researchers at Lawrence
Livermore National Laboratory.
On March 28, 2007, the Company purchased all the outstanding shares of Leak
Location Technologies, Inc. (LLTI) from UTEK Corporation for 36,710,526 shares
of the Company's common stock valued at $1,090,303. The shares were valued at
the average sales price received in private placements for sales of restricted
common stock for cash. LLTI became a wholly owned subsidiary of the Company as
of the date of acquisition. LLTI holds a non-exclusive license in the United
States for a leak detection and location technology developed by the Rensselaer
Polytechnic Institute ("Rensselaer") through its researcher Michael Savic.
On September 22, 2007 the Company entered into an agreement with respect to its
purchase of a 75.6% interest in Oiltek, Inc. (Oiltek) for $50,000 and the right
of Oiltek to market Avalon's intellectual property. Oiltek is consolidated in
these financial statements with a minority interest shown.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Ultrasonic Mitigation Technologies, Inc.;
Intelli-Well Technologies, Inc. and Leak Location Technologies, Inc. along with
the majority owned Oiltek, Inc. All significant inter-company items have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates and assumptions.
F-7
Basis of Accounting
The Company's financial statements are prepared using the accrual method of
accounting. Revenues are recognized when earned and expenses when incurred.
Cash Equivalents
Cash and cash equivalents consist primarily of cash on deposit, certificates of
deposit, money market accounts, and investment grade commercial paper that are
readily convertible into cash and purchased with original maturities of three
months or less. The Company maintains its cash balances at several financial
institutions. Accounts at the institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000.
Investments
The Company classifies its debt and marketable securities into held-to-maturity,
trading, or available-for-sale categories. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale.
Held-to-maturity securities are recorded as either short-term or long-term on
the balance sheet based on contractual maturity date and are stated at amortized
cost. Marketable securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and are
reported at fair value, with unrealized gains and losses recognized in earnings.
Debt and marketable equity securities are classified as available-for-sale and
are carried at fair market value, with the unrealized gains and losses, net of
tax, included in the determination of comprehensive income and reported in
shareholder's equity.
The fair value of substantially all securities is determined by quoted market
prices. Gains or losses on securities sold are based on the specific
identification method. As of December 31, 2007, all investments are considered
to be available-for-sale for financial reporting purposes.
Fair Value of Financial Instruments
The Company's financial instruments are cash and cash equivalents, accounts
receivable, accounts payable, notes payable, and long-term debt. The recorded
values of cash and cash equivalents, accounts receivable, and accounts payable
approximate their fair values based on their short-term nature. The recorded
values of notes payable and long-term debt approximate their fair values, as
interest approximates market rates.
Accounts Receivable
Management periodically assesses the collectibility of the Company's accounts
receivable. Accounts determined to be uncollectible are charged to operations
when that determination is made. All of the Company's accounts receivable are
concentrated in the Oil industry.
Oil and Natural Gas Properties
The Company follows the full cost method of accounting for natural gas and oil
properties, prescribed by the Securities and Exchange Commission ("SEC".) Under
the full cost method, all acquisition, exploration, and development costs are
capitalized. The Company capitalizes all internal costs, including: salaries and
related fringe benefits of employees directly engaged in the acquisition,
exploration and development of natural gas and oil properties, as well as other
identifiable general and administrative costs associated with such activities.
F-8
All capitalized costs of natural gas and oil properties, including the estimated
future costs to develop reserves, are amortized on the units-of-production
method using estimates of proved reserves. Investments in unproved reserves and
major development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized. Abandonment of
natural gas and oil properties are accounted for as adjustments of capitalized
costs; that is, the cost of abandoned properties is charged to the full cost
pool and amortized.
Under the full cost method, the net book value of natural gas and oil
properties, less related deferred income taxes, may not exceed a calculated
"ceiling". The ceiling is the estimated after-tax future net revenue from proved
natural gas and oil properties, discounted at ten percent (10%) per annum, plus
the lower of cost or fair market value of unproved properties adjusted for the
present value of all future oil and gas hedges. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes that are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
basis. The excess, if any, of the net book value above the ceiling is required
to be written off as an expense. During the year ended March 31, 2008, the
Company did not recognize any impairment expense.
Other Property and Equipment
Other property and equipment is reviewed on an annual basis for impairment and
as of March 31, 2008, the Company had not identified any such impairment.
Repairs and maintenance are charged to operations when incurred and improvements
and renewals are capitalized.
Other property and equipment are stated at cost. Depreciation is calculated
using the straight-line method for financial reporting purposes and accelerated
methods for tax purposes.
Their estimated useful lives are as follows:
Office Equipment: 5-7 Years
Asset Retirement Obligations
In accordance with the provisions of SFAS No. 143, Accounting for Asset
Retirement Obligations, the Company records the fair value of its liability for
asset retirement obligations in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long live assets.
Over time, the liability is accreted to its present value at the end of each
reporting period, and the capitalized cost is depreciated over the useful life
of the related assets. Upon settlement of the liability, the Company will either
settle the obligation for its recorded amount or incur a gain or loss upon
settlement. The Company's asset retirement obligations relate to the plugging
and abandonment of its oil properties.
Intangible Assets
The cost of licensed technologies acquired is capitalized and will be amortized
over the shorter of the term of the licensing agreement or the remaining life of
the underlying patents.
F-9
The Company evaluates recoverability of identifiable intangible assets whenever
events or changes in circumstances indicate that intangible assets carrying
amount may not be recoverable. Such circumstances include, but are not limited
to: (1) a significant decrease in the market value of an asset, (2) a
significant adverse change in the extent or manner in which an asset is used, or
(3) an accumulation of cost significantly in excess of the amount originally
expected for the acquisition of an asset. The Company measures the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with it.
Should the sum of the expected cash flows be less than the carrying amount of
assets being evaluated, an impairment loss would be recognized. The impairment
loss would be calculated as the amount by which the carrying amount of the
assets, exceed fair value. For the year ended March 31, 2007, the Company
recognized an impairment loss of $371,925 related to Intelli-Well Technologies.
Estimated amortization of intangible assets over the next five years is as
follows:
03/31/09 $ 220,822
03/31/10 220,822
03/31/11 220,822
03/31/12 220,822
03/31/13 220,822
----------
$1,104,110
==========
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards No. 123R (FAS-123R), Share Based Payment, which
is a revision of Statement of Financial Accounting Standards No. 123 (FAS-123),
Accounting for Stock-Based Compensation.
FAS-123R eliminates accounting for share-based compensation transaction using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No.25 (APB-25, Accounting for Stock Issued to Employees), and requires instead
that such transactions be accounted for using a fair-value-based method. The
Company has elected to adopt the provisions of FAS-123R effective January 1,
2006, under the modified prospective transition method, in which compensation
cost was recognized beginning with the effective date (a) based on the
requirements of FAS-123R for all share-based payments granted after the
effective date and (b) based on the requirements of FAS 123-R for all awards
granted to employees prior to the effective date of FAS-123R that remain
unvested on the effective date.
As permitted under FAS-123, the Company elected to follow Accounting Principles
Board Opinion No.25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for stock-based awards to employees through
December 31, 2005. Accordingly, compensation cost for stock options and
non-vested stock grants was measured as the excess, if any, of the market price
of the Company's common stock at the date of the grant over the exercise price.
With the adoption of FAS-123R, the Company elected to amortize stock-based
compensation for awards granted on or after the adoption of FAS-123R on January
1, 2006, on a straight-line basis over the requisite service (vesting) period
for the entire award. For awards granted prior to January 1, 2006, compensation
costs are amortized in a manner consistent with Financial Accounting Standards
Boards Interpretation No. 28 (FIN-28), Accounting for Stock Appreciation Rights
and Other Variable Stock Option of Award Plans. This is the same manner applied
in the pro-forma disclosures under FAS-123.
F-10
Warrants
The value of warrants issued is recorded at their fair values as determined by
use of a Black Scholes Model at such time or over such periods as the warrants
vest.
Earnings per Common Share
Statement of Financial Accounting Standards ("SFAS") 128, Earnings Per Share,
requires presentation of "basic" and "diluted" earnings per share on the face of
the statements of operations for all entities with complex capital structures.
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted during the period.
Dilutive securities having an antidilutive effect on diluted earnings per share
are excluded from the calculation.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is intended to clarify
the accounting for uncertainty in income taxes recognized in a company's
financial statements and prescribes the recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Under FIN 48, evaluation of a tax position is a two-step process. The first step
is to determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent period in
which the threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer met.
F-11
The adoption of FIN 48 at January 1, 2007 did not have a material effect on the
Company's financial position.
Revenue Recognition
In accordance with the requirements of SEC Staff Accounting Bulletin Topic 13A
"Revenue Recognition", revenues are recognized at such time as (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services have
been rendered, (3) the seller's price to the buyer is fixed or determinable and
(4) collectibility is reasonably assured. Specifically, oil and gas sales are
recognized as income at such time as the oil and gas are delivered to a viable
third party purchaser at an agreed price. Interest income is recognized as it is
earned.
Recently Issued Accounting Standards
In February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments" ("SFAS No. 155"), which amends FASB Statements No.
133 and 140. This Statement permits fair value remeasurement for any hybrid
financial instrument containing an embedded derivative that would otherwise
require bifurcation, and broadens a Qualified Special Purpose Entity's ("QSPE")
permitted holdings to include passive derivative financial instruments that
pertain to other derivative financial instruments. This Statement is effective
for all financial instruments acquired, issued or subject to a remeasurement
event occurring after the beginning of an entity's first fiscal year beginning
after September 15, 2006. This Statement has no current applicability to the
Company's financial statements. Management adopted this Statement on April 1,
2007 and it is anticipated that the initial adoption of this Statement will not
have a material impact on the Company's financial position, results of
operations, or cash flows.
In June 2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"), an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes." FIN 48 clarifies the accounting and reporting for
income taxes where interpretation of the law is uncertain. FIN 48 prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of income tax uncertainties with respect to
positions taken or expected to be taken in income tax returns. FIN 48 is
effective for fiscal years beginning after December 15, 2006. This Statement has
no current applicability to the Company's financial statements. Management
adopted this Statement on April 1, 2007 and it is anticipated that the initial
adoption of FIN 48 will not have a material impact on the Company's financial
position, results of operations, or cash flows.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure
purposes under GAAP. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
with earlier adoption permitted. Management is assessing the impact of the
adoption of this Statement.
In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"), an
amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires
(a) recognition of the funded status (measured as the difference between the
fair value of the plan assets and the benefit obligation) of a benefit plan as
an asset or liability in the employer's statement of financial position, (b)
measurement of the funded status as of the employer's fiscal year-end with
limited exceptions, and (c) recognition of changes in the funded status in the
year in which the changes occur through comprehensive income. The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15, 2006.
F-12
The requirement to measure the plan assets and benefit obligations as of the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. This Statement has no
current applicability to the Company's financial statements. Management adopted
this Statement on April 1, 2007 The adoption of SFAS No. 158 had no material
impact to the Company's financial position, results of operations, or cash
flows.
In September 2006, the Securities Exchange Commission issued Staff Accounting
Bulletin No. 108 ("SAB No. 108"). SAB No. 108 addresses how the effects of prior
year uncorrected misstatements should be considered when quantifying
misstatements in current year financial statements. SAB No. 108 requires
companies to quantify misstatements using a balance sheet and income statement
approach and to evaluate whether either approach results in quantifying an error
that is material in light of relevant quantitative and qualitative factors. When
the effect of initial adoption is material, companies will record the effect as
a cumulative effect adjustment to beginning of year retained earnings and
disclose the nature and amount of each individual error being corrected in the
cumulative adjustment. SAB No. 108 is effective beginning January 1, 2007. The
initial adoption of SAB No. 108 did not have a material impact on the Company's
financial position, results of operations, or cash flows.
In February 2007, the FASB issued Statement No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159). This statement permits
companies to choose to measure many financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS 159 on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"). SFAS 141(R) will change the accounting for
business combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS No.
141(R) will change the accounting treatment and disclosure for certain specific
items in a business combination. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. SFAS 141(R) will impact the Company in the event of any future
acquisition.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements--an amendment of Accounting Research Bulletin
No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company does not believe that SFAS
160 will have a material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133 (FAS
161). FAS 161 changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in FAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The Company is
currently assessing the impact of FAS 161.
F-13
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
Note 2: RELATED PARTY TRANSACTIONS
Promissory Notes
On May 8, 2005, a shareholder loaned the Company $100,000 for working capital in
exchange for a promissory note. The note carries a 10% interest rate and matured
on November 8, 2006. The Company entered into an agreement with the noteholder
to extend the due date until May 8, 2008. The note holder has the right to
convert the note and accrued interest at the rate of $0.20 per share as adjusted
for the May 2007 1-for-20 reverse stock split. The value of this conversion
feature was treated as a loan discount for the full $100,000 of the loan and is
being amortized to interest expense over the life of the loan. Amortization of
$100,000 was included in interest expense for the year ended March 31, 2007.
On May 8, 2007 the loan was extended for one year. The conversion feature of the
note was valued at $25,852 and was treated as prepaid loan costs. During the
nine months ended December 30, 2007 $25,852 was amortized to interest expense.
This note was not extended and is currently past due.
On October 19, 2007, the note holder converted $30,000 of principal plus accrued
interest of $16,152 for 1,350,000 shares of common stock.
On November 30, 2007, the note holder converted $10,000 of principal for 950,000
shares of common stock.
On January 31, 2008, the note holder converted $10,000 of principal and accrued
interest of $600 for 1,250,000 shares of common stock.
On February 29, 2008, the note holder converted $8,000 of principal for
1,250,000 shares of common stock.
On March 31, 2008, the note holder converted $5,000 of principal for 1,250,000
shares of common stock.
The balance of the note as of March 31, 2008 and 2007 was $124,500 and $100,000,
respectively.
On February 11, 2008, the Company borrowed $75,000 from an officer of the
corporation. The note carries a 10% interest rate and matures on March 31, 2008.
This note was not extended and is currently past due.
Convertible notes payable in the amount of $12,500 dated November 28, 2006 were
issued by Oiltek. The notes bear interest at the rate of 8% per annum, and were
due in full on October 1, 2007. The notes are convertible by the holder into
common stock of Oiltek at a conversion of $0.01 per share. Accrued interest is
convertible by the holders into common stock of Oiltek at maturity of the note
at a price of $0.02 per share.
F-14
Preferred Stock
The 100 shares of Series A Preferred Stock, issued to an officer/director as
payment for $500,000 in promissory notes, are convertible into the number of
shares of common stock sufficient to represent 40 percent (40%) of the fully
diluted shares outstanding after their issuance. The Series A Preferred Stock
pays an eight percent (8%) dividend. The dividends are cumulative and payable
quarterly. The Series A Preferred Stock carries liquidating preference, over all
other classes of stock, equal to the amount paid for the stock plus any unpaid
dividends. The Series A Preferred Stock provides for voting rights on an "as
converted to common stock" basis.
During the years ended March 31, 2008 and 2007, the Company incurred $40,000 in
preferred stock dividends, respectively.
The holders of the Series A Preferred Stock have the right to convert each share
of preferred stock into a sufficient number of shares of common stock to equal
40% of the then fully-diluted shares outstanding. Fully diluted shares
outstanding is computed as the sum of the number of shares of common stock
outstanding plus the number of shares of common stock issuable upon exerciser,
conversion or exchange of outstanding options, warrants, or convertible
securities.
Note 3: STOCK-BASED COMPENSATION
During the year ended March 31, 2007, the Company issued its directors an option
to purchase 100,000 shares of common stock for directors' fees. The transactions
were recorded at the quoted market price of the stock on the date of issuance.
The services, valued at $33,187, are included in the accompanying financial
statements as "Stock-based compensation".
On October 30, 2007, the Company issued its directors 400,000 shares of common
stock for directors' fees. The stock was recorded at the quoted market price of
the stock on the date of issuance. The services, valued at $220,000, are
included in the accompanying financial statements as "Stock-based compensation".
During the year ended March 31, 2007, 3,479,513 of the 3,486,349 shares issued
during the year ended March 31, 2006 for consulting services valued at
$2,017,206 were earned and included in the accompanying financial statements as
"Stock-based compensation".
During the year ended March 31, 2007 the Company issued 49,682 shares of common
stock valued at $34,777 for consulting services. Of these shares 6,835 valued at
$4,785 were treated as not being issued for financial reporting purposes as
required by SAB D-90 "Grantor Balance Sheet Presentation of Unvested,
Forfeitable Equity Instruments Granted to Non Employees".
During the year ended March 31, 2008 6,835 shares were earned and the value of
$4,785 was included in the accompanying financial statements as "Stock-based
compensation".
During the year ended March 31, 2008 the Company issued 4,994,739 shares of
common stock valued at $1,570,084 for consulting services.
During the year ended March 31, 2007 the Company issued warrants with a life of
five years to purchase 50,000 shares of common stock at $0.075; 50,000 shares of
common stock at $1.00; 50,000 shares of common stock at $1.25 and 50,000 shares
of common stock at $1.50. These warrants were valued using a Black-Sholes model
at $30,325 and included in these financial statements as "Stock-based
compensation". On October 1, 2007 these warrants were cancelled.
F-15
Note 4: NOTE RECEIVABLE
On December 11, 2006 the Company loaned to an individual $65,000, whih was due
on April 1, 2007 with an interest rate of 13%. The Company received a promissory
note evidencing the loan. The note is secured by real property. An Interest only
payment of $3,163 was made on the note and it was extended until October 1,
2007. The loan is now past due.
On September 12, 2007 the Company loaned to a company $25,000, which was due on
November 5, 2007 with an interest rate of 10%. The Company received a promissory
note evidencing the loan. The note is unsecured. The loan is now past due.
Note 5: OIL AND GAS PROPERTY ACTIVITY
Effective on November 15, 2006, the Company acquired a fifty (50%) percent
working interest in an active Woodbine production property in Upshur County,
Texas, consisting of thirteen (13) wellbornes.
On October 9, 2007, the Company acquired a ten (10%)percent working interest in
the Lake Washington Field, Plaquemines Parish, LA., for $200,000.
On October 15, 2007, the Company acquired a five (5%) percent working interest
in the Waters well for $12,800.
On October 19, 2007 the Company acquired a ten (10%) percent working interest in
the California Creek Field for 50,000 shares of common stock valued at $26,000.
On October 17, 2007, the Company signed a non-binding letter of intent with Gran
Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company,
expressing Avalon's intent to acquire Gran Tierra's interest in the Mecaya Block
and the Talora Block.
Pursuant to the non-binding letter of intent, the Company is required to pay
$1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at
this time the Company's management does not believe that the terms of the
non-binding letter of intent will be complied with, or that we will enter into a
definitive agreement.
On January 15, 2008 the Company sold its working interest in the Aloha field for
$35,000.
Note 6: INCOME TAXES
In July 2006, the Financial Accounting Standards Board (FASB) issued
interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is intended to clarify
the accounting for uncertainty in income taxes recognized in a company's
financial statements and prescribes the recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Under FIN 48, evaluation of a tax position is a two-step process. The first step
is to determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
F-16
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent period in
which the threshold is met. Previously recognized tax positions that no longer
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