Avalon Oil & Gas, Inc. - Recent Material Event
<![CDATA[Avalon Oil & Gas, Inc.
FORM 10-QSB QUARTERLY REPORT FOR THE QUARTER ENDED
DECEMBER 31, 2007
INDEX
Part I: FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Condensed Balance Sheet December 31, 2007 (unaudited).........................3
Condensed Statements of Operations for the Three Months and Nine months
ended December 31, 2007 and 2006 (unaudited).............................4
Condensed Statements of Cash Flows for the Nine Months
ended December 31, 2007 and 2006 (unaudited).............................5
Notes to Condensed Financial Statements (unaudited)...........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................24
Item 3. Controls and Procedures...............................................27
Part II: OTHER INFORMATION
Item 1. Legal Proceedings.....................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........28
Item 3. Defaults Upon Senior Securities.......................................28
Item 4. Submission of Matters to a Vote of Security Holders...................29
Item 5. Other Information.....................................................29
Item 6. Exhibits .............................................................29
Signature ....................................................................31
2
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AVALON OIL AND GAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2007
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 184,783
Marketable securities 33,971
Accounts receivable 24,838
Deposits 3,138
Notes receivable 100,000
Prepaid expenses 29,262
------------
Total current assets 375,992
------------
Property and equipment
Equipment, net of depreciation of $6,190 34,376
Producing oil and gas properties, net of depletion of $89,663 and
impairment of $93,999 819,860
------------
Total property and equipment 854,236
Goodwill 33,943
Intellectual property rights, net of amortization of $217,130 and
impairment of $371,925 1,208,597
------------
$ 2,472,768
============
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable 84,831
Notes payable - related party 72,500
Accrued liabilities 17,467
------------
Total current liabilities 209,298
------------
Accrued ARO liability 32,025
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
Common stock, $0.001 par value, 50,000,000 shares authorized,
24,765,050 shares issued and outstanding 24,765
Additional paid-in capital 23,994,326
Stock subscription receivable (50,500)
Other comprehensive income (3,635)
Accumulated (deficit) (22,199,511)
------------
Total shareholders' equity 2,231,445
------------
$ 2,472,768
============
3
AVALON OIL AND GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three and Nine Months Ended December 31, 2007 and 2006
(Unaudited)
Three months ended, Nine months ended,
December 31, December 31,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Oil and Gas Sales $ 78,304 $ 20,723 $ 178,610 $ 26,813
Operating expenses:
Lease operating expense, serverance taxes and
ARO accretion 31,035 22,334 102,646 27,658
Selling, general and administrative expenses 304,482 191,098 956,802 481,173
Stock-based compensation 326,000 283,814 1,786,610 1,418,537
Depreciation, depletion and amortization 76,249 14,764 236,740 14,963
------------ ------------ ------------ ------------
Total operating expenses 737,766 512,010 3,082,798 1,942,331
------------ ------------ ------------ ------------
Loss from operations (659,462) (491,287) (2,904,188) (1,915,518)
Other Income (Expenses)
Interest income 881 10,920 15,864 16,969
Realized losses on marketable securites 7,181 (8,943)
Interest expense:
Related party (6,173) (40,512) (31,036) (107,179)
------------ ------------ ------------ ------------
Loss from Continuing Operations before
Income Taxes (657,573) (520,879) (2,928,303) (2,005,728)
Provision (benefit) for income taxes -- -- -- --
Net loss before minority interest (657,573) (520,879) (2,928,303) (2,005,728)
Minority interest in loss of subsidary 5,183 -- 5,183 --
------------ ------------ ------------ ------------
Net loss (652,390) (520,879) (2,923,120) (2,005,728)
Preferred Stock Dividend (10,000) (10,000) (30,000) (30,000)
------------ ------------ ------------ ------------
Loss attributable to common stock
after preferred stock dividends $ (662,390) $ (530,879) $ (2,953,120) $ (2,035,728)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.03) $ (0.05) $ (0.15) $ (0.19)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 22,706,111 10,092,623 20,262,326 10,556,921
============ ============ ============ ============
The components of other comprehensive income:
Net loss $ (657,573) $ (520,879) $ (2,928,303) (2,005,728)
Unrealized gains on available-for-sale
marketable securites 7,193 -- 14,008 --
------------ ------------ ------------ ------------
Comprehensive income (loss) $ (650,380) $ (520,879) $ (2,914,295) $ (2,005,728)
============ ============ ============ ============
4
AVALON OIL AND GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended December 31, 2007 and 2006
(Unaduited)
2007 2006
----------- -----------
Cash flows from operating activities:
Net loss $(2,928,303) $(2,005,728)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation 4,796 563
Depletion 66,328 14,400
Amortization 165,617 31,080
Amortization of loan discount to interest expense -- 100,000
Stock-based compensation 1,789,410 1,418,537
Changes in operating assets and liabilities:
Marketable securities (2,924) --
Accounts receivable (13,195) (34,829)
Prepaid expenses 25,585 7,549
Deposits -- (3,138)
Accounts payable and other accrued expenses 38,521 (93,209)
Asset retirement obligation 2,184 --
----------- -----------
Net cash used in operating activities $ (851,981) $ (564,775)
----------- -----------
Cash flows from investing activities:
Purchase of Leak Location Technologies (5,000)
Proceeds from UMTI stock purchase -- 269,650
Proceeds from Intell-well stock purchase -- 202,500
Purchase of Oiltek (13,593) --
Note receivable (35,000) (65,000)
Purchase of fixed assets (2,210) (7,964)
Disposal of fixed assets 194 --
Additions to oil and gas properties (313,717) (291,892)
----------- -----------
Net cash (used) in provided by investing activities (369,326) 107,294
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 531,294 1,514,527
Preferred stock dividends (20,000) --
Syndication fees paid (6,565) (74,660)
Proceeds from issuance of note payable -- 100,000
----------- -----------
Net cash provided by financing activities 504,729 1,539,867
----------- -----------
Effect of unrealized gains on marketable
securities held for resale 824 --
Net increase (decrease) in cash
and cash equivalents (715,754) 1,082,386
Cash and cash equivalents,
Beginning of period 900,537 43,818
----------- -----------
Cash and cash equivalents,
End of period $ 184,783 $ 1,126,204
=========== ===========
5
AVALON OIL AND GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended December 31, 2007 and 2006
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 $1,539,085 $1,253,204
========== ==========
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 $ -- $1,289,500
========== ==========
Common stock issued on conversion of notes payable $ 40,000 $ --
========== ==========
6
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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.
7
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.
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. At December 31, 2007 $74,512 of the
Company's cash balances are in excess of insured amounts.
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.
8
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.
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 nine months ended December 31, 2007,
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 December 31, 2007, the Company had not identified any such impairment.
Repairs and maintenance are charged to operations when incurred and improvements
and renewals are capitalized.
9
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.
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:
03/31/08 $ 220,822
03/31/09 220,822
03/31/10 220,822
03/31/11 220,822
03/31/12 220,822
----------
$1,104,110
==========
10
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.
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.
11
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.
The adoption of FIN 48 at January 1, 2007 did not have a material effect on the
Company's financial position.
12
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.
13
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.
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.
14
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.
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. 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 31, 2007 $25,852 was amortized to interest expense.
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.
Convertible notes payable in the amount of $12,500 dated November 28, 2006 were
issued by Oiltek. The notes bears interest at the rate of 8% per annum, and were
due in full on October 1, 2007, but such due date was extended for six months
until April 1, 2008. 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.
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.
15
During the nine months ended December 31, 2007, the Company incurred $30,000 in
preferred stock dividends.
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 six months ended September 30, 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, alued at $220,000, are included
in the accompanying financial statements as "Stock-based compensation".
During the year ended March 31, 2007, the Company also issued 2,128,000 shares
of common stock valued at $949,284 for consulting services. Of these shares
1,416,667 valued at $668,833 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 three months ended June 30, 2006, 566,667 shares of those shares valued at
$228,833 were earned and included in the accompanying financial statements as
"Stock-based compensation".
During the nine months ended December 31, 2007 the Company issued 9,093,642
shares of common stock valued at $322,957 for consulting services. Of these
shares 203,687 valued at $33,164 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 nine months ended December 31, 2007 the Company issued 6,681,750
shares of common stock valued at $4,298,575 for consulting services.
16
During the nine months ended December 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
share 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.
Note 4: NOTE RECEIVABLE
On December 11, 2006 the Company accepted a note receivable from an individual
who is a long time shareholder and consultant to the Company for $65,000, due on
April 1, 2007 with an interest rate of 13%. 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 Company is in the process of restructuring
the note.
On April 11, 2007 the Company accepted a note receivable from an individual who
is a long time shareholder and consultant to the Company for $10,000, due on
October 1, 2007 with an interest rate of 13%. The note has been paid.
On September 12, 2007 the Company accepted a note receivable from a company for
$25,000, due on November 5, 2007 with an interest rate of 10%. The note is
unsecured. The loan was to a business associate in connection with the
acquisition of oil and gas properties. The Company expects to be repaid by the
end of February, 2008.
Note 5: 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
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.
The adoption of FIN 48 at January 1, 2007 did not have a material effect on the
Company's financial position.
The Company is delinquent filing tax returns with the Internal Revenue service
and state taxing authorities. The company is currently in the process of filing
these delinquent returns. The filing of theses returns should result in a net
operating loss (NOL) carry forward which would create a deferred tax asset that
would be fully reserved.
17
Note 6: SHAREHOLDERS' EQUITY
On May 15, 2007, the Board of Directors approved and implemented a reverse stock
split and established a ratio of 1-for 20. This move followed a vote by written
consent of the stockholders dated April 23, 2007 and an action by written
consent of the Board of Directors on April 25, 2007. The Company's common stock
began trading on a reverse-split basis on May 15, 2007. As a result of the
reverse stock split, every 20 shares of common stock were combined into one
share of common stock. The reverse stock split affects all shares of common
stock, stock options and warrants outstanding as of and immediately prior to the
effective time of the reverse stock split. Fractional shares equal or greater to
one-half share are rounded up, and fractional shares less then one-half are
rounded down. The effect of this reverse stock split has been applied in the
consolidated financial statements and notes to consolidated financial
statements.
On April 18, 2006, the Company authorized the issuance of 135,000 shares of
common stock valued at $94,500 for consulting services.
In May 2006, the Company issued 109,000 shares of common stock and warrants to
purchase 50,000 shares of common stock at a price of $2.00 per share. These
warrants expire in May 2014. The purchase price for the shares and the warrants
was $100,000.
On May 1, 2006, the Company granted to its directors warrants to purchase
100,000 shares of common stock at a price of $0.5 per share for director
services. These warrants expire on May 1, 2011. These warrants were exercised in
March 2007.
On May 15, 2006, the Company entered into a strategic alliance agreement with
UTEK Corporation for consulting services. The Company issued 34,682 shares of
common stock in connection with this agreement. The value of the stock issued,
$0.035 per share was recorded at fair value based on other cash sales of
restricted stock. Of the $24,277 in services, $21,242 was included in
"Stock-based compensation" with the balance not shown as issued until services
are rendered.
On May 18, 2006, the Company issued 375,000 shares of stock for consulting
services valued at $262,500.
$34,500 is shown as a stock subscription receivable for consulting services and
the assumption of payroll taxes from May 24, 2006, and will remain as stock
subscriptions receivable until the underlying assumed payroll taxes have been
paid by the shareholder at which time the payroll tax liability will be removed
from the Company's books and the stock will be treated as issued.
On June 1, 2006, the Company executed a six-month consulting agreement with a
Consultant and issued 15,000 shares of common stock as compensation. The stock
was valued at $10,500 of which $8,750 was recognized as compensation expense
during the year ending March 31, 2007.
18
On June 8, 2006 the Company granted warrants to purchase 12,500 shares at a
price of $0.5 per share at a value of $4,148 for website design and maintenance
services. These warrants expire on September 8, 2011
On August 18, 2006, the Company authorized the issuance of 25,000 shares of
common stock for consulting services. The stock was valued at $21,400 and was
charged to expense during the year ending March 31, 2007.
On August 29, 2006 the Company authorized the issuance of 50,000 shares of
common stock for consulting services. This transaction was valued at $42,800 and
was charged to expense for the year ending March 31, 2007.
On September 12, 2006 the Company authorized the issuance of 60,000 shares of
common stock for consulting services. The stock was valued at $68,480 and was
recognized as compensation expense during the year ending March 31, 2007.
During the year ended March 31, 2007, the Company issued 206,262 shares of its
common stock to 8 accredited investors, at an average price of approximately
$1.00 per share, pursuant to the exemptions afforded by Section (4)2 of the
Securities Act of 1933, as amended, for which the Company received total cash
proceeds of $196,404.
All stock transactions for services with third parties were valued as of the
earlier of the date at which a commitment for performance by the third party to
earn the stock was reached or the date at which the third party's performance
was complete.
On May 15, 2006, the Company entered into a Regulation S Stock Purchase
agreement.
During the year ended March 31, 2007, 1,730,644 shares of common stock with cash
proceeds of $1,199,123 were sold pursuant to the Regulation S Stock Purchase
agreement.
During the nine months ended December 31, 2007 the Company issued 6,681,750
shares of common stock valued at $4,298,575 for consulting services.
During the nine months ended December 31, 2007, 2,934,707 shares of common stock
with cash proceeds of $722,451 were sold pursuant to the Regulation S Stock
Purchase agreement.
During the nine months ended December 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
share 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". Pursuant to cancellation of the consulting agreement
on October 1, 2007 these warrants were cancelled.
19
Information with respect to stock warrants outstanding is follows:
Expired,
Exercise Outstanding Exercised or Outstanding Expiration
Price June 30, 2007 Granted Cancelled Dec. 31, 2007 Date
----- -------------- ------- --------- ------------- ----
Warrants:
$0.20 125,000 -0- -0- 125,000 12/8/2012
$0.20 100,000 -0- 100,000 -0- 3/31/2011
$0.60 150,000 -0- -0- 150,000 3/6/2013
$0.50 -0- 100,000 100,000 -0- 5/1/2011
$0.50 -0- 12,500 12,500 -0- 6/8/2011
$0.75 -0- 50,000 50,000 -0- 7/16/2012
$1.00 -0- 50,000 50,000 -0- 7/16/2012
$1.25 -0- 50,000 50,000 -0- 7/16/2012
$1.50 -0- 50,000 50,000 -0- 7/16/2012
$2.00 -0- 50,000 50,000 -0- 5/1/2001
Note 7: TECHNOLOGY LICENSE AGREEMENTS
On July 12, 2006 UMTI entered into a technology license of a patented process
for paraffin wax mitigation from crude oil using ultrasonic waves from the
University of Wyoming. This license calls for an earned royalty of five percent
on net sales of licensed technologies and services; twenty-five percent of all
sublicense fees and revenues with an escalating minimum annual royalty which
will be credited toward the total royalties due.
On March 27, 2007 LLTI entered into 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. The
agreement calls for a milestone license fee of $10,000 sixteen months following
the effective date of the agreement or the first production introduction which
ever is sooner. A royalty fee of four and one-half percent (4.5%) of gross sales
of licensed products required with annual minimum royalty payments.
Minimum obligations under license agreements for the next five years:
3/31/08 $ --
3/31/09 10,000
3/31/10 20,000
3/31/11 30,000
3/31/12 40,000
---------
$ 100,000
=========
20
Note 8: OILTEK, INC. PURCHASE
On September 22, 2007 the Company entered into an agreement with respect to its
purchase for $25,000 in cash and a $25,000 note payable and the right of Oiltek
to market its intellectual property for 10,000,000 shares of Oiltek, Inc., a
75.6% ownership interest. The purchase price was allocated as follows:
Cash $ 11,407
Accounts payable assumed (2,667)
N/P (12,500)
Minority interest (5,183)
Stock subscription 25,000
Goodwill 33,943
--------
$ 50,000
========
As part of the transaction Oiltek received a license of the UMTI, IWTI and LLTI
technologies for a period of 5 years.
Oiltek was controlled by officers of the Company prior to the acquisition.
Note 9: EARNINGS PER SHARE
SFAS 128 requires a reconciliation of the numerator and denominator of the basic
and diluted earnings per share (EPS) computations. The following securities were
not included in the calculation of diluted earnings per share because their
effect was anti-dilutive.
For the nine months ended September 30, 2007 and 2006, dilutive shares do not
include outstanding warrants to purchase 125,000 shares of common stock at an
exercise price of $0.20; 150,000 shares of common stock at an exercise price of
$0.60; because the effects were anti-dilutive. Diluted shares does not include
shares issuable to the preferred shareholders pursuant to their right to convert
preferred stock into sufficient common shares sufficient to equal 40% of the
post conversion outstanding shares as the effect would be anti-dilutive.
21
<TABLE>
<CAPTION>
<S> <C> <C>
The following reconciles the components of the EPS computation:
Income Shares Per Share
Numerator) (Denominator) Amount
----------- ----------- --------
For the nine months ended December 31, 2007:
Net loss $(2,923,120)
Preferred stock dividends (30,000)
-----------
Basic EPS loss available to
common shareholders $(2,953,120) 20,262,326 $ (0.15)
Effect of dilutive securities:
None -- -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $(2,953,120) 20,262,326 $ (0.15)
=========== =========== ========
For the nine months ended December 31, 2006:
Net loss $(2,005,728)
Preferred stock dividends (30,000)
-----------
Basic EPS loss available to
common shareholders $(2,035,728) 10,556,921 $ (0.19)
Effect of dilutive securities:
None -- -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $(2,035,728) 10,556,921 $ (0.19)
=========== =========== ========
For the three months ended December 31, 2007:
Net loss $ (652,390)
Preferred stock dividends (10,000)
-----------
Basic EPS loss available to
common shareholders $ (662,390) 22,706,111 $ (0.03)
Effect of dilutive securities:
None -- -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $ (662,390) 22,706,111 $ (0.03)
=========== =========== ========
For the three months ended December 31, 2006:
Net loss $ (520,879)
Preferred stock dividends (10,000)
-----------
Basic EPS loss available to
common shareholders $ (530,879) 10,092,623 $ (0.05)
Effect of dilutive securities:
None -- -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $ (530,879) 10,092,623 $ (0.05)
=========== =========== ========
Note 10: SUBSEQUENT EVENTS
None
22
</TABLE>
References in this document to "us," "we," "the Registrant" or "the Company"
refer to Avalon Oil & Gas, Inc., and its predecessors.
This report contains "forward-looking" statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are based on
certain assumptions and describe future plans, strategies and expectations of
the Company. They are generally identifiable by use of the words "believe",
"expect", "intend", "anticipate", "estimate", "project" or similar expressions.
These statements are not guarantees of future performance, events or results and
involve potential risks and uncertainties. Accordingly, actual performance,
events or results may differ materially from such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from current
expectations include, but are not limited to, changes in general economic
conditions, changes in interest rates, legislative and regulatory changes, the
unavailability of equity and debt financing, unanticipated costs associated with
our potential acquisitions, expanding a new line of business, ability to meet
competition, loss of existing key personnel, ability to hire and retain future
personnel, our failure to manage our growth effectively and the other risks
identified in this filing or other reports of the Company filed with the U.S.
Securities and Exchange Commission. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning us and our
business, including additional factors that could materially affect our
financial results, is included in our other filings with the U.S. Securities and
Exchange Commission.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements and the 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.
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., 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
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 our strategic partnership with UTEK
Corporation, (UTK: ASE) a transfer technology company, we are 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 period covered by this report:
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
Avalon's intent to acquire Gran Tierra's interest in the Mecaya Block and the
Talora Block. On February 6, 2008, we closed on the purchase of the foregoing
properties, for which Avalon paid a total of $1,839,399in cash.
24
On November 1, 2007 the Company closed a transaction to acquire non-operated
production in the Lake Washington Field in Plaquemines Parish, Louisiana. Since
its discovery in the 1930s, the field has produced approximately 350 million
barrels of oil, putting it among the largest oil and gas fields in the United
States. This acquisition substantially increases Avalon's daily production of
oil and gas. Avalon will hold approximately 0.7% working interest in 3 producing
units that are currently making over 1000 barrels of oil per day. Also acquired
are like interests in surface production facilities and two salt water injection
wells
We plan to raise additional capital during the current 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 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
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.
Financing Activities
We have been funding our obligations through the issuance of our Common Stock
for services rendered or for cash in private placements. The Company may seek
additional funds in the private or public equity or debt markets in order to
execute its 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
on acceptable terms in which case the Company's ability to execute its business
strategy will be impaired.
25
Operations for the Three Months ended December 31, 2007
As of December 31, 2006, we had $218,754 in cash and marketable securities cash
equivalents compared with $1,126,204 on December 31, 2006, a decrease of 80.5%,
total assets of $2,472,768, compared with $2,681,893 on December 31, 2006, a
decrease of 7.8%, and outstanding liabilities of $209,298, compared with
$197,649 on December 31, 2006, an increase of 5.9%.
We had oil and gas sales of $78,304 for the three months ended December 31,
2007, as compared with $20,723 for the three month period ended December 31,
2006, an increase of 277%. Revenues from the sale of oil and gas increased as a
result of the purchase of additional oil and gas interests
We had interest income of $881 for the three month period ended December 31,
2007, as compared to interest income of $10,920 for the three month period
ending December 31, 2007, a decrease of $10,038.
During the three month period ending December 31, 2007, our lease operating
expense was $31,035 as compared with $22,334 for the three month period ended
December 31, 2007, an increase of 38%, as a result of the acquisition of several
properties over the course of the last 12 months ended December 31, 2007. Our
selling, general, and administrative expenses were for the period ended December
31, 2007 was $304,482 as compared to $191,098 for the three month period ended
December 31, 2007. Our stock based expenses for the three month period ended
December 31, 2007 were $326,000 as compared to $283,814 for the three month
period ended December 31, 2007. Our interest expense for the three month period
ended December 31, 2007 was $6,173 as compared to $40,512 for the three month
period ended December 31, 2007.
Operations for the Nine Months ended December 31, 2007
We had oil and gas sales of $178,610 and interest income of $15,864 for the nine
month period ended December 31, 2007, as compared to oil and gas sales of
$26,813 and interest income of $16,969 for the nine month period ending December
31, 2006. Revenues from and expenses incurred with respect to the sale of oil
and gas increased as a result of the purchase of additional oil and gas
properties. During the nine month period ending December 31, 2007, our lease
operating expense was $102,646 compared to our lease operating expense of
$27,658 for the period ended December 31, 2006. Our selling, general, and
administrative expenses for the period ended December 31, 2007 was $958,802, as
compared to $281,173 for the period ended December 31, 2006. Our stock based
expenses for the nine month period ended December 31, 2007 was $ 1,786,610 as
compared to $1,418,537 for the nine months ended December 31, 2006 due to
additional compensation paid due to the expansion of the Company's activities.
Our interest expense for the nine month period ended December 31, 2007 was
$31,036 compared to $107,179 for interest expense for the period ended December
31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $218,754 on December 31, 2007, compared to
$1,126,204 on December 31, 2006. We met our liquidity needs through the issuance
of our common stock for cash and the revenue derived from oil and gas
operations.
26
During the three month period ended December 31, 2007 we sold 1,749,945 shares
of our common stock and received $440,137 in cash.
During the nine months ended December 31, 2007, we used $369,326 in cash in
investing activities. Our financing activities for this period provided cash of
$504,729 as compared to $1,539,867 for the same period in 2006.
We need to raise additional capital during the fiscal year, but currently have
not acquired sufficient additional funding. 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 interest, and to
achieve profitability, none of which can be guaranteed. Unless additional
funding is located, it is highly unlikely that we can continue to operate. There
is no assurance that even with adequate financing or combined operations, we
will generate revenues and be profitable.
Ultimately, our success is dependent upon our ability to generate revenues from
our acquired oil and gas leasehold interests.
Subsequent Events
We plan to raise additional capital during the fiscal year, but currently have
not identified additional funding. 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, none of which can be
guaranteed. Unless additional funding is identified, it is highly unlikely that
we can continue to operate. There is no assurance that even with adequate
financing or combined operations, we will generate revenues and be profitable.
Contractual Obligations
Future payments due on our contractual obligations as of December 31, 2007 are
as follows:
Total 2007-2008 2009-2010 2011-2012
Notes payable $72,500 $ - $ - $ -
Critical Accounting Policies
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States. As such, we are required to make
certain estimates, judgments and assumptions that we believe are reasonable
based on information available. These estimates and assumptions affect the
reporting amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. A summary of the significant accounting policies is described
in Note 1 to the financial statements.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 end of
the period covered by this report (the "Evaluation Date"), have concluded that
27
as of the Evaluation Date, 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. Our auditors identified material
adjustments in the areas of valuation of marketable securities.
There have been no changes in our internal controls or in other factors that
could affect these controls subsequent to the Evaluation Date.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) The common stock described below has been issued through the date hereof
without registration under the Securities Act. Unless otherwise indicated, the
shares were valued at the quoted market price of the shares on the date of
issuance.
On October 4, 2007 The Company agreed to issue twenty five thousand (25,000)
shares of common stock per month for the six (6) month term pursuant to the
terms of a consulting agreement, for an aggregate of one hundred and fifty
thousand shares of common stock.
On October 4, 2007, the Company agreed to issue one hundred thousand (100,000)
shares of common stock pursuant to the terms of a consulting agreement.
On October 12, 2007, the Company agreed to issue fifty thousand (50,000) shares
of fully paid and non-assessable shares of common stock of the Company to a
consultant for services rendered.
On October 12, 2007, the Company converted thirty thousand ($30,000) dollars and
all accrued interest on a one hundred thousand ($100,000) dollar note issued to
a shareholder on May 8, 2005, into one million three hundred fifty thousand
(1,350,000) shares of common stock.
On November 23, 2007, the Company converted ten thousand ($10,000) dollars of
principal of the remaining seventy thousand ($70,000) dollar note issued to a
shareholder on May 8, 2005, into nine hundred fifty thousand (950,000) shares of
common stock.
(b) None.
(c) None.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES.
None.
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 16, 2007, the shareholders acting by written consent approved the
removal of Thad Kaplan from the Board of Directors of the Company pursuant to a
two-thirds majority vote as required pursuant to Nevada law. The shareholders,
also acting by written consent, appointed Ms. Jill Allison, the vice-president
of the Company, to replace Mr. Kaplan.
ITEM 5. OTHER INFORMATION.
A) 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.
B) On October 30, 2007, the Board of Directors acting by resolution appointed
Menno Wiebe and Stephen Newton as directors of the Company, as set forth in the
Company's Form 8-K filed on October 31, 2007.
C) On November 1, 2007 the Company in a press release that it had closed a
transaction to acquire non-operated production in the Lake Washington Field in
Plaquemines Parish, Louisiana, Since its discovery in the 1930s, the field has
produced approximately 350 million barrels of oil, putting it among the largest
oil and gas fields in the United States. This acquisition substantially
increases Avalon's daily production of oil and gas. Avalon will hold
approximately 0.7% working interest in 3 producing units that are currently
making over 1000 barrels of oil per day. Also acquired are like interests in
surface production facilities and two salt water injection wells.
D) On November 13, 2007, the Company announced in a press release the execution
of a Letter of Intent for the acquisition of an interest in the Mecaya 1 oil
discovery in Colombia. Pursuant the terms of the Letter of Intent, Avalon will
acquire a 15% interest in the 74,000 acre Mecaya Block in Colombia. The Mecaya 1
well was drilled by the Colombian National Oil Company, Ecopetrol, in 1989, and
tested approximately 665 BOPD (barrels of oil per day) of 27 (degree) API oil,
with no water from a sand reservoir at approximately 7,200 feet.
E) On February 6, 2008, the Company announced in a press release the closing of
its acquisition of a twenty percent (20%) interest in the Talora Block and a
fifteen (15%) interest in the Mecaya Block, in Colombia, from Gran Tierra
Energy, Inc., as first reported in the Company's press release dated November
13, 2007
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K
1. Filed October 23, 2007, the Company disclosed that the shareholders acting by
written consent removed Thad Kaplan from the Board of Directors of the Company
and the shareholders appointed Jill Allison, the vice-president of the Company,
to replace Mr. Kaplan.
2. Filed October 31, 2007, the Company disclosed that the Board of Directors
acting by unanimous consent appointed Menno Wiebe and Stephen Newton as
directors of the Company.
3. Filed November 2, 2007, the Company disclosed that it had 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.
29
(b) Exhibits
Exhibit
Number Description Page
------ ----------- ----
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 4.1 to Registration
Statement on Form SB-2, Registration No.
33-74240C).
4.2 Certificate of Designation of Series and *
Determination of Rights and Preferences of
Series A Convertible Preferred Stock
(Incorporated by reference to Exhibit 4.2 to
Form 10-KSB filed July 12, 2002.)
10.1 Incentive Compensation and Employment *
Agreement for Kent A. Rodriguez
(Incorporated by Reference to Exhibit 10.12
of our Form 10-KSB filed July 20, 2001)
31 Certification pursuant to Section 302 of the *
Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the *
Sarbanes-Oxley Act of 2002
* Incorporated by reference to a previously filed exhibit or report.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Avalon Oil & Gas, Inc.
By: /s/ Kent Rodriguez
-------------------------------
Date: February 14, 2008
Kent Rodriguez
Chief Executive Officer
Chief Financial and Accounting Officer
31
</TEXT>
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