GROOVE BOTANICALS INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - GROOVE BOTANICALS INC.	Financial_Report.xls
EX-32 - CERTIFICATION - GROOVE BOTANICALS INC.	aogn_ex32.htm
EX-31 - CERTIFICATION - GROOVE BOTANICALS INC.	aogn_ex31.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

FORM 10-Q

____________

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 1-12850

AVALON OIL & GAS, INC.

(Exact Name of Small Business Issuer as specified in its charter)

Nevada		84-1168832
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

7808 Creekridge Circle, Suite 105

Minneapolis, MN 55439

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:

(952) 746-9652

Indicate by check mark whether the Issuer:

(1) Has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports): Yes þ No o

(2) Has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	o	Accelerated Filer	o

Non-Accelerated Filer	o	Smaller Reporting Company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

655,315,455 shares of the registrant's Common Stock, $0.001 per share, were outstanding as of February 1, 2012.

Table of Contents

PART I FINANCIAL INFORMATION		Page

Item 1.	Financial Statements		3
	Consolidated Balance Sheets as of December 31, 2011(Unaudited) and March 31, 2011		3
	Consolidated Statements of Operations for the Three Months and Nine Months Ended December 31, 2011 and 2010 (Unaudited)		5
	Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended December 31, 2011 and 2010 (Unaudited)		7
	Notes to Consolidated Financial Statements		9

Item 2.	Management's Discussion and Analysis of Financial Condition or Plan of Operation		21
Item 3.	Qualitative and Quantitative Disclosures About Market Risk		27
Item 4.	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		28
Item 5.	Other Information		28
Item 6.	Exhibits and Reports on Form 8-K		29

Signatures			30

ITEM 1. FINANCIAL STATEMENTS

Avalon Oil & Gas, Inc.
Consolidated Balance Sheets

	December 31, 2011		March 31, 2011
	(Unaudited)
Assets

Current Assets:
Cash and cash equivalents	$	116,529	$	311,802
Accounts receivable		29,627		15,258
Notes receivable		9,287		7,857
Deposits and prepaid expenses		160,000
Receivables from joint interests, net of allowance
for doubtful accounts of $135,727 and $178,922		20,000		6,070

Total current assets		335,443		340,987

Notes receivable – Long Term		22,143		29,286
Property and equipment, net		2,456		7,882
Unproven oil & gas properties		1,867,183		1,867,183
Producing oil & gas properties, net		197,488		231,720
Intellectual property rights, net		191,633		223,574

Total Assets	$	2,616,346	$	2,700,632

See notes to consolidated financial statements

Avalon Oil & Gas, Inc.
Consolidated Balance Sheets (Continued)

	December 31, 2011			March 31, 2011
	(Unaudited)
Liabilities and Stockholders' Equity

Current Liabilities:
Accounts payable and accrued liabilities		600,873			580,506
Accrued payroll - related parties		197,400			185,200
Dividends payable to related party		44,950			48,200
Accrued liabilities to joint interest		12,805			14,532
Notes payable - related party		40,000			-
Notes payable, net of discount		440,357			449,262

Total current liabilities		1,336,385			1,277,700

Long Term Notes payable, net of discount		450,000			296,550
Accrued asset retirement obligation (ARO) liability		83,801			79,454

Total Liabilities		1,870,186			1,653,704

Commitments and contingencies

Stockholders' Equity

Preferred stock, Series A, $.10 par value, 1,000,000 shares authorized; 100 shares issued and outstanding stated at redemption value		500,000			500,000
Common stock, $.001 par value: 3,000,000,000 shares
authorized 655,315,455and 479,556,004 shares issued and
outstanding at December 31, 2011 and March 31, 2011 respectively		655,315			479,556
Additional paid in capital		28,532,244			28,413,734
Common stock subscribed		70,000			140,000
Accumulated deficit		(29,011,399	)		(28,486,362	)

Total Stockholders’ Equity		746,160			1,046,928

Total Liabilities and Stockholders’ Equity	$	2,616,346		$	2,700,632

See notes to consolidated financial statements

Avalon Oil & Gas, Inc.
Consolidated Statements of Operations

	For the three			For the three
	Months ended			Months ended
	December 31, 2011			December 31, 2010
	(Unaudited)			(Unaudited)

Oil & Gas Sales	$	49,446		$	56,935

Operating expenses:
Lease operating expense, severance taxes
and ARO accretion		48,405			53,903
Selling, general and administrative expenses		72,253			214,139
Stock based compensation		10,000			3,500
Depreciation, depletion, and amortization		14,846			27,558

Total operating expenses		145,504			299,100

Operating loss		(96,058	)		(242,165	)

Other income (expense):


Gain (Loss) on extinguishment of debt		7,000			-

Gain on settlement of accounts payable		-			(2,694	)
Interest expense, net		(140,832	)		(26,308	)

Total other income (expense)		(133,832	)		(29,002	)

Loss before income tax		(229,890	)		(271,167	)

Provision for income taxes		-			-

Net Loss		(229,890	)		(271,167	)

Preferred stock dividends		(10,000	)		(10,000	)

Net loss attributable to common shareholders	$	(239,890	)	$	(281,167	)

Net loss per share - basic and diluted		0.000			(0.001	)

Weighted average shares outstanding - basic and diluted		589,161,586			475,839,373

Avalon Oil & Gas, Inc.

Consolidated Statements of Operations

	For the Nine			For the Nine
	Months ended			Months ended
	December 31, 2011			December 31, 2010
	(Unaudited)			(Unaudited)

Oil & Gas Sales	$	168,981		$	134,916

Operating expenses:
Lease operating expense, severance taxes
and ARO accretion		103,638			111,175
Selling, general and administrative expenses		265,782			781,256
Stock based compensation		35,946			274,633
Depreciation, depletion, and amortization		69,425			89,602

Total operating expenses		474,791			1,256,666

Operating loss		(305,810	)		(1,121,750	)

Other income (expense):

Gain on sale of well interest		-			22,478
Gain (Loss) on extinguishment of debt		35,531			(110,880	)
Gain (Loss) on conversion of notes payable		(9,172	)		(2,694	)
Gain on settlement of accounts payable		-			19,925
Interest expense, net		(245,586	)		(57,965	)

Total other income (expense)		(219,227	)		(129,136	)

Loss before income tax		(525,037	)		(1,250,886	)

Provision for income taxes		-			-

Net Loss		(525,037	)		(1,250,886	)

Preferred stock dividends		(30,000	)		(30,000	)

Net loss attributable to common shareholders	$	(555,037	)	$	(1,280,886	)

Net loss per share - basic and diluted		(0.001	)		(0.004	)

Weighted average shares outstanding - basic and diluted		584,246,445			341,104,308

See notes to consolidated financial statements

Avalon Oil & Gas, Inc.

Consolidated Statement of Cash Flows

	(Unaudited)			(Unaudited)
	For the nine			For the nine
	Months ended			Months ended
	December 31, 2011			December 31, 2010

Cash flows from operating activities:
Net (loss)	$	(525,037	)	$	(1,250,886	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock issued for services		35,946			-
(Gain) Loss on estinguishment of debt		(35,531	)		110,880
(Gain) on sale of Well interest		-			(22,478	)
(Gain) on settlement of debt		7,842			(19,925	)
Loss on conversion of notes payable					2,694
Non-cash compensation		-			274,633
Common stock issued for financing fees		-			74,260
Bad debt expense		44,200
Depreciation		5,426			7,425
Depletion		32,058			50,244
Depreciation and ARO liability		2,174			2,172
Amortization of discount on notes payable		188,645			24,319
Amortization of intangible assets		31,941			31,938
Net change in operating assets and liabilities:
Accounts receivable		(14,369	)		5,451
Joint interest receivable		(13,930	)		(1,616	)
Prepaid expenses and deposits		-			1,350
Accounts payable and other accrued expenses		18,640			179,335
Dividends payable to related party		(3,250	)		29,500
Due to related party		12,200			55,400
Asset retirement obligation		4,347			4,346

Net cash (used) in operationg activities		(208,698	)		(440,958	)

Cash flows from investing activities:
Deposit on the purchase of additional assets		(160,000	)		-
Principle payments received on notes receivable		5,713			3,571

Net cash provided in investing activities		(154,287	)		3,571

See notes to consolidated financial statements

Avalon Oil & Gas, Inc.

Consolidated Statement of Cash Flows (Continued)

	(Unaudited)			(Unaudited)
	For the nine			For the nine
	Months ended			Months ended
	December 31, 2011			December 31, 2010

Cash flows from financing activities:
Proceeds from advances from related party		40,000			13,000
Payments on notes payable - related party		-			(24,000	)
Reduction in accountants payable in exchange for common stock		47,712			-
Payments on notes payable		-			(5,000	)
Proceeds from notes payable		80,000			47,500
Common stock issued for cash		-			542,600

Net cash provided by financing activities		167,712			574,100

Net (decrease) increase in cash and cash equivalents		(195,273	)		136,713

Cash and cash equivalents at beginning of period		311,802			46,522

Cash and cash equivalents at end of period	$	116,529		$	183,235

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	-		$	-
Taxes	$	-		$	-
Common stock issued in exchange for consulting
services	$	35,946		$	185,383
Common stock issued for conversion of note payable,
accrued interest, and assumption of debt	$	224,219		$	406,694
Gain on sale of Well interests	$	-		$	22,478
Common stock issued in error	$	-		$	10,000
Gain (Loss) on extinguishment of debt	$	35,531		$	(110,880	)
Gain (Loss) from settlement of debt	$	(9,172	)	$	19,925
Common stock issued for financing fees				$	74,260
Common stock issued for directors services				$	89,250

See notes to consolidated financial statements

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Avalon Oil & Gas, Inc. (the "Company") was originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. The Company was 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, the Company relocated its 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. 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. . On November 16, 2011, a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock from 1,000,000,000 shares to 3,000,000,000 shares par value of $0.001

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 17, 2006, the Company purchased all the outstanding shares of Ultrasonic Mitigation Technologies, Inc. (UMTI) from Innovaro 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 9, 2006, the Company purchased all the outstanding shares of Intelli-Well Technologies, Inc. (IWTI) from Innovaro 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 Innovaro 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 non-controlling interest shown.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

Basis of Preparation of Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by Accounting Principles generally accepted accounting principles in United States America (“US GAAP”) for complete financial statements and related notes. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended March 31, 2011.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the balance sheets of Avalon Oil and Gas Inc. and subsidiaries as of December 31, 2011 and the results of their operations for the three month and nine months ended December 31, 2011 and 2010, and cash flows for the nine months ended December 31, 2011 and 2010 are not necessarily indicative of the results to be expected for the entire year.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and The Company’s subsidiary Oiltek, Inc. All significant inter-company items have been eliminated in consolidation.

Going Concern

The December 31, 2011, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $29,011,399 from inception through December 31, 2011, and has a working capital deficiency of $1,000,942 and stockholders’ equity of $746,160 as of December 31, 2011. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future. The Company will continue so seek equity and debt financing to meet our operating losses. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

Use of Estimates

The preparation of financial statements in conformity with US GAAP 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.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

Cash and 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 $250,000.

Fair Value of Financial Instruments

The Company's financial instruments are cash and cash equivalents, accounts receivable, accounts payable, notes payable, notes receivable 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, notes receivable and long-term debt approximate their fair values, as interest approximates market rates.

Accounts Receivable

Management periodically assesses the collectability of the Company's accounts receivable. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company had an allowance of $-0-and $-0- for accounts receivable from the joint working interests, respectively for the nine month periods ending December 31, 2010 and three months ended March 31, 2011.

Oil and Natural Gas Properties

The Company follows the full cost method of accounting for natural gas and oil properties. Under the full cost concept, all costs incurred in acquiring, exploring, and developing properties cost center are capitalized when incurred and are amortized as mineral reserves in the cost center are produced, subject to a limitation that the capitalized costs not exceed the value of those reserves. The unamortized costs relating to a property that is surrendered, abandoned, or otherwise disposed of are accounted for as an adjustment of accumulated amortization, rather than as a gain or loss that enters into the determination of net income, until all of the properties constituting the amortization base are disposed of, at which point gain or loss is recognized. 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. During the nine month periods ending December 31, 2011 and 2010, no acquisition costs were capitalized. Oil and natural gas properties are reviewed for recoverability at least annually or when events or changes in circumstances indicate that its carrying value may exceed future undiscounted cash inflows. As of December 31, 2011 and 2010, the Company had not identified any such impairment.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

Other Property and Equipment

Other property and equipment is reviewed for recoverability when events or changes in circumstances indicate that its carrying value may exceed future undiscounted cash inflows. As of December 31, 2011 and 2010, 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 Financial Accounting Standards Board “FASB” Accounting Standard Codification “ASC” 410-20-15, “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.

There was not any impairment loss for the three and nine month periods ending December 31, 2011 and December 31, 2010.

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. Estimated amortization of intangible assets over the next five years is as follows:

December 31,
2012	$	21,293
2013		42,585
2014		42,585
2015		42,585
2016		42,585
	$	191,633

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

Stock Based Compensation

The Company records share-based compensation expense for awards granted to non-employees in exchange for services at fair value in accordance with the provisions of ASC 505-50, "Equity based" payment to non-employees. For the awards granted to non-employees, the Company will record compensation expenses equal to the fair value of the share options at the measurement date, which is determined to be the earlier of the performance commitment date or the service completion date.

Loss per Common Share

ASC 260-10-45, “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 anti-dilutive effect on diluted earnings per share are excluded from the calculation. When the company is in loss position, no dilutive effect is considered.

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 carry forwards, 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.

ASC 740-10-25, “Accounting for Uncertainty in Income Taxes”, 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. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under ASC 740-10-25, 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.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

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.

Revenue Recognition

In accordance with the requirements ASC topic 605 "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) collectability 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.

Long-Lived Assets

Equipment is stated at acquired cost less accumulated depreciation. Office equipment is depreciated on the straight-line basis over the estimated useful lives (five to seven years).

Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time. Measurement of impairment may be based upon appraisal, market value of similar assets or discounted cash flows. There was no impairment for the three and nine month periods ended December 31, 2010 and December 31, 2011.

Recently enacted accounting standards

In the first nine months of 2011, The Financial Accounting Standards Board (“FASB”) has issued ASU No. 2011-02 through ASU 2011-12, which are not expected to have a material impact on the consolidated financial statements upon adoption.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

NOTE 2: RECEIVABLE FROM JOINT INTERESTS

The Company is the operator of certain wells acquired in the Expanded Bedford Agreement (see note 4). Pursuant to a joint interest operating agreement (the “Joint Interest Agreement”), the Company charges the other owners of the Grace Wells for their pro-rata share of operating and workover expenses. These receivables are carried on the Company’s balance sheet as Receivable from Joint Interests. At December 31, 2011 and March 31, 2011, the amount of these receivables is $155,750 and $184,992 respectively. During year ended March 31, 2011 and the nine months ended December 31, 2011, the Company deemed the collectability of the receivable from joint interests in the amount of $135,727 and $178,922 respectively as unlikely. As a result, the Company reversed $43,195 of previous bad debt expense to operations during the nine months ended December 31, 2011.

NOTE 3: INTELLECTUAL PROPERTY RIGHTS

A summary of the intellectual property rights at December 31, 2011 and March 31, 2011, are as follows:

	December 31, 2011			March 31, 2011
	(Unaudited)
Ultrasonic Mitigation Technology	$	425,850		$	425,850
Less: accumulated amortization		(234,177	)		(202,276	)
Total	$	191,673		$	223,574

Amortization expense for the three month and nine month period ended December 31, 2011 and 2010 was $10,649 and $31,941respectively.

NOTE 4: OIL AND GAS PROPERTY ACTIVITY

The table below shows the Company’s working interests in the Grace Wells as of December 31, 2011. There were not any additional acquisitions during the nine month period ended December 31, 2011.

Well	Working Interest
Grace #1		65.25	%
Grace #2		55.75	%
Grace #3		64.00	%
Grace #5A		52.00	%
Grace #6		58.00	%

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

NOTE 4: OIL AND GAS PROPERTY ACTIVITY (Continued)

Producing oil and gas properties consist of the following at December 31, 2011and March 31, 2011:

	December 31, 2011			March 31, 2011
Lincoln County, Oklahoma	$	67,565		$	67,565
Other properties, net		1,049,513			1,049,514
Asset retirement obligation		47,812			49,260
Property impairments		(481,072	)		(481,072	)
Less: Depletion		(486,331	)		(453,547	)
Net	$	197,487		$	231,720

NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

	December 31, 2011		March 31, 2011
	(Unaudited)
Accounts payable	$	453,560	$	483,533
Accrued interest		147,313		96,973
Total	$	600,873	$	580,506

NOTE 6: NOTES PAYABLE

Notes Payable are summarized as follows:

	Note		Unamortized			Net of
March 31, 2011:	Amount		Discounts			Discount
Notes payable – long-term portion	$	450,000	$	(153,450	)	$	296,550
Notes payable – current portion		482,500		(33,238	)		449,262
Total	$	932,500	$	(186,688	)	$	745,812

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

	Note		Unamortized			Net of
December 31, 2011 (Unaudited):	Amount		Discounts			Discount
Notes payable – long-term portion	$	450,000	$	(0	)	$	450,000
Notes payable – current portion		472,000		(31,643	)		440,357
Total	$	922,000	$	(31,643	)	$	890,357

	Nine months ended December 31,
	2011			2010
		(Unaudited)
Discount on Notes Payable amortized to interest expense		$	188,645	$	24,319

	Three months ended December 31,
	2011			2010
		(Unaudited)
Discount on Notes Payable amortized to interest expense		$	122,922	$	20,561

NOTE 7: RELATED PARTY TRANSACTIONS

Promissory Notes

During the nine months ended December 31, 2011, an Officer of the Company loaned the Company $5,000 and $35,000. Both notes mature on December 15, 2012 and are interest free.

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 forty 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 three months and nine months ended December 31, 2011 and 2010, the Company incurred $10,000 and $30,000 respectively in preferred stock dividends.

The holders of the Series A Preferred Stock have the right to convert all of the shares 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 exercise, conversion or exchange of outstanding options, warrants, or convertible securities.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

Employment Agreements

KENT RODRIGUEZ

In 2009, Mr. Rodriguez, our President, was under an employment agreement dated April 1, 2008 that expires on March 31, 2013, pursuant to which he was compensated at an annual rate of $120,000. On April 1, 2011 Mr. Rodriguez voluntarily reduced his compensation to an annual rate of $48,000, subject to an increase by the Company’s Board of Directors. The Company charged to operations the amount of $12,000 and $36,000 for the three month and nine month periods ended December 31, 2011 and $30,000 and $90,000 for the three and nine month periods ended December 31, 2010, in annual salary for Mr. Rodriguez, of which $24,200 was paid to him during the nine month period ending December 31 2011, and $32,600 during the nine month period ending December 31, 2010. As of December 31, 2011, and March 31, 2011, the balances of accrued and unpaid salaries were $197,400, and $185,200.

NOTE 8: INCOME TAXES

Deferred income taxes result from the temporary difference arising from the use of accelerated depreciation methods for income tax purposes and the straight-line method for financial statement purposes, and an accumulation of New Operating Loss carryforwards for income tax purposes with a valuation allowance against the carryforwards for book purposes.

In assessing the value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carryforwards of approximately $7,500,000, which will expire beginning in 2028. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon our cumulative losses through December 31, 2011, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at December 31, 2011. The amount of the deferred tax asset considered realizable could change in the near term if projected future taxable income is realized. Due to significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.

NOTE 9: STOCKHOLDERS' EQUITY

Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.10 per share. As of December 31, 2011 and March 31, 2011, the Company has 100 shares of preferred stock issued and outstanding.

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.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

During the nine months ended December 31, 2011and December 31, 2010, the Company incurred $30,000 in preferred stock dividends, and paid $33,250 and $500 respectively. As of December 31, 2011 and March 31, 2011, dividends in the amount of $44,950 and $48,200 have not been paid, and are carried on the Company’s balance sheet as Dividends Payable to Related Party.

The holders of the Series A Preferred Stock have the right to convert the preferred stock into shares of common stock such that if converted simultaneously, they shall represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. 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 exercise, conversion or exchange of outstanding options, warrants, or convertible securities.

Common Stock

The Company has authorized 3,000,000,000 shares of common stock with a par value of $0.001 per share. As of December 31, 2011 and March 31, 2011, the Company had 655,315,455 and 479,556,004 shares of common stock issued and outstanding, respectively.

Common stock issuances during the nine month period ended December 31, 2011:

The Company issued 28,000,000 shares of common stock to consultants for services provided, pursuant to consulting agreements. The value of these shares in the amount of $39,200, or $0.0014 per share was charged to operations.

The Company issued 147,759,451 shares of common stock for the conversion of notes payable and for the assumption of debt and certain accounts payable. The value of these shares in the amount of $154,723 has been credited to the notes payable and accounts payable. No gain or loss was recognized on the conversions.

Options

There are no stock options outstanding.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three and Nine Month Periods Ended December 31, 2011 and 2010

(Unaudited)

Warrants

The following table summarizes the warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company at December 31, 2011:

Warrants Outstanding						Warrants Exercisable
				Weighted Average						Weighted Average
Exercise		Number		Remaining Contractual		Weighted Average		Number		Remaining Contractual
Prices		Outstanding		Life (years)		Exercise Price		Exercisable		Life (years)
$	0.10		500,000		0.62	$	0.10		500,000	0.62
	0.20		125,000		1.69		0.20		125,000	1.69
	0.60		150,000		1.96		0.60		150,000	1.96
			775,000		1.05				775,000	1.05

Transactions involving warrants are summarized as follows:

	Number of Shares		Weighted Average Price Per Share
Outstanding at March 31, 2011		775,000	$	0.21
Granted		-		-
Exercised		-		-
Cancelled or expired		-		-
Outstanding at December 31, 2011		775,000	$	0.21

NOTE 10: EARNINGS PER SHARE

ASC 260-10-45 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. As the Company is in a loss position during the nine months ended December 31, 2011 and December 31, 2010 there is no dilutive effect included.

NOTE 11: COMMITMENTS AND CONTINGENCIES

Commitments and contingencies through the date of these financial statements were issued have been considered by the Company and none were noted which were required to be disclosed.

NOTE 12: SUBSEQUENT EVENTS

The Company has evaluated events subsequent to December 31, 2011 to assess the need for potential recognition or disclosure in the report. Such events were evaluated through the date of that these financial statements were issued and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.

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 which was formed to sell proprietary snow skates under the name "Sled Dogs" and 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 $0.001, and engage in the acquisition of producing oil and gas properties. . On November 16, 2011, a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock from 1,000,000,000 shares to 3,000,000,000 shares par value of $0.001

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 its strategic partnership with Innovaro Corporation, (ASE: INV) 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 April 7, 2008 we announced in a press release our acquisition in December 2007 of a 5% working interest in the 1,280 acre Waters prospect. The first well is being drilled between two gas wells that have produced over 500 million cubic feet of natural gas in the two years they have been in production.

In June 2008, the Company entered into an agreement with Bedford Energy to acquire a 2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which had been producing 350 thousand cubic feet of gas per day. In August 2008, the Company entered into an additional agreement with Bedford Energy (the “Expanded Bedford Agreement”) to increase its working interest in the Grace #2 well from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 well to 11.95%. In addition, the Company acquired a 10% working interest and a 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. In March, 2009 Avalon additionally increased its working interest in the Grace wells as follows: in the Grace #1 to 42.125%; in the Grace # 2 to 30.5%; in the Grace #3 to 39.0%, in the Grace #5A to 40.0%, and in the Grace #6 to 34.0%.

In September 2008, the Company sold 15% of its recently acquired interest in the Bedford assets, for cash in the amount of $262,500.

The Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field.

As part of the Expanded Bedford Agreement, the Company also acquired the right to operate Grace Wells #1, #2, #3, #5A, and #6 (the “Grace Wells”). The Company hired a third party to operate the Grace Wells and to upgrade the operation of the Grace Wells (“Workover”). In February and March 2009, the Company made formal buyout offers (the “Grace Wells Buyout Offer”) to the approximately 93 additional working interest holders in the Grace Wells (the “Additional Grace Wells Owners”). The Grace Wells Buyout Offer provided three options to the Additional Grace Wells Owners: (1) The Additional Grace Wells Owners would continue to participate in the operation of the Grace Wells, and would remit to the Company funds representing their pro rata portion of the Workover costs; (2) The Additional Grace Wells Owners would sell their interests in the Grace Wells to the Company for cash and stock in the Company; (3) The Additional Grace Wells Owners could do nothing. If this third option was chosen, the Additional Grace Well Owner would retain their interest in the Grace Wells, but their pro-rata portion of the costs would be subject to a 500% penalty; in addition, their pro-rata portion of the revenue generated by the Grace Wells would be applied to their portion of the costs, including the 500% penalty, before they would receive any payment. As of June 30, 2010, the approximately 93 Grace Wells investors had selected the following options: Approximately 22 selected option 1, continued participation; 29 selected option 2, the Company buyout; 17 were in Option 3, non-consent; and 25 were still pending and had not made a selection.

During the three months ended June 30, 2009, the Company amended the agreement with Bedford Energy, whereby the Company transferred a 2.25% carried interest in the Grace Wells #1, #2, #3, #5A and #6 in consideration for the cancellation of the note payable and accrued interest to Bedford in the amounts of $390,000 and $18,627, respectively.

During the three months ended December 31, 2009, the Company reduced the amount recorded for the assumption of accounts payable pursuant to the Bedford Energy transaction in the amount of $26,785. Also during the three months ended December 31, 2009, the Company determined that the Leak Location Technology license and the BIO-CAT Technology license value was impaired, which resulted in a write-down of $564,711.

The Company has reached an agreement to purchase a 13.50% working interest in the Grace # 1, a 22.50% working interest in the Grace # 2, a 14.50% working interest in the Grace # 3, an 11.50% working interest in the Grace # 5A, and a 21.50% working interest in the Grace #6, for $43,837.50, from 17 working interest owners. We closed this purchase in January, 2011.

During the three months ended June 30, 2010, the Company sold working interests in the wells located in Blackmon- Hall Unit, New Diana Field, Upshur County, Texas (the “New Diana Wells”), of which it had previously acquired a ten percent (10%) working interest in April, 2008, for a note receivable in the amount of $42,857. These properties has a net book value as of June 30, 2010 of $20,379, this resulted in a gain from the sale of the working interest in the wells in the amount of $22,478.

We also purchased a 5.75% working interest in the Grace #1, a 6.25% working interest in the Grace #2, an 8.5% working interest in the Grace #3, a 4.50% working interest in the Grace #5A and a 3.50% working interest in the Grace #6, during the year ended March 31, 2011 by issuing 294,000 shares of common stock to two (2) working interest owners.

During the three months ending September 30, 2011, we advanced $160,000 for the purchase of oil and gas producing properties in Western Oklahoma, pending the completion of due diligence by the Company. These funds will be returned to us if we do not complete the acquisition of these producing properties.

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 Innovaro 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 Innovaro 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 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 Inc. ("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.

On September 22, 2007 the Company entered into an agreement with respect to its purchase of a 75.6% interest in Oiltek for $50,000 and the right of Oiltek to market Avalon's intellectual property.

The December 31, 2011, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $29,011,399 from inception through December 31, 2011, and has a working capital deficiency of $1,000,942 as of December 31, 2011. Stockholders’ equity as of December 31, 2011, is $746,160. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

Financing Activities

We have been funding our obligations through the issuance of our Common Stock for services rendered and for notes payable owed 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.

Results of Operations

Three and nine months ended Decmeber31, 2011 compared to the three and nine months ended December 31, 2010:

Revenues

Revenues for the three months ended December 31, 2011 were $49,446, a decrease of $7,489 or approximately 13% compared to revenue of $56,935 for the three months ended December 31, 2010. Revenues from the sale of oil and gas decreased as a result of the lower market price for natural gas.

Revenues for the nine months ended December 31, 2011 were $168,981, an increase of $34,065 or approximately 25% compared to revenue of $134,916 for the nine months ended December 31, 2010. Revenues from the sale of oil and gas increased as a result of the higher market price for oil and the Company’s decision to put the Grace Wells into production.

Lease Operating Expenses

During the three months ended December 31, 2011, our lease operating expenses were $48,405, a decrease of $5,498 or approximately 10% compared to $53,903 for the three months ended December 31, 2010.

During the nine months ending December 31, 2011, our lease operating expenses were $103,638, a decrease of $7,537 or approximately 7% compared to $111,175 for the nine months ended December 31, 2010.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2011 were $72,253 a decrease of $141,886 or approximately 66% compared to selling, general and administrative expenses of $214,139 during the three months ended December 31, 2010. Selling, general and administrative expenses for the three months ended December 31, 2011 consisted primarily of payroll and related costs of $12,000; legal and accounting fees in the amount of $9,440; travel and entertainment expenses of $6,827; dividend expense of $10,000; office expenses of $2,679; facilities costs in the amount of $14,215; consulting expense of $11,445; and investor relations costs of $1,461.

Selling, general and administrative expenses for the nine months ended December 31, 2011 were $265,782 a decrease of $515,474 or approximately 66% compared to selling, general and administrative expenses of $781,256, during the nine months ended December 31, 2010. Selling, general and administrative expenses for the nine months ended December 2011 consisted primarily of payroll and related costs of $36,000; legal and accounting fees in the amount of $44,142; travel and entertainment expenses of $35,923; dividend expense of $30,000; office expenses of $11,377; facilities costs in the amount of $31,783 and consulting expense of $76,508.

Stock Based Compensation

Non-cash compensation for the three months ended December 31, 2011 was $10,000, a decrease of $6,500 compared to non-cash compensation of $3,500 for the three months ended December 31, 2010.

Non-cash compensation for the nine months ended December 31, 2011 was $35,946, a decrease of $238,687 compared to non-cash compensation of $274,633 for the nine months ended December 31, 2010. This decrease was the result of common stock issuances to a consultant group as payment for services rendered during the period ending December 31, 2010.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization was $14,846 for the three months ended December 31, 2011, a decrease of $12,712 or approximately 46% compared to $27,558 for the three months ended December 31, 2010.

Depreciation, Depletion, and Amortization was $69,425 for the nine months ended December 31, 2011, a decrease of $20,177 or approximately 23% compared to $89,602 for the nine months ended December 31, 2010

Interest Expense, net of Interest Income

Interest expense, net of interest income was $140,832 for the three months ended December 31, 2011, an increase of $114,524 compared to interest expense of $26,308 for the three months ending December 31, 2010. This increase is due to the issuance of $450,000 in convertible promissory debentures to two (2) shareholders.

Interest expense, net of interest income was $245,586 for the nine months ended December 31, 2011, an increase of $187,621 compared to interest expense of $57,965 for the nine months ending December 31, 2010. This increase is due to the issuance of $450,000 in convertible promissory debentures to two (2) shareholders

Net Loss

Our net loss for the three months ended December 31, 2011, was $229,890, a decrease of $41,277 or approximately 15% compared to a net loss of $271,167 during the three months ending December 31, 2010.

Our net loss for the nine months ended December 31, 2011, was $525,037, a decrease of $725,849 or approximately 58% compared to a net loss of $1,250,886 during the nine months ending December 31, 2010.

LIQUIDITY AND CAPITAL RESOURCES

The December 31, 2011, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $29,011,399 from inception through December 31, 2011, and has a working capital deficiency of $1,000,942 and Stockholders’ equity of $746,160 as of December 31, 2011. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future. The Company will continue so seek equity and debt financing to meet our operating losses. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

Our cash and cash equivalents were $116,529 on December 31, 2011, compared to $311,802 on December 31, 2010. We met our liquidity needs through the issuance of our common stock and convertible notes payable for cash and the revenue derived from our oil and gas operations.

We need to raise additional capital during the fiscal year, but currently have not acquired sufficient additional funding. Our ability to continue operations as a going concern 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.

Operating activities

The Company had a net loss of $229,890 for the three months ended December 31, 2011 compared to a net loss of $271,167 for the three months ended December 31, 2010. Our net loss for the nine months ended December 31, 2011, was $525,037, compared to a net loss of $1,250,886 during the nine months ending December 31, 2010, due to a reduction in expense in for the issuance of stock for consulting services.

Net accounts receivable for the nine months ended December 31, 2011 were $29,627 compared to $15,258 for the nine months ended December 31, 2010.

Critical Accounting Policies

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. 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.

Recently enacted accounting standards

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Material Commitments

We have no material commitments during the next twelve (12) months.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information has been omitted, as the Company qualifies as a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our principal executive and financial officer, 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"), has concluded that 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.

There has been no change in our internal control over financial reporting identified during the period covered by this report which have materially affected or is likely to materially affect

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

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

The Company issued 58,000,000 shares of common stock to consultants for services provided, pursuant to consulting agreements. The value of these shares was $80,946, and was charged to operations.

The Company issued 117,759,451 shares of common stock for the conversion of notes payable and for the assumption of debt and certain accounts payable. The value of these shares in the amount of $109,723 has been credited to the note (s) payable and accounts payable. No gain or loss was recognized on these conversions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 16, 2011, a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock from 1,000,000,000 shares to 3,000,000,000 shares par value of $0.001

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Form 8-K

1. Filed on July 23, 2010, the Company announced the restatement of the previously issued financial statements for the period ended March 31, 2009.

(b) Exhibits

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 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.

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.

Date: February 14, 2012	By:	/s/ Kent Rodriguez
		Kent Rodriguez
		Chief Executive Officer
		Chief Financial and Accounting Officer

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