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EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Avalon Oil & Gas, Inc.f10q0912ex32_avalonoilgas.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Avalon Oil & Gas, Inc.f10q0912ex31_avalonoilgas.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
 
Or
 
r 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 x       No o
 
(2) Has been subject to such filing requirements for the past 90 days.   Yes x      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   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o      No  x
 
3,190,673 shares of the registrant's Common Stock, $0.001 per share, were outstanding as of December 10, 2012.
 
 
 

 
 
Table of Contents

PART I FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
3
 
Consolidated Balance Sheets as of September 30, 2012(Unaudited)  and March 31, 2012
3
 
Consolidated Statements of Operations for the Three  and  Six moths Months Ended September 30, 2012 and 2011 (Unaudited)
5
 
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2012 and 2011 (Unaudited)
7
 
Notes to Consolidated Financial Statements
9
     
Item 2.
Management's Discussion and Analysis of Financial Condition or Plan of Operation
20
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
25
     
PART II OTHER INFORMATION
     
Item 1.
Legal Proceedings
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3.
Defaults upon Senior Securities
26
Item 4.
Mine Safety Disclosures
26
Item 5.
Other Information
26
Item 6.
Exhibits and Reports on Form 8-K
26
     
Signatures
27
 
 
 

 
 
ITEM 1. FINANCIAL STATEMENTS
 
Avalon Oil & Gas, Inc.
Consolidated Balance Sheets
             
             
   
September 30.
   
March 31,
 
   
2012
   
2012
 
   
(Unaudited)
       
Assets
           
             
Current Assets:
           
  Cash and cash equivalents
  $ 112,727     $ 114,533  
  Accounts receivable, net of allowance for doubtful
         
    accounts of $0 and $0
    15,225       33,958  
  Notes receivable
    10,000       9,286  
  Deposits and prepaid expenses
    160,000       160,000  
Receivables from joint interests, net of allowance
         
    for doubtful accounts of $126,791 and $135,708
    20,000       20,000  
                 
Total current assets
    317,952       337,777  
                 
  Notes receivable
    16,429       20,000  
  Property and equipment, net
    335       1,033  
  Unproven oil & gas properties
    1,867,183       1,867,183  
  Producing oil & gas properties, net
    191,371       208,281  
  Intellectual property rights, net
    159,694       180,986  
                 
Total Assets
  $ 2,552,964     $ 2,615,260  
 
The accompanying notes are an integral part of these financial statements.
 
 
3

 
 
Avalon Oil & Gas, Inc.
Consolidated Balance Sheets (Continued)
             
   
September 30.
   
March 31,
 
   
2012
   
2012
 
   
(Unaudited)
       
Liabilities and Stockholders' Equity
           
             
Current Liabilities:
           
  Accounts payable and accrued liabilities
    630,272       581,380  
  Accrued payroll - related parties
    203,267       196,365  
  Dividends payable to related party
    42,450       35,450  
  Accrued liabilities to joint interest
    12,385       12,547  
  Notes payable - related party
    20,000       15,000  
  Notes payable, net of discount
    494,014       620,931  
                 
Total current liabilities
    1,402,388       1,461,673  
                 
  Notes payable, net of discount
    650,000       474,500  
  Accrued asset retirement obligation (ARO) liability
    97,995       91,094  
                 
Total Liabilities
    2,150,383       2,027,267  
                 
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: 3,333,333 shares
               
 authorized 3,190,673 and 2,558,584shares issued and
               
 outstanding at September 30, 2012 and March 31, 2012 respectively
    3,199       2,559  
Additional paid in capital
    29,438,719       29,308,950  
Common stock subscribed
    -       -  
Accumulated deficit
    (29,539,337 )     (29,223,516 )
                 
Total Stockholders’ Equity
    402,581       587,993  
                 
Total Liabilities and Stockholders' Equity
  $ 2,552,964     $ 2,615,260  
 
The accompanying notes are an integral part of these financial statements.
 
 
4

 
 
Avalon Oil & Gas, Inc.
Consolidated Statements of Operations
             
   
For the three
   
For the three
 
   
Months ended
   
Months ended
 
   
September 30, 2012
   
September 30, 2011
 
   
(Unaudited)
   
(Unaudited)
 
             
Oil & Gas Sales
  $ 25,481     $ 60,305  
                 
Operating expenses:
               
  Lease operating expense, severance taxes
               
    and ARO accretion
    9,686       21,243  
  Selling, general and administrative expenses
    83,444       121,140  
  Stock based compensation
    -       10,000  
  Depreciation, depletion, and amortization
    20,284       30,407  
                 
Total operating expenses
    113,414       182,790  
                 
Operating loss
    (87,933 )     (122,485 )
                 
Other income (expense):
               
                 
  (Loss) on conversion of notes payable
    -       (9,172 )
  Interest expense, net
    (25,518 )     (135,194 )
                 
Total other income (expense)
    (25,518 )     (144,366 )
                 
Loss before income tax
    (113,451 )     (266,851 )
                 
Provision for income taxes
    -       -  
                 
Net Loss
    (113,451 )     (266,851 )
                 
Preferred stock dividends
    (10,000 )     (10,000 )
                 
Net loss attributable to common shareholders
  $ (123,451 )   $ (276,851 )
                 
Net loss per share - basic and diluted
    (0.039 )     (0.139 )
                 
Weighted average shares outstanding - basic and diluted
    3,162,339       1,993,872  
 
The accompanying notes are an integral part of these financial statements.
 
 
5

 
 
Avalon Oil & Gas, Inc.
Consolidated Statements of Operations
             
   
For the six
   
For the six
 
   
Months ended
   
Months ended
 
   
September 30, 2012
   
September 30, 2011
 
   
(Unaudited)
   
(Unaudited)
 
             
Oil & Gas Sales
  $ 48,769     $ 119,535  
                 
Operating expenses:
               
  Lease operating expense, severance taxes
               
    and ARO accretion
    17,035       55,233  
  Selling, general and administrative expenses
    148,325       193,529  
  Stock based compensation
    87,500       25,946  
  Depreciation, depletion, and amortization
    37,416       54,579  
                 
Total operating expenses
    290,276       329,287  
                 
Operating loss
    (241,507 )     (209,752 )
                 
Other income (expense):
               
                 
  (Loss) on conversion of notes payable
            (9,172 )
  Gain on extinguishment of debt
    -       28,531  
  Interest expense, net
    (74,310 )     (104,754 )
                 
Total other income (expense)
    (74,310 )     (85,395 )
                 
Loss before income tax
    (315,817 )     (295,147 )
                 
Provision for income taxes
    -       -  
                 
Net Loss
    (315,817 )     (295,147 )
                 
Preferred stock dividends
    (20,000 )     (20,000 )
                 
Net loss attributable to common shareholders
  $ (335,817 )   $ (315,147 )
                 
Net loss per share - basic and diluted
    (0.106 )     (0.174 )
                 
Weighted average shares outstanding - basic and diluted
    3,162,339       1,813,472  
 
The accompanying notes are an integral part of these financial statements.
 
 
6

 
 
Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows
             
   
(Unaudited)
   
(Unaudited)
 
   
For the six
   
For the six
 
   
Months ended
   
Months ended
 
   
September 30, 2012
   
September 30, 2011
 
             
Cash flows from operating activities:
           
Net (loss)
 
$
(315,817
)
 
$
(295,147
)
Adjustments to reconcile net loss to net cash used
         
 in operating activities:
               
   Common stock issued for services
   
87,500
     
20,946
 
   Accrued interest
   
5,000
     
-
 
   Stock issued for reduction of interest on notes payable
   
2,409
     
(1,330
)
  (Gain) Loss on extinguishment of debt
   
-
     
(890
)
   Gain on sale of Well interest
   
-
     
-
 
   Depreciation
   
698
     
3,704
 
   Depletion
   
15,462
     
30,308
 
   Depreciation and ARO liability
   
1,448
     
724
 
   Amortization of discount on notes payable
   
19,083
     
65,723
 
   Amortization of intangible assets
   
21,292
     
21,292
 
Net change in operating assets and liabilities:
               
   Accounts receivable
   
18,733
     
20,473
 
   Joint interest receivable
   
-
     
(13,930
)
   Accounts payable and other accrued expenses
   
60,223
     
(50,283
)
   Dividends payable to related party
   
7,000
     
2,500
 
   Due to related party
   
405
     
5,400
 
   Asset retirement obligation
   
6,901
     
2,897
 
                 
Net cash (used) in operating activities
   
(69,663
)
   
(187,613
)
                 
Cash flows from investing activities:
               
Deposit on the purchase of additional assets
   
-
     
(160,000
)
Principal payments received on notes receivable
   
2,857
     
1,141
 
                 
Net cash provided by (used in) investing activities
   
2,857
     
(158,859
)
                 
Cash flows from financing activities:
               
Proceeds from advances from related party
   
-
     
40,000
 
Reduction of accounts payable in exchange for common stock
     
47,712
 
Proceeds from notes payable
   
65,000
     
80,000
 
                 
Net cash provided in financing activities
   
65,000
     
167,712
 
                 
The accompanying notes are an integral part of these financial statements.
 
 
 
7

 
 
Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows (Continued)
             
   
(Unaudited)
   
(Unaudited)
 
   
For the six
   
For the six
 
   
Months ended
   
Months ended
 
   
September 30, 2012
   
September 30, 2011
 
Net (decrease) in cash and cash equivalents
    (1,806 )     (178,760 )
                 
Cash and cash equivalents at beginning of period
    114,533       311,802  
                 
Cash and cash equivalents at end of period
  $ 112,727     $ 133,042  
                 
Supplemental disclosures of cash flow information:
               
                                     Cash paid during the period for:
               
                                                                            Interest
  $ -     $ -  
                                                                            Taxes
  $ -     $ -  
Common stock issued in exchange for consulting
               
 services
  $ 87,500     $ 20,946  
Common stock issued for conversion of note payable,
               
 accrued interest, and assumption of debt
  $ 42,909     $ 179,219  
Gain from settlement of debt
  $ -     $ (9,172 )
Gain (Loss) on extinguishment of debt
  $ -     $ 28,531  
 
The accompanying notes are an integral part of these financial statements.
 
 
8

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
 (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.  This amendment was not filed with the Nevada Secretary of State.  On September 28, 2012 we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock, to address this issue.  We expect to file an amendment with the Nevada Secretary of State on or before December 31, 2012, to increase our authorized shares to 200,000,000.

On June 4, 2012 the Board of Directors approved an amendment to our Articles of Incorporation to a reverse split of the issued and outstanding shares of Common Stock of the Corporation (“Shares”) such that each holder of Shares as of the record date of June 4, 2012 shall receive one (1) post-split Share on the effective date of June 4, 2012 for each three hundred (300) Shares owned.  The reverse split was effective on July 23, 2012.   On September 28, 2012, we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock.  We expect to file an amendment with the Nevada Secretary of State on or before December 31, 2012, to increase our authorized shares to 200,000,000.

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 May17, 2006, The Company signed a strategic alliance agreement with Innovaro Corporation, a technology transfer company to build a portfolio of new technologies for the oil and gas industry.
 
 On November 9, 2006, The Company acquired Intelli-Well Technologies, Inc., ("IWT"). IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory.
 
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.
 
 
9

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
 (Unaudited)
 
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 promote Avalon's intellectual property.
 
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.  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, 2012.
 
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 September 30, 2012 and March 31, 2012 and the results of their operations and cash flows for the three and six month periods ended September 30, 2012 and 2011 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 September 30, 2012, financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred a loss of $29,539,337 from inception through September 30, 2012, and has a working capital deficiency of $1,084,436 and stockholders’ equity of $402,581 as of September 30, 2012. 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 to 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.

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.
 
 
10

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
(Unaudited)
 
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 $126,791 and $ 135,708 respectively for accounts receivable from the joint working interests, for September 30, 2012 and March 31, 2012.

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 three and six month periods ending September 30, 2012 and 2011, 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 September 30, 2012 and 2011 the Company had not identified any such impairment.
 
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 September 30, 2012 and 2011, 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

 
11

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
(Unaudited)

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 month periods ending September 30, 2012 and 2011.

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:
 
 September 30,
     
  2013
   
21,293
 
  2014
   
42,585
 
  2015
   
42,585
 
  2016
   
42,585
 
2017 and thereafter
   
6,055
 
   
$
155,103
 

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.

 
12

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
(Unaudited)

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.

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.
 
 
13

 
 
 AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
 (Unaudited)

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 six month periods ended September 30, 2012 and 2011.

Recently issued accounting standards

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment."  This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Except for the ASUs above, in the period ended December 14, 2012, The FASB has issued ASU No. 2012-01 through ASU 2012-07, which is not expected to have a material impact on the consolidated financial statements upon adoption.

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 work over expenses.  These receivables are carried on the Company’s balance sheet as Receivable from Joint Interests. At September 30, 2012 and March 31, 2012, the amount of these receivables is $146,791 and 155,708.   At March 31, 2012 and September 30, 2012, the Company deemed the collectability of the receivable from joint interests in the amount of $135,708 and 126,791 as unlikely.
 
NOTE 3: INTELLECTUAL PROPERTY RIGHTS

A summary of the intellectual property rights at September 30, 2012 and March 31, 2012, are as follows:

    September 30, 2012    
March 31,
2012
 
   
(Unaudited)
       
Intelli-Well Technology
  $ 425,850     $ 425,850  
Less: accumulated amortization
    (266,156 )     (244,864 )
Total
  $ 159,694     $ 180,986  
 
Amortization expense for the three month and six month period ended September 30, 2012 and 2011, was $21,292
 
 
14

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
(Unaudited)

NOTE 4: OIL AND GAS PROPERTY ACTIVITY
 
The table below shows the Company’s working interests in the Grace Wells as of September 30, 2012.  There were not any additional acquisitions during the three and six month period ending September 30, 2012.
 
Well
 
Working Interest
 
Grace #1
    65.25 %
Grace #2
    55.75 %
Grace #3
    64.00 %
Grace #5A
    52.00 %
Grace #6
    58.00 %
  
Producing oil and gas properties consist of the following at September 30, 2012 and March 31, 2012:

   
September 30, 2012
   
March 31,
2012
 
   
(Unaudited)
         
Lincoln County, Oklahoma
  $ 67,565     $ 67,565  
Other properties, net
    1,049,513       1,049,514  
Asset retirement obligation
    44,916       46,364  
Property impairments
    (481,072 )     (481,072 )
Less: Depletion
    (489,551 )     (474,089 )
Net
  $ 191,371     $ 208,281  

 
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

   
September 30, 2012
   
March 31,
2012
 
   
(Unaudited)
       
Accounts payable
  $ 410,024     $ 409,094  
Accrued interest
   
220,248
      172,286  
Total
  $
630,272
    $ 581,380  
 
NOTE 6: NOTES PAYABLE

Notes Payable are summarized as follows:
   
Note
   
Unamortized
   
Net of
 
March 31, 2012:
 
Amount
   
Discounts
   
Discount
 
Notes payable – long-term portion
  $ 474,500     $ -0-     $ 474,500  
Notes payable – current portion
    650,000       (29,069 )     620,931  
Total
  $ 1,124,500     $ (29,069 )   $ 1,095,431  
 
 
15

 

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
(Unaudited)

NOTE 6: NOTES PAYABLE (continued)

      Note       Unamortized       Net of  
September  30, 2012 (Unaudited):
   Amount       Discounts       Discount  
Notes payable – long-term portion
  $ 650,000     $       $ 650,000  
Notes payable – current portion
    503,999       (9,985 )     494,014  
Total
  $ 1,153,999     $ (9,985 )   $ 1,144,014  

 
Three months ended September 30,
   
Six months ended September 30,
 
 
2012
  2011    
2012
    2011  
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Discount on Notes Payable amortized to interest expense
  $ 2,171     $ 54,180     $ 19,083     $ 65,633  

NOTE 7: RELATED PARTY TRANSACTIONS
 
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 six months ended September 30, 2012 and 2011, the Company incurred $10,000 and $20,000 respectively for both years 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 exercise, conversion or exchange of outstanding options, warrants, or convertible securities.

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 is 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 $24,000 for the six month periods ended September 30, 2012 and 2011, in annual salary for Mr. Rodriguez, of which $21,700 was paid to him during the six month periods ending September 30, 2012, and $17,200 during the period ended September 30, 2011.   As of September 30, 2012, and March 31, 2012, the balances of accrued and unpaid salaries were $198,667, and $196,365.
 
 
16

 

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
(Unaudited)
 
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 carry forwards 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 September 30, 2012, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at September 30, 2012.  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 September 30, 2012 and March 31, 2012, 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.

During the six months ended September 30, 2012 and 2011, the Company incurred $20,000 in preferred stock dividends, and paid $13,000 and $17,500 respectively.  As of September 30, 2012 and March 31, 2012, dividends in the amount of $42,450 and $35,450 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.

 
17

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
(Unaudited)

Common Stock

The Company has authorized 3,333,333 shares of common stock with a par value of $0.001 per share.  As of September 30, 2012 and March 31, 2012, the Company had 3,190,991 and 2,558,584 shares of common stock issued and outstanding, respectively.

Common stock issuances during the six month period ended September 30, 2012:

The Company issued 150,000 shares of common stock to the Company’s outside directors for services provided.  The value of these shares in the amount of $45,000 was charged to operations.

The Company issued 141,667 shares of common stock to consultants for services provided, pursuant to consulting agreements.  The value of these shares in the amount of $42,500 was charged to operations

The Company issued 340,771 shares of common stock for the conversion of notes payable and for the assumption of debt.  The value of these shares in the amount of $42,909 was been credited to the note (s) payable.    No gain or loss was recognized on these conversions.

Options

There are no stock options outstanding.
 
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 September 30, 2012:

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)
$ 30.00    
1,666
     
0.62
   
$
30.00
     
1,666
 
0.62
  60.00    
417
     
1.69
     
60.00
     
417
 
1.69
  180.00    
                    500
     
1.96
     
180.00
     
                  500
 
1.96
       
2,583
     
1.05
             
2,583
 
1.05
 
Transactions involving warrants are summarized as follows:
 
   
Number of Shares
   
Weighted Average
Price Per Share
 
Outstanding at March 31, 2012
   
2,583
   
$
63.00
 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Cancelled or expired
   
-
     
-
 
Outstanding at September 30, 2012
   
2,583
   
$
63.00
 
 
 
18

 
 
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Six Month Periods Ended September 30, 2012 and 2011
 (Unaudited)

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 six and three months ended September 30, 2012 and 2011 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 September 30, 2012 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.

 
19

 
 
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. This amendment was not filed with the Nevada Secretary of State.  On September 28, 2012 we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock, to address this issue.  We expect to file an amendment with the Nevada Secretary of State on or before December 31, 2012, to increase our authorized shares to 200,000,000.

On June 4, 2012 the Board of Directors approved an amendment to our Articles of Incorporation to a reverse split of the issued and outstanding shares of Common Stock of the Corporation (“Shares”) such that each holder of Shares as of the record date of June 4, 2012 shall receive one (1) post-split Share on the effective date of June 4, 2012 for each three hundred (300) Shares owned.  The reverse split was effective on July 23, 2012.   On September 28, 2012, we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock.  We expect to file an amendment with the Nevada Secretary of State on or before December 31, 2012, to increase our authorized shares to 200,000,000

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.
 
 
20

 
 
In furtherance of the foregoing strategy, we have engaged in the following transactions during the last three years:
 
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, an 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.
 
 
21

 
 
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 June 30, 2010, 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 build a portfolio of new technologies for the oil and gas industry.
 
On November 9, 2006, The Company acquired Intelli-Well Technologies, Inc., ("IWT"). IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory.
 
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 promote Avalon's intellectual property.

Going Concern

The September 30, 2012, financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred a loss of $29,539,337 from inception through September 30, 2012, and has a working capital deficiency of $1,084,436 and stockholders’ equity of $402,581 as of September 30, 2012. 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 to 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.
 
Results of Operations

Three and six months ended September 30, 2012 compared to the three and six months ended September 30, 2011:

 
22

 
 
Revenues

Revenues for the three months ended September 30, 2012 were $25,481, a decrease of 34,824 or approximately 58% compared to revenue of $60,305 for the three months ended September 30, 2011.  Revenues from the sale of oil and gas decreased as a result of the lower market price for oil and natural gas, the lack of production from the Company’s Miller County Arkansas Properties

Revenues for the six months ended September 30, 2012 were $48,769, a decrease of $70,766 or approximately 59% compared to revenue of $119,535 for the six months ended September 30, 2011.  Revenues from the sale of oil and gas decreased as a result of the lower market price for oil and natural gas, the lack of production from the Company’s Miller County Arkansas Properties
 
Lease Operating Expenses

During the three months ending September 30, 2012, our lease operating expenses were $9,686, a decrease of $11,557 or approximately 54% compared to $21,243 for the three months ended September 30, 2011.  

During the six months ending September 30, 2012, our lease operating expenses were $17,035, a decrease of $38,198 or approximately 69% compared to $55,233 for the six months ended September 30, 2011. 
 
Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2012 were $83,444 a decrease of $37,696 or approximately 31% compared to selling, general and administrative expenses of $121,140 during the three months ended September 30, 2011.

Selling, general and administrative expenses for the six months ended September 30, 2012 were $148,325, a decrease of $45,204 or approximately 23% compared to selling, general and administrative expenses of $193,529 during the six months ended September 30, 2011.
 
Stock Based Compensation

There was no non-cash compensation for the three months ended September 30, 2012 a decrease of $10,000, compared to non-cash compensation of $10,000 for the three months ended September 30, 2011.  This decrease was the result of common stock issuances to a consultant group as payment for services rendered during the period ending September 30, 2011.

Non-cash compensation for the six months ended September 30, 2012 was $87,500, an increase of $61,554 compared to non-cash compensation of $25,946 for the six months ended September 30, 2011.  This increase was the result of common stock issuances to a consultant group as payment for services rendered during the period ending September 30, 2012.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization was $20,284 for the three months ended September 30, 2012, a decrease of $10,123 or approximately 33% compared to $30,407 for the three months ended September 30, 2011.  

Depreciation, Depletion, and Amortization was $37,416 for the six months ended September 30, 2011, a decrease of $17,163 or approximately 31% compared to $54,579 for the six months ended September 30, 2011
 
Interest Expense, net of Interest Income

Interest expense, net of interest income was $25,518 for the three months ended September 30, 2012, an decrease of $109,676 compared to interest expense of $135,194 for the three months ending September 30, 2011.
 
 
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Interest expense, net of interest income was $74,310 for the six months ended September 30, 2012, an increase of $30,444 compared to interest expense of $104,754 for the six months ending September 30, 2011.
 
Net Loss

Our net loss for the three months ended September 30, 2012, was $113,451, a decrease of $153,400 or approximately 57% compared to a net loss of $266,851 during the three months ending September 30, 2011.
 
Our net loss for the six months ended September 30, 2012, was $315,817, an increase of $20,670 or approximately 7% compared to a net loss of $295,147 during the six months ending September 30, 2011.

LIQUIDITY AND CAPITAL RESOURCES
 
The September 30, 2012, financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred a loss of $29,539,337 from inception through September 30, 2012, and has a working capital deficiency of $1,084,436 and stockholders’ equity of $402,581 as of September 30, 2012. 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 to 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 $112,727 on September 30, 2012, compared to $114,533 on March 31, 2012. We met our liquidity needs through the issuance of our common stock and 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 $113,451 for the three months ended September 30, 2012 compared to a net loss of $266,851 for the three months ended September 30, 2011. Our net loss for the six months ended September 30, 2012, was $315,817, compared to a net loss of $295,147 during the six months ending September 30, 2011

Net accounts receivable as of September 30, 2012 were $18,733 compared to $20,473 for the six months ended September 30, 2011.
 
Investing activities

For the six months ended September 30, 2012, net cash provided by investing activities was 2,857 compared to $158,859 used in the six months ended September 30, 2011.  The primary use of cash for investing activities in the six months ending September 30, 2011 was the escrow of funds for the purchase of oil and gas producing properties.

Financing activities

Our financing activities for the six months ended September 30, 2012 provided cash of $65,000 as compared to $167,712 for the six months ended September 30, 2011. We plan to raise additional capital during the coming fiscal year.  Cash generated by financing activities represented two note payable of $65,000 from a private investor.
 
 
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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 issued accounting standards

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment."  This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Except for the ASUs above, in the period ended December 14, 2012, The FASB has issued ASU No. 2012-01 through ASU 2012-07, which is not expected to have a material impact on the consolidated financial statements upon adoption.

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 our internal control over financial reporting.
 
 
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PART II

ITEM 1. LEGAL PROCEEDINGS

None.

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

The Company issued 150,000 shares of common stock to the Company’s outside directors for services provided  The value of these shares in the amount of $45,000, was charged to operations.

The Company issued 141,667 shares of common stock to consultants for services provided, pursuant to consulting agreements.  The value of these shares in the amount of $42,500 was charged to operations

The Company issued 340,771 shares of common stock for the conversion of notes payable and for the assumption of debt.  The value of these shares in the amount of $42,909 has been credited to the note (s) payable.    No gain or loss was recognized on these conversions.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
None.

ITEM 5. OTHER INFORMATION

None.
  
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Form 8-K

1.    
Filed on July 16, 2012, the Company announced that the outstanding common stock was reverse split on a 300-for-1 basis.

2.    
 Filed on October 3, 2012, the Company announced that the authorized shares have been increased from 3,333,333 to 200,000,000.
 
(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.
 
 
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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: December 17, 2012
By:
/s/ Kent Rodriguez                                       
 
   
Kent Rodriguez
 
   
Chief Executive Officer
Chief Financial and Accounting Officer
 
 
 
 
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