UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

 

FORM 10-Q

____________

 

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

 

For the quarterly period ended September 30, 2015

 

Or

 

☐  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.)

 

310 Fourth Avenue South, Suite 7000

Minneapolis, MN 55415

(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  ☒    No  ☐

 

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

 

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  ☒  No ☐

 

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	☐	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☒

 

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

 

17,498,062 shares of our common stock were issued and outstanding as of November 12, 2015.

 

Table of Contents

 

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of  September 30, 2015  (Unaudited)  and March 31, 2015	3
	Consolidated Statements of Operations for the Three Months ended September 30, 2015 and 2014 (Unaudited)	5
	Consolidated Statements of Operations for the Six Months Ended September 30, 2015 and  2014 (Unaudited)	6
	Consolidated Statement of Cash Flows for the Six Months ended September 30, 2015 and 2014 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operation	25
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits and Reports on Form 8-K	30
Signatures		31

 

 

 

Avalon Oil & Gas, Inc.
Consolidated Balance Sheets
			September 30,				March 31,
			2015				2015
			(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	175,488			$	135,713
Accounts receivable, net of allowance for doubtful  accounts of $0 and $0			28,833				33,344
Notes receivable			10,714				11,429
Deposits and prepaid expenses			352,280				368,946
Receivables from joint interest, net of allowance for doubtful accounts of $131,239 and $131,236			20,000				20,000
Total current assets			587,315				569,432
Property and equipment, net			15,859				18,125
Unproven oil & gas properties			1,867,183				1,867,183
Producing oil & gas properties, net			229,737				239,283
Intellectual property rights, net			31,942				53,234
Total Assets		$	2,732,036			$	2,747,257
The accompanying notes are an integral part of these financial statements.

Avalon Oil & Gas, Inc.
Consolidated Balance Sheets (Continued)
			September 30,				March 31,
			2015				2015
			(Unaudited)
Liabilities and Equity
Current Liabilities:
Accounts payable and accrued liabilities			163,944				433,751
Accrued payroll - related parties			198,965				211,317
Dividends payable			110,200				32,950
Accrued liabilities to joint interest			10,567				10,567
Notes payable - related party			20,000				20,000
Notes payable			199,300				224,300
Total current liabilities			702,976				932,885
Accrued asset retirement obligation (ARO) liability			130,431				124,220
Total Liabilities			833,407				1,057,105
Equity
Preferred stock, 1,000,000 authorized
Preferred stock, Series A, $.10 par value, 100 shares authorized; 100 shares issued and outstanding as of September 30, 2015 and March 31, 2015, respectively liquidation preference of $531,450 and $ 532,950 as of September 30, 2015 and March 31, 2015, respectively			10				10
Preferred stock, Series B, $.10 par value, 2,000 shares authorized; 1,825 and 1,625 shares issued and outstanding liquidation preference of $1,903,750  and $1,625,000 as of September 30, 2015 and March 31, 2015, .respectively			185				164
AFS Holdings, Inc. (Subsidiary):
Preferred stock, Series A, $.001 par value, 1,000 shares authorized; 50 shares and 0 shares issued and outstanding as of September 30, 2015 and March 31, 2015  respectively liquidation preference of $50,000  and  $0 as of September 30, 2015 and March 31, 2015, respectively			—				—
Common stock, $.001 par value: 200,000,000 shares authorized 17,498,062 and 16,548,062 shares issued and outstanding at September 30, 2015 and March 31, 2015, respectively			17,499				16,549
Additional paid in capital			32,859,331				32,572,302
Accumulated deficit			(30,978,796	)			(30,898,873	)
Total Avalon Oil & Gas Inc. Stockholders' Equity			1,898,229				1,690,152
Non-controlling interest			400				—
Total equity			1,898,629				1,690,152
Total Liabilities and  Equity		$	2,732,036			$	2,747,257
The accompanying notes are an integral part of these financial statements.

Avalon Oil & Gas, Inc.
Consolidated Statements of Operations
			For the Three				For the Three
			Months ended				Months ended
			September 30, 2015				September 30, 2014
			(Unaudited)				(Unaudited)
Oil & Gas Sales		$	15,373			$	38,433
Operating expenses:
Lease operating expense, severance taxes and ARO accretion			16,359				19,246
Selling, general and administrative expenses			89,702				104,244
Stock based compensation			8,333				—
Depreciation, depletion, and amortization			17,088				20,600
Total operating expenses			131,482				144,090
Operating loss			(116,109	)			(105,657	)
Other income (expense):
Interest expense, net			(4,016	)			(10,717	)
Total other expense			(4,016	)			(10,717	)
Loss before income tax			(120,125	)			(116,374	)
Provision for income taxes			—				—
Net loss		$	(120,125	)		$	(116,374	)
Preferred stock dividends		$	(50,500	)		$	(40,596	)
Net loss attributable to common shareholders		$	(170,625	)		$	(156,970	)
Net loss per share - basic and diluted		$	(0.010	)		$	(0.013	)
Weighted average shares outstanding - basic and diluted			17,498,062				11,858,062
The accompanying notes are an integral part of these financial statements.

Avalon Oil & Gas, Inc.
Consolidated Statements of Operations
			For the Six				For the Six
			Months ended				Months ended
			September 30, 2015				September 30, 2014
			(Unaudited)				(Unaudited)
Oil & Gas Sales		$	23,904			$	62,934
Operating expenses:
Lease operating expense, severance taxes and ARO accretion			26,906				38,793
Selling, general and administrative expenses			163,755				177,680
Stock based compensation			28,666				14,000
Depreciation, depletion, and amortization			31,656				40,232
Total operating expenses			250,983				270,705
Operating loss			(227,079	)			(207,771	)
Other income (expense):
Other miscellaneous income			—				10,100
Gain on settlement of trade payables			244,972				—
Interest income (expense), net			934				(21,321	)
Total other income (expense)			245,906				(11,221	)
Income (loss) before income tax			18,827				(218,992	)
Provision for income taxes			—				—
Net income (loss)		$	18,827			$	(218,992	)
Preferred stock dividends		$	(98,750	)		$	(80,973	)
Net loss attributable to common shareholders		$	(79,923	)		$	(299,965	)
Net loss per share - basic and diluted		$	(0.005	)		$	(0.025	)
Weighted average shares outstanding - basic and diluted			17,189,319				11,831,832
The accompanying notes are an integral part of these financial statements.

Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows
			For the Six				For the Six
			Months ended				Months ended
			September 30, 2015				September 30, 2014
			(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	18,827			$	(218,992	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Stock issued for services			12,000				14,000
Non-cash consulting services			16,666				—
(Gain) on forgiveness of debt			(244,972	)			—
(Gain) on forgiveness of interest payable			(11,375	)			—
Depreciation			2,266				2,267
Depletion			8,098				16,673
Depreciation and ARO liability			1,448				1,448
Amortization of intangible assets			21,292				21,294
Net change in operating assets and liabilities:
Accounts receivable			4,511				(7,807	)
Accounts payable and other accrued expenses			5,589				26,348
Asset retirement obligation			6,211				5,647
Net cash used in operating activities			(159,439	)			(139,122	)
Cash flows from investing activities:
Acquisition of oil producing assets							(120,000	)
Principal payments received on notes receivable			714				6,428
Net cash provided by (used in ) investing activities			714				(113,572	)
Cash flows from financing activities:
Notes payable			(5,000	)			60,000
Series B Preferred Stock issued for cash			225,000				175,000
Dividends paid			(21,500	)			(41,500	)
Net cash provided by financing activities			198,500				193,500
The accompanying notes are an integral part of these financial statements.

Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows (Continued)
			For the Six				For the Six
			Months ended				Months ended
			September 30, 2015				September 30, 2014
			(Unaudited)				(Unaudited)
Net increase (decrease) in cash and cash equivalents			39,775				(59,194	)
Cash and cash equivalents at beginning of period			135,713				223,914
Cash and cash equivalents at end of period		$	175,488			$	164,720
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	—			$	—
Taxes		$	—			$	—
Common stock issued in exchange for consulting services		$	12,000			$	14,000
Common stock issued for payment of accounts payable		$	26,000			$	—
Note payable issued for payment of accounts payable		$	5,000			$	—
Preferred stock issued for extinguishment of note payable, accrued interest, and assumption of debt		$	25,000			$	50,000
The accompanying notes are an integral part of these financial statements.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(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.

 

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 filed an amendment with the Nevada Secretary of State on April 10, 2013, 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 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.

 

On March 19, 2014, the Company formed Weyer Partners, LLC, (“Weyer”) a one hundred percent (100%) wholly owned Minnesota Corporation. Weyer Partners, LLC, was formed to operate oil and gas properties in Oklahoma and Texas. Weyer is consolidated in these financial statements.

 

On May 9, 2014, the Company formed AFS Holdings, Inc., (“AFS”) a Nevada Corporation. As of September 30, 2015 the Company owns 96.8% of the outstanding common shares of AFS Holding, Inc. AFS was formed to leverage the Company’s relationship with IP TechEx, and market technology licensed from IP TechEx. AFS is consolidated in these financial statements.

 

On June 1, 2015, AFS entered into a technology license agreement with Avalon Oil & Gas, Inc., a related party majority shareholder of AFS. Under the terms of the agreement, AFS shall pay to Avalon Oil & Gas, Inc. $300,000 no later than December 31, 2015 together with 5% of the gross receipts received by AFS for the use of the licensed technology. The Company consolidates AFS’s assets, liabilities, income and expenses and inter-company transactions were eliminated for purposes of these financial statements. On June 10, 2015, AFS sold 3,000,000 shares of Common Stock to the Company for $10,000 and 100,000 shares to the Directors of the Company for $400.

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

On October 5, 2015, the Articles of Incorporation of AFS were amended. Pursuant to the amended articles of incorporation, AFS is authorized to issue 250,000,000 shares of common stock, each having a par value of $0.001, with each share of common stock entitled to one vote for all matters on which a shareholder vote is required or requested. AFS was also authorized to issue 5,000,000 shares of Preferred Stock, par value $0.001, of which 1,000 shares were designated as Series A Preferred Stock.

 

On October 23, 2015, AFS filed a registration statement on Form S-1 with the Securities and Exchange Commission, in order to register shares to be sold by AFS. AFS has not yet received comments on the registration statement.

 

Principles of consolidation

 

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

 

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, 2015.

 

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, 2015 and the results of their operations and cash flows for the three and six months ended September 30, 2015 and 2014, and are not necessarily indicative of the results to be expected for the entire year.

 

Going Concern

 

The September 30, 2015, consolidated financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $30,978,796 from inception through September 30, 2015, and has a working capital deficiency of $115,661 and stockholders’ equity of $1,898,229 as of September 30, 2015. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. 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 generally accepted accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

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.

 

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 and Receivables from the Joint Interest

 

Management periodically assesses the collectability of the Company's accounts receivable and receivables from the Joint Interest. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company had an allowance for receivables from the Joint Interest of $131,239 and $131,236 as of September 30, 2015 and March 31, 2015.

 

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 month and six month periods ended September 30, 2015, 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, 2015 and March 31, 2015, the Company had not identified any such impairment.

 

Property and Equipment, net

 

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, 2015 and March 31, 2015, the Company had not identified any such impairment. Repairs and maintenance are charged to operations when incurred and improvements and renewals are capitalized.

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

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
	Vehicles	5 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.

 

Intellectual Property Rights, net

 

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 six months ended September 30, 2015 and 2014.

 

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:

 

March 31,
	2016			$	21,292
	2017				10,650
				$	31,942

 

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

Stock Based Compensation

 

Share awards granted to employees and independent directors are accounted for under ASC 718, "Share-Based Payment". ASC 718-10 eliminates accounting for share-based compensation transaction using the intrinsic value method and requires instead that such transactions be accounted for using a fair-value-based method. The Company has elected to adopt the provisions of ASC 718-10 effective January 1, 2006, under the modified prospective transition method, in which compensation cost was recognized beginning with the effective date (a) based on the requirements of ASC 718-10 for all share-based payments granted after the effective date and (b) based on the requirements of ASC 718-10 for all awards granted to employees prior to the effective date of ASC 718-10 that remain unvested on the effective date. 

 

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.

 

Warrants

 

The value of warrants issued is recorded at their fair values as determined by use of a Black Scholes Model at such time or over such periods as the warrants vest.

 

Non-controlling interest

 

The Company accounts for non-controlling interest in accordance with ASC Topic 810-10-45, which requires the Company to present non-controlling interests as a separate component of total shareholders’ equity on the consolidated balance sheet and the consolidated net income attributable to the parent and the non-controlling interest be clearly identified and presented on the face of the consolidated income and comprehensive income statement. ASC Topic 810-10-45 also requires that losses attributable to the parent and the non-controlling interest in a subsidiary be attributed to those interests even if it results in a deficit non-controlling interest balance.

 

Earnings (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.

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

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.

 

Recently Issued Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements.

 

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 an operating agreement (the “Operating 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 September 30, 2015 and March 31, 2015, the amounts of these receivables are $151,239 and $151,236, respectively. As of September 30, 2015 and March 31, 2015, the Company deemed the collectability of the receivable from joint interests in the amount of $131,239 and $131,236, respectively as unlikely and reserved for $131,239 and $131,236, respectively.  

 

NOTE 3: DEPOSITS AND PREPAID EXPENSES

 

The Company previously advanced $279,400 toward the purchase of properties.

 

In 2014 the Company had prepaid consulting fees in the amount of $100,000 which is being amortized over 36 months. Amortization through September 30, 2015 and March 31, 2015 was $27,120 and $10,454, respectively.

 

		September 30, 2015				March 31, 2015
Deposits on wells		$	279,400			$	279,400
Prepaid consulting fees			100,000				100,000
			379,400				379,400
Less: Accumulated amortization on prepaid fees			(27,120	)			(10,454	)
Total		$	352,280			$	368,946

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

 

NOTE 4: PROPERTY AND EQUIPMENT, NET

 

A summary of property and equipment at September 30, 2015 and March 31, 2015 is as follows:

 

		September 30, 2015				March 31, 2015
Office Equipment		$	41,778			$	41,778
Vehicles			22,657				22,657
			64,435				64,435
Less: Accumulated depreciation			(48,576	)			(46,310	)
Total		$	15,859			$	18,125

 

Depreciation expense for the three months periods ended September 30, 2015 and 2014 was $1,133 and $1,133, respectively.

 

Depreciation expense for the six months periods ended September 30, 2015 and 2014 was $2,266 and $2,266, respectively.

 

NOTE 5: INTELLECTUAL PROPERTY RIGHTS, NET

 

A summary of the intellectual property rights at September 30, 2015 and March 31, 2015, are as follows:

 

		September 30, 2015				March 31, 2015
		(Unaudited)
Ultrasonic Mitigation Technology		$	425,850			$	425,850
Less: accumulated amortization			(393,908	)			(372,616	)
Total		$	31,942			$	53,234

 

Amortization expense for the three months periods ended September 30, 2015 and 2014 was $10,646 and $10,646, respectively.  

  

Amortization expense for the six months periods ended September 30, 2015 and 2014 was $21,292 and $21,292, respectively.  

 

NOTE 6: OIL AND GAS PROPERTY ACTIVITY

 

The table below shows the Company’s working interests in the Grace Wells as of September 30, 2015.  There were not any additional acquisitions during the three and six month periods ended September 30, 2015.

 

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

September 30, 2015

(Unaudited)

 

NOTE 6: OIL AND GAS PROPERTY ACTIVITY (Continued)

 

Producing oil and gas properties consist of the following at September 30, 2015 and March 31, 2015: 

 

		September 30, 2015				March 31, 2015
		(Unaudited)
Lincoln County, Oklahoma		$	111,402			$	111,402
Lipscomb County, Texas			250,082				250,082
Miller County, Arkansas			132,909				132,909
Ward Petroleum Assets			290,500				290,500
Kensington Energy Assets			120,000				120,000
Other Properties			332,185				332,185
Total Properties			1,237,078				1,237,078
Asset retirement cost, net			36,228				37,676
Property impairments			(481,072	)			(481,072	)
Less: Depletion			(562,497	)			(554,399	)
Net		$	229,737			$	239,283

 

For the three and six months periods ended September 30, 2015, depletion per Bbl was $6.85 and $6.85, respectively.

 

For the three and six months periods ended September 30, 2014, depletion per Bbl was $5.12 and $5.12, respectively.

 

NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consisted of the following:

 

 

		September 30, 2015				March 31, 2015
		(Unaudited)
Accounts payable		$	102,709			$	371,722
Accrued interest			61,240				62,030
Total		$	163,949			$	433,752

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited

 

NOTE 8: NOTES PAYABLE

 

Notes Payable are summarized as follows:

		Note
		Amount
March 31, 2015:
Notes payable – long-term portion		$	-0-
Notes payable – current portion			224,300
Total		$	224,300

  

		Note
		Amount
September 30, 2015 (Unaudited):
Notes payable – long-term portion		$	-0-
Notes payable – current portion			199,300
Total		$	199,300

 

NOTE 9: RELATED PARTY TRANSACTIONS

 

Notes Payable

 

On April 21, 2011, Mr. Rodriguez advanced the Company $35,000. As of September 30, 2015 and March 31, 2015, amount outstanding is $20,000. This note does not accrue interest and is due on demand.

 

Series A Convertible Preferred Stock

 

The 100 shares of Series A Convertible Preferred Stock were issued on June 3, 2002 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 holder of these shares of Series A Convertible Preferred Stock is our President, Kent Rodriguez. The Series A Convertible Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Convertible 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 Convertible Preferred Stock provides for voting rights on an "as converted to common stock" basis.

 

The holders of the Series A Convertible 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, and warrants. In the event that the Company does not have an adequate number of shares of Common Stock authorized, upon a conversion request, only the maximum allowable number of shares of Series A Convertible Preferred Stock shall convert into Common Stock and the remaining shares of Series A Convertible Preferred Stock shall convert upon lapse of the applicable restrictions.

 

During the three months ended September 30, 2015 and 2014, the Company incurred $10,000 and $10,000 in Series A Convertible Preferred Stock dividends, paid $8,000 and $6,500 for the three months ended September 30, 2015 and 2014. During the six months ended September 30, 2015 and 2014, the Company incurred $20,000 and $20,000 in Series A Convertible Preferred Stock dividends, and paid $ 21,500 and $25,500 for the six months ended September 30, 2015 and 2014. As of September 30, 2015 and March 31, 2015, the accrued balance due Mr. Rodriguez was $31,450 and $32,950 respectively. The liquidation preference of Series A Convertible Preferred Stock as of September 30, 2015 and March 31, 2015 was $531,450 and $532,950 or $5,315 and $5,330 per share. 

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

Employment Agreements

 

In 2009, Mr. Rodriguez, our President, was under an employment agreement dated April 1, 2008 that expires on March 31, 2016, 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 $24,000 for the three and six month periods ended September 30, 2015 and 2014, of which $14,470 and $36,352 was paid to him during the three month and six month periods ending September 30, 2015, and $10,950 and $22,450 during the three and six month periods ending September 30, 2014 respectively.  As of September 30, 2015, and March 31, 2015, the balances of accrued and unpaid salaries were $198,965 and $211,317.

 

NOTE 10: 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 Net Operating Loss carry-forwards for income tax purposes with a valuation allowance against the carry-forwards 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 $30,978,396, 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, 2015, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at September 30, 2015.  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 11: STOCKHOLDERS' EQUITY

 

Preferred Stock

 

The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.10 per share.  

 

Series A Convertible Preferred Stock

 

The 100 shares of Series A Convertible Preferred Stock were issued on June 3, 2002 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 holder of these shares of Series A Convertible Preferred Stock is our President, Kent Rodriguez. The Series A Convertible Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Convertible 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 Convertible Preferred Stock provides for voting rights on an "as converted to common stock" basis.

 

The holders of the Series A Convertible Preferred Stock have the right to convert the preferred stock into shares of common stock such that if converted simultaneously, they shall represent forty 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.

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

 

As of September 30, 2015, the Company has 100 shares of Series A Convertible preferred stock issued and outstanding.

 

During the three months ended September 30, 2015 and 2014, the Company incurred $10,000 and $10,000 in Series A Convertible Preferred Stock dividends, paid $8,000 and $6,500 for the three months ended September 30, 2015 and 2014. During the six months ended September 30, 2015 and 2014, the Company incurred $20,000 and $20,000 in Series A Convertible Preferred Stock dividends, and paid $ 21,500 and $25,500 for the six months ended September 30, 2015 and 2014. As of September 30, 2015 and March 31, 2015, the accrued balance due Mr. Rodriguez was $31,450 and $32,950 respectively. The liquidation preference of Series A Convertible Preferred Stock as of September 30, 2015 and March 31, 2015 was $531,450 and $532,950 or $5,315 and $5,330 per share. 

 

Series B Preferred Stock

 

In March, 2013, our Board of Directors authorized the issuance of 2,000 shares of Series B Preferred Stock, (the "Series B Preferred Stock").  The face amount of share of the Series B Preferred Stock is $1,000.  As of September 30, 2015 and March 31, 2015, the Company has 1,825 and 1,625 shares of Series B preferred stock respectively issued and outstanding.  

 

The Series B Preferred Stock accrues dividends at the rate of 9% per annum on the original purchase price for the shares. These dividends are payable annually, beginning in January 2014. We are prohibited from paying any dividends on our Common Stock until all accrued dividends are paid on our Series B Preferred Stock.  The Series B Preferred Stock ranks junior to the Series A Convertible Preferred Stock owned by our President and Chief Executive Officer, as to Dividends and to a distribution of assets in the event of a liquidation of assets.

 

The Holders of Series B Preferred Stock do not have any voting rights and their consent is not required to take any sort of corporate action.

 

During the three month period ended September 30, 2015, the Company issued 75 shares of Series B Preferred Stock, for an investment of $75,000.

 

During the six month period ended September 30, 2015, the Company issued 200 shares of Series B Preferred Stock, 25 shares in exchange for a $25,000 promissory note and 175 shares for an investment of $175,000. During the three month periods ended September 30, 2015 and 2014, the Company incurred $40,500 and $30,596 in dividends on Series B preferred stock.  The Company did not pay any dividends for the three or six months period ended September 30, 2015 and paid $16,000 for the six months period ended September 30, 2014. During the six month periods ended September 30, 2015 and 2014, the Company incurred $78,750 and $69,750 in dividends on Series B preferred stock. The liquidation preference of Series B Preferred Stock as of September 30, 2015 and March 31, 2015 was $1,903,750 and $1,625,000 or $1,043.15 or $1,000 per share, respectively. Dividends payable for Series B Preferred Stock at September 30, 2015 and March 31, 2015 were $78,750 and $0 respectively.

 

Total dividends payable from both Series A and Series B preferred shares at September 30, 2015 and March 31, 2015 were $110,200 and $32,950 respectively.

 

AFS Holdings, Inc. Series A Preferred Stock

 

On October 5, 2015, the Articles of Incorporation of AFS were amended to authorize the issuance of 5,000,000 shares of Preferred Stock, par value $0.001, of which 1,000 shares are designated as Series A Preferred Stock.

 

AFS Series A Preferred Stock accrues dividends at the rate of 12% per annum on the original purchase price for the shares. These dividends are payable annually in cash or the AFS Common Stock at the discretion of the Board of Directors, beginning in March 2016. AFS is prohibited from paying any dividends on AFS Common Stock until all accrued dividends are paid on our Series A preferred Stock. Upon liquidation, the Series A Preferred Stock shareholders shall be entitled to the stated value of each shares held, in addition to accrued and unpaid dividends, as long as AFS possesses the funds necessary to make payments. AFS may, at any time, redeem the shares of Series A Preferred Stock without the prior written consent of the Series A Preferred Stock shareholders. The Series A Preferred Stock ranks senior to AFS Common Stock in a distribution of assets in the event of a liquidation of assets.

 

On September 30, 2015, AFS issued 50 shares of its Series A Preferred Stock for $50,000 to an unaffiliated third party. The liquidation preference as of September 30, 2015 was $50,000 or $1,000 per share.

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

Common Stock

 

On June 10, 2015, the Company’s subsidiary AFS Holdings, Inc. issued us 3,000,000 shares of its Common Stock for $10,000 in cash. The shares were valued at $0.0033. The issuance was an isolated transaction not involving a public offering pursuant to Section 4(2) of the Securities Act of 1933.

 

On June 10, 2015, the Company’s subsidiary AFS Holdings, Inc., issued 100,000 shares of its Common Stock to their directors for their services. The shares were valued at $0.004. The issuance was an isolated transaction not involving a public offering pursuant to Section 4(2) of the Securities Act of 1933.

 

During the six months period ended September 30, 2015 the Company issued the following shares:

 

On April 2, 2015 we issued 300,000 shares of our Common Stock to our directors for their services. The shares were valued at $12,000 or $0.04 per share and were valued based on the midpoint between the closing bid and offer price of the Company's common stock on the date the shares were issued.

 

On June 25, 2015, the Company issued 650,000 shares of Common Stock, paid $5,000 in cash and issued a $5,000 promissory note for settlement of an account payable of $280,972.06. The shares were valued at $26,000 or $0.04 per share. The value of the shares was based on the closing bid price of the Company's common stock on the date the Agreement was executed by the Company. $244,972 was treated as a gain from this transaction.

 

Warrants

 

There are no warrants outstanding as of September 30, 2015 and March 31, 2015.

 

NOTE 12: TECHNOLOGY LICENSE AGREEMENTS

 

On December 1, 2014, the Company entered into an exclusive license agreement for anti-corrosion technology from Ronald Knight in exchange for three hundred thousand (300,000) shares of our common stock. This license calls for an earned royalty of three percent (3.00%) on sales of licensed products and services as they may relate to corrosion prevention and maintenance of sump pumps at gasoline and diesel dispensing locations, including, but not limited to gas stations, convenience stores, trucking companies, bus companies, and any other locations where gasoline and/or diesel is dispensed. We did not have any revenue for the period from December 1, 2014 through September 30, 2015.

 

On June 1, 2015, the Company entered into a technology license agreement with AFS Holdings, Inc related to the anti-corrosion technology mentioned in the paragraph above. Under the terms of the agreement, the AFS shall pay to the Company. $300,000 no later than December 31, 2015 together with 5% of the gross receipts received by the AFS for the use of the licensed technology. As of September 30, 2015, the license fee of $300,000 has not been paid. 

 

NOTE 13: EARNINGS (LOSS) PER SHARE

 

ASC 260-10-45 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. We have included the basic and diluted earnings per share (EPS) computation for the three and six months periods ended September 30, 2015.

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

 

Basic and diluted earnings per share for each of the periods presented is calculated as follows:
			For the  six months ended September 30,				For the  six months ended September 30,
			2015				2014
			(Unaudited)				(Unaudited)
Net income (loss) attributable to Avalon Oil & Gas, Inc.		$	18,827			$	(218,992	)
Preferred stock dividends			(98,750	)			(80,973	)
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for basic earnings per share)			(79,923	)			(299,965	)
Dividend for Series A convertible preferred stock			—				—
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for diluted earnings per share)			(79,923	)			(299,965	)
Weighted average number of common shares outstanding - Basic			17,189,319				11,831,832
Effect of diluted securities:
Convertible amount of Common Shares			—				—
Weighted average number of common shares outstanding - Diluted			17,189,319				11,831,832
Loss per share- Basic and Diluted		$	(0.005	)		$	(0.025	)

 

		For the three months ended September 30,				For the three months ended September 30,
		2015				2014
		(Unaudited)				(Unaudited)
Net loss attributable to Avalon Oil & Gas, Inc.		$	(120,125	)		$	(116,374	)
Preferred stock dividends			(50,500	)			(40,596	)
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for basic earnings per share)			(170,625	)			(156,970	)
Dividend for Series A convertible preferred stock			—				—
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for diluted earnings per share)			(170,625	)			(156,970	)
Weighted average number of common shares outstanding - Basic			17,498,062				11,858,062
Effect of diluted securities:
Convertible amount of Common Shares			—				—
Weighted average number of common shares outstanding - Diluted			17,498,062				11,858,062
Loss per share- Basic and Diluted		$	(0.010	)		$	(0.013	)

 

 

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

For the three months end September 30, 2015, the diluted earnings per share calculation did not include the effect of the shares resulted from assumed conversion of the Series A convertible preferred stock and the shares convertible from convertible notes payable with the principal amount of $164,300 and the related accrued interest, because the effect is anti-dilutive, as the Company incurred a loss during the periods.

 

For the three months end September 30, 2014, the diluted earnings per share calculation did not include the effect of the shares resulted from assumed conversion of the Series A convertible preferred stock and the shares convertible from convertible note payable with the principal amount of $489,750 and the related accrued, because the effect is anti-dilutive, as the Company incurred a loss during the periods.

 

 

For the six months end September 30, 2015, the diluted earnings per share calculation did not include the effect of the shares resulted from assumed conversion of the Series A convertible preferred stock and the shares convertible from convertible notes payable with the principal amount of $164,300 and the related accrued interest, because the effect is anti-dilutive, as the Company incurred a loss during the periods.

 

For the six months end September 30, 2014, the diluted earnings per share calculation did not include the effect of the shares resulted from assumed conversion of the Series A convertible preferred stock and the shares convertible from convertible note payable with the principal amount of $489,750 and the related accrued interest, because the effect is anti-dilutive, as the Company incurred a loss during the periods.

 

 

NOTE 14: 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 15: SUBSEQUENT EVENTS

 

On October 5, 2015, AFS amended its Articles of Incorporation authorizing the issuance of 250,000,000 shares of common stock, par value $0.001.

 

On October 19, 2015, AFS issued 30,000 common shares for legal services, valued at $120 (based on the estimated fair value of the stock on the date of grant).

On October 23, 2015, AFS Holdings, Inc., a subsidiary of the Company, filed a registration statement on Form S-1 with the Securities and Exchange Commission, in order to register shares to be sold by AFS Holdings, Inc. AFS Holdings, Inc. has not yet received comments on the registration statement.

 

The Company has evaluated subsequent events through the issuance of the consolidated financial statements and other than as listed above, no subsequent event is identified.

 

  

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

 

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.

 

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 filed an amendment with the Nevada Secretary of State on April 10, 2013, 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 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.

 

On March 19, 2014, the Company formed Weyer Partners, LLC, (“Weyer”) a one hundred percent (100%) wholly owned Minnesota Corporation. Weyer Partners, LLC, was formed to operate oil and gas properties in Oklahoma and Texas. Weyer is consolidated in these financial statements.

 

On May 9, 2014, the Company formed AFS Holdings, Inc., (“AFS”) a Nevada Corporation. As of September 30, 2015, the Company currently owns 96.8% of the outstanding common shares of AFS Holding, Inc. AFS was formed to leverage the Company’s relationship with IP TechEx, and market technology licensed from IP TechEx. AFS is consolidated in these financial statements.

 

 

On October 5, 2015, the Articles of Incorporation of AFS were amended. Pursuant to the amended articles of incorporation, AFS is authorized to issue 250,000,000 shares of common stock, each having a par value of $0.001, with each share of common stock entitled to one vote for all matters on which a shareholder vote is required or requested. AFS was also authorized to issue 5,000,000 shares of Preferred Stock, of which 1,000 shares are designated as Series A Preferred Stock.

 

On October 23, 2015, AFS filed a registration statement on Form S-1 with the Securities and Exchange Commission, in order to register shares to be sold by AFS. AFS has not yet received comments on the registration statement.

 

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. 

 

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

 

During the year ended March 31, 2013, 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, if the Seller is not able to deliver clear title to these properties these funds will be returned to us.

 

On July 1, 2013, the Company acquired a fifty percent (50%) working interest in the Moody and West Lease, Duval County, Texas.

 

On October 10, 2013, the Company entered into a Technology Scouting Agreement with IP Technology Exchange, Inc. ("IP TechEx"), to identify potential technology acquisition and licensing opportunities.  Our alliance with IP TechEx will enable us to develop a portfolio of new technologies within the oil and gas industry.

 

On March 19, 2014, the Company formed Weyer Partners, LLC, a one hundred percent (100%) wholly owned Minnesota Corporation. Weyer Partners, LLC, was formed to operate oil and gas properties in Oklahoma and Texas.

 

On May 9, 2014, the Company formed AFS Holdings, Inc., (“AFS”) a Nevada Corporation. As of September 30, 2015, the Company owns 96.8% of the outstanding common shares of AFS Holding, Inc. AFS was formed to leverage the Company’s relationship with IP TechEx, and market technology licensed from IP TechEx. 

 

On September 29, 2014 the Company acquired the assets of Kensington Energy Limited Partnership – 1985, Kensington Energy Limited Partnership – 1986, Kensington Energy Limited Partnership – 1987, Kensington Energy Company, Kensington Group Venture Kensington Group Venture I, Kensington Group Venture II, and Kensington Group Venture III for a combination of cash and debt.

 

On December 1, 2014, the Company acquired a license for proprietary products and solutions to prevent corrosion on new sump equipment and sump equipment currently in use. These proprietary products can be used on new or used sump equipment and will substantially minimize corrosion.

 

On December 15, 2014, the Company renewed its Technology Scouting Agreement with IP TechEx for an additional three (3) years.

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 

 

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 March 29, 2007, The Company 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 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. We are working with IP Technology Exchange, Inc. to market this intellectual property.

 

On October 10, 2013, the Company entered into a Technology Scouting Agreement with IP Technology Exchange, Inc. ("IP TechEx"), to identify potential technology acquisition and licensing opportunities.  Our alliance with IP TechEx will enable us to develop a portfolio of new technologies within the oil and gas industry.

 

On December 1, 2014, the Company acquired a license for proprietary products and solutions to prevent corrosion on new sump equipment and sump equipment currently in use. These proprietary products can be used on new or used sump equipment and will substantially minimize corrosion.

 

On December 15, 2014, the Company renewed its Technology Scouting Agreement with IP TechEx for an additional three (3) years.

 

GOING CONCERN

 

The September 30, 2015, consolidated financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $30,978,796 from inception through September 30, 2015, and has a working capital deficiency of $115,661 and stockholders’ equity of $1,898,229 as of September 30, 2015. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. 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. 

 

 

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 six month periods ended September 30, 2015 compared to the three and six month periods ended September 30, 2014:

 

Revenues

 

Revenues for the three months ended September 30, 2015 were $15,373, a decrease of $23,060 or approximately 60% compared to revenue of $38,433 for the three months ended September 30, 2014.  Revenues decreased as a result of a lower market price of oil and natural gas.

 

Revenues for the six months ended September 30, 2015 were $23,904, an decrease of $39,030 or approximately 62% compared to revenue of $62,934 for the six months ended September 30, 2014.  Revenues decreased as a result of a lower market price of oil and natural gas.

 

Lease Operating Expenses

 

During the three months ended September 30, 2015, our lease operating expenses were $16,359, a decrease of $2,887 or approximately 15% compared to $19,246 for the three months ended September 30, 2013.  The decrease was due to less operating expenses incurred on the Company's properties in Miller County, Arkansas.

 

During the six months ended September 30, 2015, our lease operating expenses were $26,906, a decrease of $11,887 or approximately 31% compared to $38,793 for the six months ended September 30, 2014. The decrease was due to less operating expenses incurred on the Company's properties in Miller County, Arkansas.

 

Selling, General, and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended September 30, 2015 were $89,702, an decrease of $14,542 or approximately 14% compared to selling, general and administrative expenses of $104,244 during the three months ended September 30, 2014.   Selling, general and administrative expenses for the three months ended September 30, 2015 consisted primarily of payroll and related costs of $12,000; legal and accounting fees in the amount of $40,000; travel and entertainment expenses of $9,884; office expenses of $23,186; facilities costs in the amount of $3,000; and investor relations costs of $1,632.

 

Selling, general and administrative expenses for the six months ended September 30, 2015 were $163,755, a decrease of $13,925 or approximately 8% compared to selling, general and administrative expenses of $177,680 during the six months ended September 30, 2014.   Selling, general and administrative expenses for the six months ended September 30, 2015 consisted primarily of payroll and related costs of $24,000; legal and accounting fees in the amount of $56,400; travel and entertainment expenses of $38,060; office expenses of $36,555; facilities costs in the amount of $6,000; and investor relations costs of $2,740.

 

Stock Based Compensation

 

There was $8,333 non-cash compensation for the three months ended September 30, 2015 compared to $-0- for the three month period ended September 30, 2014.

 

 

Non-cash compensation for the six months ended September 30, 2015 was $28,666, compared to non-cash compensation of $14,000 for the six months ended September 30, 2014, or an increase of $14,666 or 105%.  This increase was due to common stock issuances for consulting and director services rendered during the six month period ended September 30, 2015. 

 

Depreciation, Depletion, and Amortization

 

Depreciation, Depletion, and Amortization was $17,088 for the three months ended September 30, 2015, an decrease of $3,512 or approximately 17% compared to $20,600 for the three months ended September 30, 2014.  Depletion decreased as a result of lower production of oil and natural gas.

 

Depreciation, Depletion, and Amortization was $31,656 for the six months ended September 30, 2015, a decrease of $8,576 or approximately 21% compared to $40,232 for the six months ended September 30, 2014. Depletion decreased as a result of lower production of oil and natural gas.

 

Interest Expense, net of Interest Income

 

Interest expense, net of interest expense was $4,016 for the three months ended September 30, 2015, a decrease of $6,701, or approximately 63% compared to $10,717 for the three months ended September 30, 2014. The decrease was due to a reduction in notes payable.

 

Interest income, net of interest expense was $934 for the six months ended September 30, 2015, an increase of $22,255 or approximately 104% compared to interest expense of $21,321 for the six months ended September 30, 2013. The increase was due to the forgiveness of interest on a promissory note payable.

 

Net Income (Loss)

 

Our net loss for the three months ended September 30, 2015, was $120,125 an increase of $3,751 or approximately 3% compared to a net loss of $116,374, during the three months ended September 30, 2014.

 

Our net income for the six months ended September 30, 2015, was $18,827 an increase of $237,819 or approximately 109% compared to a net loss of $218,992, during the six months ended September 30, 2014. The increase was due to a gain from the settlement of accounts payable and forgiveness of interest promissory note payable.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The September 30, 2015, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $30,978,796 from inception through September 30, 2015, and has a working capital of $115,661 and stockholders’ equity of $1,898,229 as of September 30, 2015. 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 $175,488 on September 30, 2015, compared to $135,713 on March 31, 2015. We met our liquidity needs through the issuance of our common and preferred stock 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 obtained, 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.

 

Investing activities

 

During the six months ended September 30, 2015, we received $714 in principal payments on a note receivable compared to a net investment of $113,572 during the six months ended September 30, 2014

 

Financing Activities

 

During six months ended September 30, 2015, the Company received $175,000 from the sale of preferred stock and our subsidiary AFS, Inc. received $50,000 from the sale of preferred stock totaling $225,000, paid $5,000 of principal on a note payable and paid dividends on preferred stock of $21,500. During six months ended September 30, 2014, we received $175,000 from the sale of preferred stock, received $60,000 from a note payable and paid dividends on preferred stock of $41,500.

 

Operating activities

 

Our net loss for the three months ended September 30, 2015, was $120,125 an increase of $3,751 or approximately 3% compared to a net loss of $116,374, during the three months ended September 30, 2014.

 

Our net income for the six months ended September 30, 2015, was $18,827 an increase of $237,819 or approximately 109% compared to a net loss of $218,992, during the six months ended September 30, 2014. The increase was due to a gain from the settlement of accounts payable and forgiveness of interest promissory note payable.

 

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 Pronouncements

 

Management does not believe that any recently issued, but not yet effective, accounting standards or pronouncements, if currently adopted, would have a material effect on the Company’s condensed consolidated financial statements.

 

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

 

During the six months period ended September 30, 2015, the Company issued 250 shares of Preferred Stock as follows:

 

175 shares of Avalon Series B Preferred Stock, to an accredited investor for $175,000 in cash.

 

25 shares of Avalon Series B Preferred Stock to an accredited investor in exchange of a $25,000 promissory note.

 

50 Shares of The Company’s subsidiary AFS Holdings, Inc. Series A Preferred Stock, to an accredited investor for $50,000 for cash.

 

During the six months period ended September 30, 2015, the Company issued 950,000 shares of Common Stock, as follows:

 

We issued 650,000 shares of our common stock, paid $5,000 in cash and issued a $5,000 promissory note to settle an account payable of $280,972.06. The common stock was valued at $.04 per share, and was based on the closing bid price.

 

We issued 300,000 shares of our common stock to our Director’s for services rendered. The 300,000 shares were valued at $0.04 shares or $12,000. The price was based on the closing bid price of the Company’s Common Stock on the date that shares were granted to the Directors.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

N/A

 

ITEM 5. OTHER INFORMATION

 

None.

 

 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Form 8-K

 

NONE 

 

(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 to Registration Statement on Form SB-2, Registration No. 33-74240C). *
10.1		Employment Agreement between the Company and Kent Rodriguez dated April 1, 2011 *
10.2		Promissory Note between the Company and Peter Messerli  dated January 6, 2011, in the amount of $200.000 *
10.3		Promissory Note between the Company and Maerki Baumann & Company AG dated January 11, 2011, in the amount of $250,000  *
10.4		Promissory Note between the Company and Maerki Baumann & Company AG dated January 27, 2012, in the amount of $200,000 *
10.5		Certificate of Designation Series B Preferred Stock*
31.1		Certification
32.1		Certification

____________

 

* 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: November 22, 2015	By:	/s/ Kent Rodriguez
		Kent Rodriguez
		Chief Executive Officer
		Chief Financial and Accounting Officer