U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2006
Commission file number: 1-12850
Avalon Oil & Gas, Inc.
--------------------------------------------------
(Exact name of small business issuer in its charter)
7000 Flour Exchange Building
310 Fourth Avenue South
MINNEAPOLIS, MINNESOTA 55415
(Address of principal executive offices)
Incorporated under the laws of 84-1168832
the State of Nevada I.R.S .Identification Number
Small Business Issuer's telephone number including area code: (612) 359-9020
Indicate by check mark whether the Company (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes: X No:
------- ------
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes: No: X
----- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the Company's classes of
common equity, as of the latest practicable date: 267,875,770 common stock, par
value $0.001, issued and outstanding as of August 21, 2006.
Transitional Small Business Disclosure Format: Yes: X No:
----- -----
Avalon Oil & Gas, Inc.
FORM 10-QSB QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2006
INDEX
Part I: FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed balance sheet, June 30, 2006 (unaudited)..................... 4
Condensed statements of operations for the three months
ended June 30, 2006 and 2005 (unaudited)............................ 5
Condensed statements of cash flows for the three months
ended June 30, 2006 and 2005 (unaudited)............................ 6
Notes to condensed financial statements (unaudited).................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 14
Item 3. Controls and Procedures............................................ 15
Part II: OTHER INFORMATION................................................. 17
Item 1. Legal Proceedings................................................... 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......... 17
Item 3. Defaults Upon Senior Securities..................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................. 18
Item 5. Other Information................................................... 18
2
References in this document to "us," "we," "the Registrant" or "the Company"
refer to Avalon Oil & Gas, Inc., and its predecessors.
This report contains "forward-looking" statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are based on
certain assumptions and describe future plans, strategies and expectations of
the Company. They are generally identifiable by use of the words "believe",
"expect", "intend", "anticipate", "estimate", "project" or similar expressions.
These statements are not guarantees of future performance, events or results and
involve potential risks and uncertainties. Accordingly, actual performance,
events or results may differ materially from such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from current
expectations include, but are not limited to, changes in general economic
conditions, changes in interest rates, legislative and regulatory changes, the
unavailability of equity and debt financing, unanticipated costs associated with
our potential acquisitions, expanding a new line of business, ability to meet
competition, loss of existing key personnel, ability to hire and retain future
personnel, our failure to manage our growth effectively and the other risks
identified in this filing or other reports of the Company filed with the U.S.
Securities and Exchange Commission. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning us and our
business, including additional factors that could materially affect our
financial results, is included in our other filings with the U.S. Securities and
Exchange Commission.
3
PART I
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures required under accounting
principles generally accepted in the United states of America have been
condensed or omitted from the following consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission.
It is suggested that the following condensed consolidated financial statements
be read in conjunction with the year-end consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended March 31, 2006.
The results of operations for the three month period ended June 30, 2006, are
not necessarily indicative of the results to be expected for the entire fiscal
year or for any other period.
AVALON OIL AND GAS, INC.
CONDENSED BALANCE SHEET
June 30, 2006
(Unaudited)
Assets
Current Assets:
Cash $ 921,294
------------
Total Current Assets 921,294
------------
Property and equipment, net of depreciaiton of $151 1,225
Oil and Gas Properties 410,000
------------
$ 1,332,519
============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable:
Accounts payable, related party $ 21,688
Accounts payable, other 22,788
Notes Payable - related party, net of loan
discount of $66,667 33,333
Accrued liabilities 68,500
------------
Total current liabilities 146,309
------------
Commitments and contingencies --
Shareholders' equity:
Preferred stock, Series A. $0.10 par value,
1,000,000 shares authorized, 100 shares
issued and outstanding 500,000
Common stock, $0.001 par vlaue, 1,000,000,000 shares
authorized, 243,041,333 shares issued and outstanding 243,042
Additional paid-in capital 17,937,099
Stock subscription receivable (866,500)
Accumulated (deficit) (16,627,431)
------------
Total shareholders' equity 1,186,210
------------
$ 1,332,519
============
See accompanying notes to condensed financial statements
4
AVALON OIL AND GAS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended,
June 30,
----------------------------------------
2006 2005
------------- -------------
Operating expenses:
Selling, general and administrative expenses $ 104,939 $ 31,193
Stock-based compensation 712,891 10,000
Depreciation 99 --
------------- -------------
Total operating expenses 817,929 41,193
------------- -------------
(Loss) from operations (817,929) (41,193)
Other Income (Expenses)
Interest expense:
Related party (33,333) (5,749)
Other -- (335)
------------- -------------
(Loss) from Continuing Operations before
Income Taxes (851,262) (47,277)
Provision (benefit) for income taxes -- --
------------- -------------
Net loss (851,262) (47,277)
Preferred Stock Dividend (10,000) (16,667)
------------- -------------
Loss attributable to common stock
after preferred stock dividends $ (861,262) $ (63,944)
============= =============
Basic and diluted loss per common share $ (0.01) $ (0.00)
============= =============
Basic and diluted weighted average
common shares outstanding 133,697,679 82,505,210
============= =============
See accompanying notes to condensed financial statements.
5
AVALON OIL AND GAS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unudited)
Three months ended
June 30,
---------------------------------
2006 2005
----------- -----------
Cash flows from operating activities
Net (loss) $ (851,262) $ (47,277)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation 99 --
Amortization of loan discount to interest expense 33,333 --
Stock-based compensation 712,891 10,000
Increase (decrease) in operating liabilities:
Accounts payable and other accrued expenses 2,865 29,413
----------- -----------
Net cash provided (used) in operating activities (102,074) (7,864)
----------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (130,000) --
----------- -----------
Net cash (used) in investing activities (130,000) --
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 1,029,550 --
Syndication fees paid (20,000)
Proceeds from issuance of note payable 100,000 8,000
----------- -----------
Net cash provided by financing activities 1,109,550 8,000
----------- -----------
Net increase (decrease) in cash
and cash equivalents 877,476 136
Cash and cash equivalents, 43,818 51
----------- -----------
Beginning of period
Cash and cash equivalents,
End of period $ 921,294 $ 187
=========== ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ -- $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash investing and financing transactions:
Common stock issued as payment for debt and
accrued interest $ -- $ 252,956
=========== ===========
Common stock issued in exchange for consulting services $ 675,556 $ --
=========== ===========
Warrants issued in exchange for services $ 4,148 $ --
=========== ===========
Warrants issued in exchange for directors' fees $ 33,187 $ --
=========== ===========
Common stock issued for in exchange for oil and
gas properties $ 280,000 $ --
=========== ===========
See accompanying notes to condensed financial statements.
6
AVALON OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is currently in the process of raising funds to acquire oil and gas
properties.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Basis of Accounting
The Company's financial statements are prepared using the accrual method of
accounting. Revenues are recognized when earned and expenses when incurred.
Cash Equivalents
Cash and cash equivalents consist primarily of cash on deposit, certificates of
deposit, money market accounts, and investment grade commercial paper that are
readily convertible into cash and purchased with original maturities of three
months or less. The Company maintains its cash balances at several financial
institutions. Accounts at the institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000. At June 30, 2006 the Company's cash
balances are $821,294 in excess of this amount.
Fair Value of Financial Instruments
The Company's financial instruments are cash and cash equivalents, accounts
receivable, accounts payable, notes payable, and long-term debt. The recorded
values of cash and cash equivalents, accounts receivable, and accounts payable
approximate their fair values based on their short-term nature. The recorded
values of notes payable and long-term debt approximate their fair values, as
interest approximates market rates.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions
and improvements are capitalized, and minor replacements, maintenance, and
repairs are charged to expense as incurred. When property and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the
results of operations for the respective period. Depreciation is provided over
the estimated useful lives of the related assets using the straight-line method
for financial statement purposes. The Company uses other depreciation methods
(generally accelerated) for tax purposes where appropriate. The estimated useful
lives for significant property and equipment categories are as follows:
Machinery and equipment 5 years
Common Stock Issued For Services
In accordance with the requirements of SEC Staff Accounting Bulletin ("SAB")D-90
"Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments
Granted to Non Employees, unvested, forfeitable equity instruments granted to
non employees are treated as not issued for accounting purposes until the
issuing entity has received consideration for it and the condition is thus
satisfied. As of June 30, 2006 there were 24,444,437 shares issued to non
7
employees valued at $700,555 for which services had not been provided. These
shares were not shown as issued for financial reporting purposes.
Warrants
The value of warrants issued is recorded at their fair value as determined by
use of a Black Sholes Model at such time or over such periods as the warrants
vest.
Earnings per Common Share
Statement of Financial Accounting Standards ("SFAS") 128, Earnings Per Share,
requires presentation of "basic" and "diluted" earnings per share on the face of
the statements of operations for all entities with complex capital structures.
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted during the period.
Dilutive securities having an antidilutive effect on diluted earnings per share
are excluded from the calculation.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Recently Issued Accounting Standards
In December 2004, the FASB issued a revision of SFAS No. 123, "Share-Based
Payment". The statement establishes standards for the accounting for
transactions in which an entity exchanges its equity investments for goods and
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. The statement does not change the accounting guidance for
share-based payments with parties other than employees. The statement is
effective for the quarter beginning January 1, 2006. The Company does not expect
this statement to have a material effect on its reporting.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets-amendment of APB Opinion No. 29". Statement 153 eliminates the exception
to fair value for exchanges of similar productive assets and replaces it with a
general exception for exchanged transactions that do not have a commercial
substance, defined as transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. This statement is
effective for exchanges of non-monetary assets occurring after September 15,
2005. The Company does not expect this statement to have a material effect on
its reporting.
8
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3".
Statement 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does
not expect this statement to have a material effect on its reporting.
Recently adopted FASB No. 155 "Accounting for Certain Hybrid Financial
Instruments - An Amendment of FASB Statements No. 133 and 140" and FASB No. 156
"Accounting for Servicing of Financial Assets - An Amendment of FASB 140" have
no implications for the Company and are not expected to affect its reporting.
Recently adopted FASB No. 156 "Accounting for Servicing of Financial Assets - An
amendment of FASB Staements No. 140" has no implications for the Company and is
not expected to affect its reporting.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
Note 2: Related Party Transactions
Accounts Payable
As of June 30, 2006, the Company owed an officer $21,688 for general and
administrative expenses paid on behalf of the Company. This liability is
included in the accompanying financial statements as "Accounts payable, related
party". This payable does not bear interest and is due on demand.
Promissory Notes
On May 8, 2006, a shareholder loaned the Company $100,000 for working capital in
exchange for a promissory note. The note carries a 10% interest rate and matures
on November 8, 2006. The note holder has the right to convert the note and
accrued interest at the rate of $0.01 per share. The value of this conversion
feature was treated as a loan discount for the full $100,000 of the loan and is
being amortized to interest expense over the life of the loan. Amortization of
$33,333 was included in interest expense for the three months ended June 30,
2006.
9
Preferred Stock
The 100 shares of Series A Preferred Stock, issued to an officer/director as
payment for $500,000 in promissory notes, are convertible into the number of
shares of common stock sufficient to represent 40 percent (40%) of the fully
diluted shares outstanding after their issuance. The Series A Preferred Stock
pays an eight percent (8%) dividends. 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 ended June 30, 2006, the Company incurred $10,000 in
preferred stock dividends of which are reflected in accrued dividends.
The holders of the Series A Preferred Stock have the right to convert all shares
of preferred stock into a sufficient number of shares of common stock to equal
40% of the then fully-diluted shares outstanding. Fully diluted shares
outstanding is computed as the sum of the number of shares of common stock
outstanding plus the number of shares of common stock issuable upon exerciser,
conversion or exchange of outstanding options, warrants, or convertible
securities.
Stock-Based Compensation
During the three months ended June 30, 2006, the Company issued its directors
five year warrants for the purchase of 2,000,000 shares of common stock at an
exercise price of $.025 per share for directors' fees. The transactions were
recorded at the fair value of the warrants using a Black Sholes pricing model.
The services, valued at $33,187, are included in the accompanying financial
statements as "Stock-based compensation". No warrants were issued to directors
during the comparable period in 2005.
During the three months ended June 30, 2006 and 2005, 24,682,538 and 1,000,000
shares of those shares valued at $675,556 and $10,000, respectively, were earned
and included in the accompanying financial statements as "Stock-based
compensation". As of June 30, 2006 in accordance with the requirements of SAB
D-90 "Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity
Instruments Granted to Non Employees", 24,444,437 shares were excluded from
shares outstanding along with unearned compensation of $700,555.
During the three months ended June 30, 2006, the Company issued to a web site
developer five year warrants for the purchase of 250,000 shares of common stock
at an exercise price of $.025 per share. These warrants were valued at $4,148
using a Black Sholes pricing model and were included in stock-based compensation
expense. No such warrants were issued for the comparable period in 2005.
Note 3: Property Acquisitions
On April 18, 2006, the Company purchased a fifty percent (50%) working interest
in a 266.73-acre oil and gas lease in Starr County, Texas, from Canyon Oil and
Gas, Inc. for $75,000 in cash and 7,500,000 shares of the Company's common Stock
valued at $262,500.
On June 15, 2006, the Company acquired a fifty percent (50%) working interest in
the J.C. Kelly wellbore, a 121.9 acre lease in Wood County, Texas, in addition
to the E.A. Chance #1 and #2 wellbores, a 40 acre lease in Camp County, Texas
and all of the surface equipment for the properties, from KROG Partners LLC.,
for $50,000 in cash and 500,000 shares of The Company's Common Stock valued at
$17,500.
Note 4: Income Taxes
At March 31, 2006, the Company had accumulated a net operating loss of
approximately $21,500,000 (including pre-reorganization), which may be used to
reduce future taxable income through 2026. A valuation allowance has been
recognized to completely reserve for the deferred tax assets related to the loss
10
carryforwards. The reserve has been established because of the uncertainty of
future taxable income, which is necessary in order to realize the benefits of
the net operating loss carryforwards. Any tax benefits realized in the future
from pre-confirmation operating loss carryforwards will be reported as a direct
addition to additional paid-in capital. The Company's ability to utilize these
carryforwards to offset future taxable income is subject to restrictions under
Section 382 of the Internal Revenue Code due to certain changes in the equity
ownership of the Company. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. Components
of the Company's deferred tax assets are:
Deferred tax assets from net operating
loss carryforwards $ 8,671,350
Less: Valuation allowance $(8,671,350)
-----------
Net Deferred tax asset $ --
===========
A reconciliation of the provision for (benefit from) income taxes with amounts
determined by applying the statutory U.S federal income tax rates to income
before income taxes is as follows:
Year Ended March 31,
----------------------
2006 2005
--------- ---------
Tax (benefit) at Federal Statutory rate $(168,600) $ (72,200)
Tax (benefit)- state (24,800) (10,600)
Valuation allowance 193,400 82,800
--------- ---------
Effective provision (benefit) for taxes $ -- $ --
========= =========
Note 5: Shareholders' Equity
In December 2005, the Company issued 10,000,000 shares of common stock in
exchange for consulting services. The value of the stock issued, $0.01 per share
was recorded at fair value based on other cash sales of restricted stock. Of the
$190,000 in services $63,333 was expensed in the year ended March 31, 2006.
During the three months ended June 30, 2006, $47,500 was included in
"Stock-based compensation" with the balance not shown as issued until services
are rendered.
In January 2006, the Company issued 20,000,000 shares of common stock in
exchange for consulting services. The value of the stock issued, $0.01 per share
was recorded at fair value based on other cash sales of restricted stock. Of the
$224,000 in services $102,667 was expensed in the year ended March 31, 2006.
During the three months ended June 30, 2006, $65,333 was included in
"Stock-based compensation" with balance not shown as issued until services are
rendered.
In March 2006, the Company issued 11,000,000 shares of common stock in exchange
for consulting services. The value of the stock issued was recorded at fair
value of $427,000, $37,000 of which was expensed in the year ended March 31,
2006. During the three months ended June 30, 2006, $116,000 was included in
"Stock-based compensation" With the balance not shown as issued until services
are rendered.
11
On April 18, 2006, the Company authorized the issuance of 2,700,000 shares of
common stock for consulting services. These shares were recorded at their
estimated fair market value at the dates of issuance for a total of $91,800.
On May 1, 2006, the Company granted to its directors warrants to purchase
2,000,000 shares of common stock at a price of $0.025 per share for director
services. These warrants expire on May 1, 2011. These warrants were recorded at
their fair market value of $33,187 as determined by the use of a Black Sholes
pricing model.
On May 15, 2006, the Company entered into a strategic alliance agreement with
UTEK Corporation for consulting services. The Company issued 693,642 share of
common stock in connection with this agreement. The value of the stock issued,
$0.035 per share was recorded at fair value based on other cash sales of
restricted stock. Of the $24,277 in services, $3,034 was included in
"Stock-based compensation" with the balance not shown as issued until services
are rendered.
On May 24, 2006, the Company entered into an agreement with a third party to
issue 10,000,000 shares for consulting services and the assumption of $34,500
in debt for an issuance price of $0.035 per share or $350,000 as 985,714 shares
have been reflected in stock subscription receivable until the liabilities have
been paid by the third party.
On June 1, 2006, the Company executed a six-month consulting agreement with a
Consultant and issued 300,000 share of common stock as compensation.
On June 8, 2006 the Company granted warrants to purchase 250,000 shares at a
price of $0.025 per share for website design and maintenance services. These
warrants expire on June 8, 2011.
During the three months ended June 30, 2006, the Company issued 27,393,582
shares of common stock to accredited and exemption (Regulation S) investors at
issuance prices ranging from $0.0347 to $0.05 per share for total consideration
of $1,029,550.
Information with respect to stock warrants outstanding is follows:
Exercise Outstanding Expired or Outstanding Expiration
Price March 31, 2005 Granted Exercised March 31, 2006 Date
----- -------------- ------- --------- -------------- ----
Warrants:
$0.01 2,500,000 -0- -0- 2,500,000 12/8/2012
$0.01 2,000,000 -0- -0- 2,000,000 3/31/2011
$0.03 3,000,000 -0- -0- 3,000,000 3/6/2013
$0.025 -0- 2,000,000 -0- 2,000,000 5/1/2011
$0.025 -0- 250,000 -0- 250,000 6/8/2011
Note 6: Stock Purchase Agreement
On October 14, 2005, the Company entered into a stock purchase agreement with
two investor groups. The investors agreed to purchase a total of 32,000,000
shares of the Company's common stock for a total consideration of $832,000. As
of June 30, 2006, the capital contribution had not been received and the stock
was held in escrow pending receipt of the funds by the Company. The Company has
requested the escrow agent return the shares to the Company. Upon receipt of
these shares, The Company will forward the shares to our transfer agent for
cancellation. The subscription price for these shares is reflected in stock
subscription receivables as of June 30, 2006.
12
Note 7: Earnings Per Share
SFAS 128 requires a reconciliation of the numerator and denominator of the basic
and diluted earnings per share (EPS) computations. The following securities were
not included in the calculation of diluted earnings per share because their
effect was antidilutive.
For the three months ended June 30, 2006, 24,444,437 shares that were issued for
services not yet rendered have been not recorded in the financial statements.
These shares will be recognized when services are rendered.
For the three months ended June 30, 2006 and 2005, dilutive shares do not
include outstanding warrants to purchase 4,500,000 shares of common stock at an
exercise price of $0.01; 3,000,000 shares of common stock at an exercise price
of $0.03 and 2,250,000 share of common stock at an exercise price of $0.025
because the effects were antidilutive. Diluted shares does not include shares
issuable to the preferred shareholders pursuant to their right to convert
preferred stock into sufficient common shares sufficient to equal 40% of the
post conversion outstanding shares as the effect would be antidilutive.
The following reconciles the components of the EPS computation:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
For the three months ended June 30, 2006:
Net loss $ (851,262)
Preferred stock dividends (10,000)
-----------
Basic EPS loss available to
common shareholders $ (861,262) 133,697,679 $ (0.01)
Effect of dilutive securities:
None -- --
----------- -----------
Diluted EPS loss available to
common shareholders $ (861,262) 133,697,679 $ (0.01)
=========== =========== ========
For the three months ended June 30, 2005:
Net loss $ (47,277)
Preferred stock dividends (16,667)
-----------
Basic EPS loss available to
common shareholders $ (63,944) 82,505,210 $ (0.00)
--------
Effect of dilutive securities:
None -- --
----------- -----------
Diluted EPS loss available to
common shareholders $ (47,277) 82,505,210 $ (0.00)
=========== =========== ========
13
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 sold proprietary snow skates under the name
"Sled Dogs" which was dissolved in August 1992. In late 1993, we relocated our
operations to Minnesota and in January 1994 changed our name to Snow Runner,
Inc. In November 1994 we changed our name to the Sled Dogs Company. On November
5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
In September 1998, we emerged from protection of Chapter 11 of the U.S.
Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and
our name to XDOGS.COM, Inc. In August 2000, we made a decision to re-focus to a
traditional wholesale to retail distributor, and obtained the exclusive North
American rights to distribute high-end European outdoor apparel and equipment.
We first intended to exploit these rights over the Internet under the name
XDOGS.COM, Inc. However, due to the general economic conditions and the ensuing
general downturn in e-commerce and internet-based businesses, we decided that to
best preserve our core assets we would need to adopt a more traditional
strategy. Thus, we abandoned this approach and to better reflect our new focus,
we changed our name to XDOGS, Inc. On July 22, 2005, the Board of Directors and
a majority of the Company's shareholders approved an amendment to our Articles
of Incorporation to change the Company's name to Avalon Oil & Gas, Inc., and to
increase the authorized number of shares of our common stock from 200,000,000
shares to 1,000,000,000 shares, par value of $0.001, and engage in the
acquisition of producing oil and gas properties.
Acquisition Strategy
We plan to acquire oil and gas producing properties with a combination of cash,
debt, and equity.
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We believe all of these properties will have proven reserves, generate immediate
cash flow, provide low risk, in-field drilling locations and expand production
within a proven oil and gas field. We will aggressively develop these low
cost/low risk properties and rapidly enhance shareholder value. In furtherance
of the foregoing strategy, we have recently engaged in the following
transactions:
On April 20, 2006, we acquired a fifty percent (50%) working interest in a
266.73-acre oil and gas lease in Starr County, Texas, from Canyon Creek Oil and
Gas, Inc., located in the Boyle Field. The 266.73 acre property has four shut-in
oil and gas wells, and ten potential drilling locations.
On June 15, 2006, we acquired a fifty percent (50%) working interest in the J.C.
Kelly wellbore, a 121.9 acre lease in Wood County, Texas, in addition to the
E.A. Chance #1 and #2 wellbores, a 40 acre lease in Camp County, Texas and all
of the surface equipment for the properties, from KROG Partners LLC.
On July 17, 2006 we acquired Ultrasonic Mitigation Technologies, Inc., ("UMTI")
a wholly owned subsidiary of UTEK Corporation (AMEX: UTK). UMTI holds the
exclusive worldwide license for the mitigation of paraffin wax deposition from
crude oil using ultrasonic waves. Varying ultrasonic transducers are positioned
in production tubing walls as a means to inhibit the wax from attaching to the
pipes. The use of this technology helps prevent precipitates from forming on
pipes, and also breaks wax bonds thereby increasing flow rates and production
efficiency. This technology was developed at the University of Wyoming by Dr.
Brian Towler.
On August 11, 2006, we jointly acquired an interest in three producing oil wells
located in Miller County, Arkansas. Our company and KROG Partners, LLC each
acquired a fifty percent (50%) working interest in the properties which consists
of the Dixon Heirs #1, Deltic Farms & Timer #1, and the Gunn #1. KROG Partners,
LLC will be the operator.
We plan to raise additional capital during the 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.
Financing Activities
We have been funding our obligations through the issuance of our Common Stock
for services rendered or for cash in private placements. The Company may seek
additional funds in the private or public equity or debt markets in order to
execute its plan of operation and business strategy. There can be no assurance
that we will be able to attract capital or obtain such financing when needed or
on acceptable terms in which case the Company's ability to execute its business
strategy will be impaired.
Operations for Quarter ended June 30, 2006
As of June 30, 2006, we had $921,294 cash and cash equivalents, total assets of
$1,332,519, and outstanding liabilities of $146,309. We did not generate any
revenues during the three month period ending June 30, 2006. During this period,
our selling, general, and administrative expenses were $104,939, our stock based
compensation was $712,891, and our interest expense was $33,333. We experienced
a net loss before income taxes of $851,262 for the three-month period ending
June 30, 2006.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $921,294 on June 30, 2006, compared to $187
on June 30, 2005. We met our liquidity needs through the issuance of our common
stock for cash.
During the period ended June 30, 2006, we borrowed $100,000 from a shareholder
of the Company. During the period ending June 30, 2006, we also sold 27,393,507
shares of the Company's common stock and received $1,029,550 in cash. We also
issued 8,000,000 shares of our common stock in exchange for oil and gas
properties, valued at $280,000.
We need to raise additional capital during the fiscal year, but currently have
not acquired sufficient additional funding. Our ability to continue operations
is highly dependent upon our ability to obtain immediate additional financing,
or generate revenues from our acquired oil and gas leasehold interest, and to
achieve profitability, none of which can be guaranteed. Unless additional
funding is located, it is highly unlikely that we can continue to operate. There
is no assurance that even with adequate financing or combined operations, we
will generate revenues and be profitable.
Ultimately, our success is dependent upon our ability to generate revenues from
our acquired oil and gas leasehold interests.
During the period ended June 30, 2006, we used $102,074 in operating activities
and raised $1,109,550 from financing activities.
Subsequent Events
We plan to raise additional capital during the current fiscal year, but
currently have not identified additional funding. Our ability to continue
operations is highly dependent upon our ability to obtain immediate additional
financing, or generate revenues from our acquired oil and gas leasehold
interests, none of which can be guaranteed. Unless additional funding is
identified, it is highly unlikely that we can continue to operate. There is no
assurance that even with adequate financing or combined operations, we will
generate revenues and be profitable.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, Kent Rodriguez, our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15b under the Securities Exchange Act of 1934. Based on his review of
our disclosure controls and procedures, Mr. Rodriguez has concluded that our
disclosure controls and procedures are effective in timely alerting him to
material information relating to us that is required to be included in our
periodic SEC filings (b) Changes in Internal Control over Financial reporting.
There were no significant changes in the internal controls or in other factors
that could significantly affect these controls after the evaluation date and the
date of this report.
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PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) The common stock described below has been issued during the period ended
June 30, 2006 without registration under the Securities Act. Unless otherwise
indicated, the shares were valued at the quoted market price of the shares on
the date of issuance.
On April 18, 2006, we authorized the issuance of 2,700,000 shares of common
stock for consulting services.
On May 1, 2006, we granted to our directors warrants to purchase 2,000,000
shares of common stock at a price of $0.025 per share for director services.
These warrants expire on May 1, 2011.
On May 15, 2006, we entered into a strategic alliance agreement with UTEK
Corporation for consulting services. We issued 693,642 share of common stock in
connection with this agreement. The value of the stock issued, $0.035 per share,
was recorded at fair value based on other cash sales of restricted stock. Of the
$24,277 in services, $3,034 was included in "stock-based compensation" with the
balance not shown as issued until services are rendered.
On May 24, 2006, we issued 10,000,000 shares of common stock to a corporation
for consulting services and assumption of $34,500 of accrued payroll taxes.
On June 1, 2006, we executed a six-month consulting agreement with a consultant
and issued 300,000 share of common stock as compensation.
On June 8, 2006, we granted warrants to purchase 250,000 shares at a price of
$0.025 per share for website design and maintenance services. These warrants
expire on June 8, 2011.
During the three months ended June 30, 2006, we issued 3,780,000 shares of
common stock to 7 accredited investors, at an average of approximately $0.05 per
share, pursuant to the exemptions afforded by Section 4(2) of the Securities Act
of 1933, as amended, for which we received total cash proceeds of $178,000.
On May 15, 2006, we entered into a Regulation S Stock Purchase agreement,
pursuant to the exemptions afforded by Regulation S of the Securities Act of
1933, as amended.
During the three months ended June 30, 2006, 23,613,585 shares of common stock
with cash proceeds of $851,550 were sold pursuant to the exemptions afforded by
Regulation S of the Securities Act of 1933, as amended.
(b) None.
(c) None.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES.
None.
17
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Form 8-K
1. Filed April 6, 2006, Completion of Acquisition of Assets, the Company
acquired a fifty percent (50%) working interest, in a 266.73-acre oil
and gas lease in Starr County, Texas, from Canyon Creek Oil and Gas,
Inc
(b) Exhibits
Exhibit
Number Description Page
- ------ ----------- ----
3.1 Restated Articles of Incorporation *
(Incorporated by reference to Exhibit 3.1
to Registration Statement on Form SB-2,
Registration No. 33-74240C).
3.2 Restated Bylaws (Incorporated by reference to *
Exhibit 3.2 to Registration Statement on Form
SB-2, Registration No. 33-74240C).
3.3 Articles of Incorporation for the State of *
Nevada. (Incorporated by reference to Exhibit
2.2 to Form 10-KSB filed February 2000)
3.4 Articles of Merger for the Colorado *
Corporation and the Nevada Corporation
(Incorporated by reference to Exhibit 3.4
to Form 10-KSB filed February 2000)
3.5 Bylaws of the Nevada Corporation *
(Incorporated by reference to Exhibit 3.5
to Form 10-KSB filed February 2000)
4.1 Specimen of Common Stock (Incorporated by *
reference to Exhibit 4.1 to Registration
Statement on Form SB-2, Registration No.
33-74240C).
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Exhibit
Number Description Page
- ------ ----------- ----
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 906 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Incorporated by reference to a previously filed exhibit or report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Avalon Oil & Gas, Inc.
By: /s/ Kent Rodriguez
- --------------------------------------
Date: August 21, 2006
Kent Rodriguez
Chief Executive Officer
Chief Financial and Accounting Officer
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