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 December 31, 2006
Commission file number: 1-12850
Avalon Oil & Gas, Inc.
----------------------
(Exact name of small business issuer in its charter)
7808 Creekridge Circle, Suite 105
MINNEAPOLIS, MINNESOTA 55439
----------------------------
(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: (952) 746-9652
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: 292,570,308 common stock, par
value $0.001, issued and outstanding as of February 14, 2007.
Transitional Small Business Disclosure Format: Yes: [X] No: [ ]
Avalon Oil & Gas, Inc.
FORM 10-QSB QUARTERLY REPORT FOR THE QUARTER ENDED DECEMBER 31, 2006
INDEX
Part I: FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Balance Sheet December 31, 2006 (unaudited)........................ 4
Condensed Statements of Operations for the Three Months and Nine months
ended December 31, 2006 and 2005 (unaudited)............................ 5
Condensed Statements of Cash Flows for the Nine Months
ended December 31, 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............................................... 19
Item 3. Controls and Procedures.............................................. 23
Part II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......... 23
Item 3. Defaults Upon Senior Securities...................................... 24
Item 4. Submission of Matters to a Vote of Security Holders.................. 24
Item 5. Other Information.................................................... 24
Item 6. Exhibits ........................................................... 25
Signature ................................................................... 26
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
------
AVALON OIL AND GAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31, 2006
Assets
Current Assets:
Cash and cash equivalents $ 1,126,204
Accounts receivable
Trade 4,270
Related party 30,559
Deposits 3,138
Notes reveivable 65,000
Prepaid expenses 18,089
------------
Total Current Assets 1,247,260
------------
Property and equipment
Equipment, net of depreciation of $613 8,726
Producing oil and gas properties, net of depletion of $14,400 608,557
------------
Total property and equipment 617,283
Intellectual property rights 817,350
------------
$ 2,681,893
============
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable: 26,817
Notes Payable - related party 100,000
Accrued ARO liability 29,665
Accrued liabilities 41,167
------------
Total current liabilities 197,649
------------
Commitments and contingencies --
Shareholders' equity:
Preferred stock, Series A. $0.10 par value, 1,000,000 shares
authorized, 100 shares issued and outstanding 10
Common stock, $0.001 par vlaue, 1,000,000,000 shares authorized,
283,476,621 shares issued and outstanding 283,477
Additional paid-in capital 20,037,154
Stock subscription receivable (34,500)
Accumulated (deficit) (17,801,897)
------------
Total shareholders' equity 2,484,244
------------
$ 2,681,893
============
4
AVALON OIL AND GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended, Nine months ended,
December 31, December 31,
------------------------------ ------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Oil and Gas Sales $ 20,723 $ -- $ 26,813 $ --
Operating expenses:
Lease operating expense 22,334 -- 27,658 --
Selling, general and administrative expenses 191,098 55,195 481,173 135,574
Stock-based compensation 283,814 16,667 1,418,537 32,667
Depreciation and depletion 14,764 -- 14,963 --
------------- ------------- ------------- -------------
Total operating expenses 512,010 71,862 1,942,331 168,241
------------- ------------- ------------- -------------
(Loss) from operations (491,287) (71,862) (1,915,518) (168,241)
Other Income (Expenses)
Interest income 10,920 -- 16,969 --
Interest expense:
Related party (40,512) -- (107,179) (6,049)
Other -- (5,762) -- (6,097)
------------- ------------- ------------- -------------
(Loss) from Continuing Operations before
Income Taxes (520,879) (77,624) (2,005,728) (180,387)
Provision (benefit) for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss (520,879) (77,624) (2,005,728) (180,387)
Preferred Stock Dividend (10,000) (10,000) (30,000) (30,000)
------------- ------------- ------------- -------------
Loss attributable to common stock
after preferred stock dividends $ (530,879) $ (87,624) $ (2,035,728) $ (210,387)
============= ============= ============= =============
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.00)
============= ============= ============= =============
Basic and diluted weighted average
common shares outstanding 201,852,464 102,099,847 211,138,421 93,340,725
============= ============= ============= =============
5
AVALON OIL AND GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unudited)
Nine months ended
December 31,
--------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net cash provided (used) in operating activities $ (564,775) $ (139,010)
----------- -----------
Cash flows from investing activities:
Proceeds from UMTI stock purchase 269,650 --
Proceeds from Intell-well stock purchase 202,500 --
Note receivable (65,000) --
Purchase of fixed assets (7,964) --
Additions to oil and gas properties (291,892) --
----------- -----------
Net cash provided by investing activities 107,294 --
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 1,514,527 109,000
Syndication fees paid (74,660) --
Payments on note payable -- (8,000)
Proceeds from issuance of note payable 100,000 58,000
----------- -----------
Net cash provided by financing activities 1,539,867 159,000
----------- -----------
Net increase (decrease) in cash
and cash equivalents 1,082,386 19,990
Cash and cash equivalents,
Beginning of period 43,818 51
----------- -----------
Cash and cash equivalents,
End of period $ 1,126,204 $ 20,041
=========== ===========
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 $ 1,253,204 $ 19,000
=========== ===========
Common stock issued in exchange for directors' fees $ -- $ 9,000
=========== ===========
Common stock issued for fees in stock sale $ -- $ 5,000
=========== ===========
Common stock issued for loan consideration $ -- $ 7,000
=========== ===========
Preferential conversion feature of loan $ -- $ 25,984
=========== ===========
Warrants issued in exchange for services $ 4,180 $ --
=========== ===========
Warrants issued in exchange for directors' fees $ 161,153 $ --
=========== ===========
Common stock issued for accrued liabilites $ 34,500 $ --
=========== ===========
Common stock issued for aquistion of oil and
gas properties $ 301,400 $ --
=========== ===========
Common stock issued for technologies acquired $ 1,289,500 $ --
=========== ===========
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 December 31, 2006 the Company's cash
balances are in excess of this amount.
Investments
The Company classifies its debt and marketable securities into held-to-maturity,
trading, or available-for-sale categories. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale.
Held-to-maturity securities are recorded as either short-term or long-term on
the balance sheet based on contractual maturity date and are stated at amortized
cost. Marketable securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and are
reported at fair value, with unrealized gains and losses recognized in earnings.
Debt and marketable equity securities are not classified as available-for-sale
and are carried at fair market value, with the unrealized gains and losses, net
of tax, included in the determination of comprehensive income and reported in
shareholder's equity.
The fair value of substantially all securities is determined by quoted market
prices. Gains or losses on securities sold are based on the sporadic
identification method. As of December 31, 2006, all investments are considered
to be available-for-sale for financial reporting purposes.
Fair Value of Financial Instruments
The Company's financial instruments are cash and cash equivalents, accounts
receivable, accounts payable, notes payable, and long-term debt. The recorded
values of cash and cash equivalents, accounts receivable, and accounts payable
approximate their fair values based on their short-term nature. The recorded
values of notes payable and long-term debt approximate their fair values, as
interest approximates market rates.
7
Natural Gas and Oil Properties
The Company follows the full cost method of accounting for natural gas and oil
properties, prescribed by the Securities and Exchange Commission ("SEC".) Under
the full cost method, all acquisition, exploration, and development costs are
capitalized. The Company capitalizes all internal costs, including: salaries and
related fringe benefits of employees directly engaged in the acquisition,
exploration and development of natural gas and oil properties, as well as other
identifiable general and administrative costs associated with such activities.
All capitalized costs of natural gas and oil properties, including the estimated
future costs to develop reserves, are amortized on the units-of-production
method using estimates of proved reserves. Investments in unproved reserves and
major development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized. Abandonment of
natural gas and oil properties are accounted for as adjustments of capitalized
costs; that is, the cost of abandoned properties is charged to the full cost
pool and amortized.
Under the full cost method, the net book value of natural gas and oil
properties, less related deferred income taxes, may not exceed a calculated
"ceiling". The ceiling is the estimated after-tax future net revenue from proved
natural gas and oil properties, discounted at ten percent (10%) per annum, plus
the lower of cost or fair market value of unproved properties adjusted for the
present value of all future oil and gas hedges. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes that are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on a quarterly
basis. The excess, if any, of the net book value above the ceiling is required
to be written off as an expense.
Other Property and Equipment
Other property and equipment is reviewed on an annual basis for impairments and
as of December 31, 2006, the Company had not identified any such impairment.
Repairs and maintenance are charged to operations when incurred and improvements
and renewals are capitalized.
Other property and equipment are stated at cost. Depreciation is calculated
using the straight-line method for financial reporting purposes and accelerated
methods for tax purposes.
The estimated useful lives are as follows:
Office Equipment: 5-7 Years
Intangible Assets
The cost of licensed technologies acquired is capitalized and will be amortized
over the shorter of the term of the licensing agreement or the remaining life of
the underlying patents.
The Company evaluates recoverability of identifiable intangible assets whenever
events or changes in circumstances indicate that intangible assets carrying
amount may not be recoverable. Such circumstances include, but are not limited
to: (1) a significant decrease in the market of an asset, (2) a significant
adverse change in the extent or manner in which as 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.
8
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.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standards No. 123R (FAS-123R), Share Based Payment, which
is a revision of Statement of Financial Accounting Standards No. 123 (FAS-123),
Accounting for Stock-Based Compensation.
FAS-123R eliminates accounting for share-based compensation transaction using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No.25 (APB-25, Accounting for Stock Issued to Employees), and requires instead
that such transactions be accounted for using a fair-value-based method. The
Company has elected to adopt the provisions of FAS-123R effective January 1,
2006, under the modified prospective transition method, in which compensation
cost was recognized beginning with the effective date (a) based on the
requirements of FAS-123R for all share-based payments granted after the
effective date and (b) based on the requirements of FAS 123-R for all awards
granted to employees prior to the effective date of FAS-123R that remain
unvested on the effective date.
As permitted under FAS-123, the Company elected to follow Accounting Principles
Board Opinion No.25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for stock-based awards to employees through
December 31, 2005. Accordingly, compensation cost for stock options and
non-vested stock grants was measured as the excess, if any, of the market price
of the Company's common stock at the date of the grant over the exercise price.
With the adoption of FAS-123R, the Company elected to amortize stock-based
compensation for awards granted on or after the adoption of FAS-123R on January
1, 2006, on a straight-line basis over the requisite service (vesting) period
for the entire award. For awards granted prior to January 1, 2006, compensation
costs are amortized in a manner consistent with Financial Accounting Standards
Boards Interpretation No. 28 (FIN-28), Accounting for Stock Appreciation Rights
and Other Variable Stock Option of Award Plans. This is the same manner applied
in the pro-forma disclosures under FAS-123.
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 December 31, 2006 there were 2,703,687 shares issued to non
employees valued at $130,664 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 values 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
9
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.
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.
In February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments" ("SFAS No. 155"), which amends FASB Statements No.
133 and 140. This Statement permits fair value remeasurement for any hybrid
financial instrument containing an embedded derivative that would otherwise
require bifurcation, and broadens a Qualified Special Purpose Entity's ("QSPE")
permitted holdings to include passive derivative financial instruments that
10
pertain to other derivative financial instruments. This Statement is effective
for all financial instruments acquired, issued or subject to a remeasurement
event occurring after the beginning of an entity's first fiscal year beginning
after September 15, 2006. This Statement has no current applicability to the
Company's financial statements. Management plans to adopt this Statement on
April 1, 2007 and it is anticipated that the initial adoption of this Statement
will not have a material impact on the Company's financial position, results of
operations, or cash flows.
In June 2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"), an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes." FIN 48 clarifies the accounting and reporting for
income taxes where interpretation of the law is uncertain. FIN 48 prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of income tax uncertainties with respect to
positions taken or expected to be taken in income tax returns. FIN 48 is
effective for fiscal years beginning after December 15, 2006. This Statement has
no current applicability to the Company's financial statements. Management plans
to adopt this Statement on April 1, 2007 and it is anticipated that the initial
adoption of FIN 48 will not have a material impact on the Company's financial
position, results of operations, or cash flows.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure
purposes under GAAP. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
with earlier adoption permitted. Management is assessing the impact of the
adoption of this Statement.
In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"), an
amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires
(a) recognition of the funded status (measured as the difference between the
fair value of the plan assets and the benefit obligation) of a benefit plan as
an asset or liability in the employer's statement of financial position, (b)
measurement of the funded status as of the employer's fiscal year-end with
limited exceptions, and (c) recognition of changes in the funded status in the
year in which the changes occur through comprehensive income. The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15, 2006.
The requirement to measure the plan assets and benefit obligations as of the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. This Statement has no
current applicability to the Company's financial statements. Management plans to
adopt this Statement on March 31, 2007 and it is anticipated the adoption of
SFAS No. 158 will not have a material impact to the Company's financial
position, results of operations, or cash flows.
In September 2006, the Securities Exchange Commission issued Staff Accounting
Bulletin No. 108 ("SAB No. 108"). SAB No. 108 addresses how the effects of prior
year uncorrected misstatements should be considered when quantifying
misstatements in current year financial statements. SAB No. 108 requires
companies to quantify misstatements using a balance sheet and income statement
approach and to evaluate whether either approach results in quantifying an error
that is material in light of relevant quantitative and qualitative factors. When
the effect of initial adoption is material, companies will record the effect as
a cumulative effect adjustment to beginning of year retained earnings and
disclose the nature and amount of each individual error being corrected in the
cumulative adjustment. SAB No. 108 is effective beginning January 1, 2007 and it
is anticipated that the initial adoption of SAB No. 108 will not have a material
impact on the Company's financial position, results of operations, or cash
flows.
11
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
Note 2: Related Party Transactions
Promissory Notes
On May 8, 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 matured
on November 8, 2006. The Company entered into an agreement with the noteholder
to extend the due date until March 8, 2007. 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 $100,000 was included in interest expense for the nine
months ended December 31, 2006.
Preferred Stock
The 100 shares of Series A Preferred Stock, issued to an officer/director as
payment for $500,000 in promissory notes, are convertible into the number of
shares of common stock sufficient to represent 40 percent (40%) of the fully
diluted shares outstanding after their issuance. The Series A Preferred Stock
pays an eight percent (8%) dividend. The dividends are cumulative and payable
quarterly. The Series A Preferred Stock carries liquidating preference, over all
other classes of stock, equal to the amount paid for the stock plus any unpaid
dividends. The Series A Preferred Stock provides for voting rights on an "as
converted to common stock" basis.
During the nine months ended December 31, 2006, the Company incurred $30,000 in
preferred stock dividends.
The holders of the Series A Preferred Stock have the right to convert each share
of preferred stock into a sufficient number of shares of common stock to equal
40% of the then fully-diluted shares outstanding. Fully diluted shares
outstanding is computed as the sum of the number of shares of common stock
outstanding plus the number of shares of common stock issuable upon exerciser,
conversion or exchange of outstanding options, warrants, or convertible
securities.
Stock-Based Compensation
During the nine months ended December 31, 2006, the Company issued its directors
an option to purchase 2,000,000 shares of common stock for directors' fees. The
transactions were recorded at the quoted market price of the stock on the date
of issuance. The services, valued at $33,187, are included in the accompanying
financial statements as "Stock-based compensation".
During the nine months ended December 31, 2006, 25,833,333 of the 42,560,000
shares issued during the year ended March 31, 2006 for consulting services
valued at $571,334 were earned and included in the accompanying financial
statements as "Stock-based compensation".
During the nine months ended December 31, 2006 the Company issued 9,093,642
shares of common stock valued at $322,957 for consulting services. Of these
shares 203,687 valued at $33,164 were treated as not being issued for financial
reporting purposes as required by SAB D-90 "Grantor Balance Sheet Presentation
of Unvested, Forfeitable Equity Instruments Granted to Non Employees".
12
Note 3: Property Acquisitions
Effective on November 15, 2006, the Company acquired a fifty (50%) percent
working interest in an active Woodbine production property in Upshur County,
Texas, consisting of thirteen (13) wellbornes.
On February 8, 2007, the Company announced that it had entered into a letter of
intent to purchase an undivided twenty-five (25%) percent interest in six-well
production property in Grant Parish, Louisiana.
Note 4: Ultrasonic Mitigation Technology Acquisition
On July 7, 2006, the Company purchased all the outstanding shares of Ultrasonic
Mitigation Technologies, Inc. (UMTI) from UTEK Corporation for 16,250,000 shares
of the Company's Common Stock valued at $695,500. UMTI became a wholly owned
subsidiary of the Company as of the date of acquisition. The purchase price was
allocated to the assets of UMTI as follows:
Cash $300,000
Technology licenses 395,500
--------
$695,500
========
The Company also paid $30,000 finders fee related to the acquisition of UMTI
that has been added to the cost of the technology license.
The technology license is for licensing of a patented process for paraffin wax
mitigation from crude oil using ultrasonic waves from the University of Wyoming.
UMTI had no operating activities prior to its being acquired by the Company,
therefore there is no pro-forma combined results.
In the agreement with UTEK, the Company agreed to an anti dilution adjustment
during the twelve (12) months following the effective date of such agreement.
This anti-dilution adjustment calls for UTEK Corporation to receive additional
shares of stock proportionate to the amount of common shares issued by the
Company to any of its current list of management and directors within twelve
(12) months subsequent to the acquisition date, and excludes any common shares
issued the holders of Series A Preferred Stock.
Note 5
On November 8, 2006, the Company purchased all the outstanding shares of
Intelli-Well Technologies, Inc. (IWTI)from UTEK Corporation for 20,000,000
shares of the Company's common stock valued at $594,000. ITWI became a wholly
owned subsidiary of the Company as of the date of acquisition. The purchase
price was allocated to the assets of UMTI as follows:
Cash $225,000
Technology licenses 369,000
--------
$594,000
========
The Company also paid a $22,500 finders fee related to the acquisition of IWTI
that has been added to the cost of the technology license.
IWTI holds a non-exclusive license in the United States for a borehole casing
technology developed by the Regents of the University of California (the
"Regents") through its researchers at Lawrence Livermore National Laboratory.
13
The technology uses a densely spaced network of sensors which are installed
along and outside of oil well casings before they are grouted into place. The
sensors monitor critical parameters in the subsurface oil reservoir. Data from
multiple sensors can provide real-time information regarding the status of the
reservoir and the primary and secondary oil recovery process. The types of
sensors that can be installed include seismic sensors, electrical resistance
tomography electrodes, electromagnetic induction tomography coils and
thermocouples.
IWTI had no operating activities prior to its being acquired by the Company,
therefore there is no pro-forma combined results.
In the agreement with UTEK, the Company agreed to an anti-dilution adjustment
during the twelve (12) months following the effective date of such agreement.
This anti-dilution adjustment calls for UTEK Corporation to receive additional
shares of stock proportionate to the amount of common shares issued by the
Company to any of its current list of management and directors within twelve
(12) months subsequent to the acquisition date, and excludes any common shares
issued the holders of Series A Preferred Stock.
Note 6: 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
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 $ -- $ --
========= =========
14
Note 7: Shareholders' Equity
During the nine months ended December 31, 2006, $126,667 was included in
"Stock-based compensation" with the balance not shown as issued until services
are rendered, for shares issued in exchange for consulting services in January
2006, There is no remaining balance due.
During the nine months ended December 31, 2006, $323,333 was included in
"Stock-based compensation" for shares issued in exchange for consulting services
rendered in March 2006, with the balance not shown as issued until services are
rendered.
On April 18, 2006, the Company authorized the issuance of 2,700,000 shares of
common stock for consulting services.
In May 2006, the Company issued 2,180,000 shares of common stock and warrants to
purchase 1,000,000 shares of common stock at a price of $.10 per share. These
warrants expire on May 2014. The purchase price for the shares and the warrants
was $100,000.
On May 1, 2006, the Company granted to its directors warrants to purchase
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, the Company entered into a strategic alliance agreement with
UTEK Corporation for consulting services. The Company issued 693,642 shares of
common stock in connection with this agreement. The value of the stock issued,
$0.035 per share was recorded at fair value based on other cash sales of
restricted stock. Of the $24,277 in services, $15,173 was included in
"Stock-based compensation" with the balance not shown as issued until services
are rendered.
On May 18, 2006, the Company issued 7,500,000 shares of stock for consulting
services valued at $262,500.
$34,500 is shown as a stock subscription receivable for consulting services and
the assumption of payroll taxes from May 24, 2006, and will remain until the
payroll taxes have been paid by the shareholder.
On June 1, 2006, the Company executed a six-month consulting agreement with a
Consultant and issued 300,000 shares of common stock as compensation. The stock
was valued at $37,500 of which $22,000 was recognized as compensation expense
during the nine month period ending December 31, 2006.
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 September 8, 2011.
On August 18, 2006, the Company authorized the issuance of 500,000 shares of
common stock for consulting services. The stock was valued at $21,400 and was
changed to expense during the nine month period ending December 31, 2006.
15
On August 29, 2006 the Company authorized the issuance of 1,000,000 shares of
common stock for consulting services. This transaction was valued at $42,800 and
was charged to expense for the nine month period ending December 31, 2006.
On September 12, 2006 the Company authorized the issuance of 1,200,000 shares of
common stock for consulting services. The stock was valued at $25,680 of which
$17,120 was recognized as compensation expense during the nine month period
ending December 31, 2006.
During the nine months ended December 31, 2006, the Company issued 4,125,238
shares of its common stock to 8 accredited investors, at an average price of
approximately $0.05 per share, pursuant to the exemptions afforded by Section
(4)2 of the Securites Act of 1933, as amended, for which the Company received
total cash proceeds of $196,404.
On May 15, 2006, the Company entered into a Regulation S Stock Purchase
agreement.
During the nine months ended December 31, 2006, 34,612,885 shares of common
stock with cash proceeds of $1,199,123 were sold pursuant to the Regulation S
Stock Purchase agreement.
Information with respect to stock warrants outstanding is follows:
Exercise Outstanding Expired or Outstanding Expiration
Price March 31, 2006 Granted Exercised Dec. 31, 2006 Date
----- -------------- ------- --------- -------------- ----
Warrants:
$0.10 1,000,000 -0- -0- 1,000,000 5/2014
$0.02 2,500,000 -0- -0- 2,500,000 10/27/2010
$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 8: 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 nine months ended December 31, 2006, 2,703,687 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 nine months ended December 31, 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.
16
The following reconciles the components of the EPS computation:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- ------
For the three months ended December 31, 2006:
Net loss $ (498,930)
Preferred stock dividends (10,000)
-----------
Basic EPS loss available to
common shareholders $ (508,930) 201,852,464 $ (0.00)
Effect of dilutive securities:
None -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $ (508,930) 201,852,464 $ (0.00)
=========== =========== ========
For the three months ended December 31, 2005:
Net loss $ (77,624)
Preferred stock dividends (10,000)
-----------
Basic EPS loss available to
common shareholders $ (87,624) 102,099,847 $ (0.00)
Effect of dilutive securities:
None -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $ (87,624) 102,099,847 $ (0.00)
=========== =========== ========
17
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- ------
For the nine months ended December 31, 2006:
Net loss $(1,983,779)
Preferred stock dividends (30,000)
-----------
Basic EPS loss available to
common shareholders $(2,013,779) 211,138,421 $ (0.01)
Effect of dilutive securities:
None -- -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $(2,013,779) 211,138,421 $ (0.01)
=========== =========== ========
For the nine months ended December 31, 2005:
Net loss $ (180,387)
Preferred stock dividends (30,000)
-----------
Basic EPS loss available to
common shareholders $ (210,387) 93,340,725 $ (0.00)
Effect of dilutive securities:
None -- -- --
----------- ----------- --------
Diluted EPS loss available to
common shareholders $ (210,387) 93,340,725 $ (0.00)
=========== =========== ========
18
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.
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 intend to aggressively develop these low
cost/low risk properties in order to rapidly enhance shareholder value. In
furtherance of the foregoing strategy, we have within the last nine months
engaged in the following transactions:
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. The J. C.
Kelly well produces from the Paluzy Interval and the Change # 1 and #2 wells
produce from the Sub-Clarksville zone, within an active waterflood area. These
wells are operated by KROG Partners, LLC.
19
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 acquired a fifty percent (50%) working interest in the
Dixon Heirs #1, Deltic Farms & Timber #1 and the Gunn #1 wells and associated
units and leases, in Miller County, Arkansas. These are mature wells with stable
production, and were originally drilled in the early 1980's.
On November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT") a
wholly owned subsidiary of UTEK Corporation (AMEX: UTK). IWT holds a license for
borehole casing technology developed by researchers at Lawrence Livermore
National Laboratory. The technology uses a densely spaced network of sensors
which are installed along and outside of the oil well casings before they are
grouted into place. The sensors monitor critical parameters in the subsurface
oil reservoir. Data from multiple sensors provides real-time information
regarding the status of the reservoir and the primary and secondary oil recovery
process. Sensors located deep within the reservoir are much more sensitive than
sensors located on the surface. The type of sensors that can be installed
include seismic sensors, electrical resistance tomography electrodes,
electromagnetic induction tomography coils and thermocouples.
On November 15, 2006, we acquired a ten percent (10%) working interest in an
active Woodbine production property consisting of 13 wellbores, which include
six (6) producing oil wells, three (3) salt water disposal wells, three (3)
shut-in or marginally producing wells, and one (1) well that has been plugged
and abandoned since the effective date, located in Upshur County, Texas. These
wells produce from the Woodbine interval and are operated by KROG Partners, LLC.
KROG and Avalon are currently working on optimization/workover opportunities
with the goal of enhancing operations and production from the shut-in wellbores.
On January 3, 2007, we executed a letter of intent, allowing us a right to
purchase a twenty-five percent (25%) working interest in a six well production
property located in Grant Parish, Louisiana. The letter of intent provides the
opportunity for Avalon and its partners to conduct a sixty day test of the
productive capability of the property, as well as customary due diligence, prior
to the acquisition. The property consists of five shut-in wells with production
potential in the prolific Wilcox production interval and one salt water disposal
well. These wells were drilled in the early 1980's by an independent producer.
Avalon believes that there is significant oil production potential in many of
these wells, and that a minimal workover program is required to return the
property to production. The salt water disposal well is also anticipated to be
capable of disposal of significant volumes of produced water, resulting in
highly economic production of the anticipated 10% oil cut in this property.
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
20
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 the Three Months ended December 31, 2006
As of December 31, 2006, we had $1,126,204 in cash and cash equivalents, total
assets of $2,681,893, and outstanding liabilities of $197,649. We had oil and
gas sales of $20,723 and interest income of $10,920 for the three month period
ending December 31, 2006. We did not generate any revenues during the three
month period ending December 31, 2005. During the three month period ending
December 31, 2006, our lease operating expense was $22,334, our selling,
general, and administrative expenses were $191,098, our stock based expenses
were $283,314, and our interest expense was $40,512. For the three month period
ending December 31, 2005, we did not have any lease operating expense. Our
selling, general, and administrative expenses were $55,195, our stock based
expenses were $16,667, and our interest expense was $5,762, for the three month
period ending December 31, 2005. We experienced a net loss before income taxes
of $520,879 for the three month period ending December 31, 2006. For the three
month period ending December 31, 2005, we experienced a net loss of $77,624.
Operations for the Nine Months ended December 31, 2006
We had oil and gas sales of $26,813 and interest income of $16,969 for the nine
month period ending December 31, 2006. We did not generate any revenues during
the nine month period ending December 31, 2005. During the nine month period
ending December 31, 2006, our lease operating expense was $27,658, our selling,
general, and administrative expenses were $481,173, our stock based expenses
were $1,418,537, and our interest expense was $107,179. For the nine month
period ending December 31, 2005, we did not have any lease operating expense.
Our selling, general, and administrative expenses were $135,574, our stock based
compensation expenses were $32,667, and our interest expense was $12,146. We
experienced a net loss before income taxes of $2,005,728, for the nine month
period ending December 31, 2006. For the nine month period ending December 31,
2005, we experienced a net loss of $180,387.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $1,126,204 on December 31, 2006, compared to
$20,041 on December 31, 2005. We met our liquidity needs through the issuance of
our common stock for cash.
21
During the three month period ended December 31, 2006 we sold 50,000 shares of
our common stock and received $3,334 in cash. We also received $225,000 in
connection with the acquisition of IWT from UTEK Corporation.
During the nine month period ended December 31, 2006, we borrowed $100,000 from
a shareholder of the Company. During the nine month period ending December 31,
2006, we also sold 38,688,123 shares of the Company's common stock and received
$1,513,044 in cash. We also received $300,000 from the acquisition of UMTI and
$225,000 in connection with the acquisition of IWT from UTEK Corporation. For
the nine month period ended December 31, 2005, we received $110,000 in cash from
the sale of 11,100,000 shares of the Company's common stock.
During the nine months ended December 31, 2006, we used $107,294 in cash in
investing activities. Our financing activities for this period provided cash of
$1,539,867 as compared to $159,000 for the same period in 2005.
We need to raise additional capital during the fiscal year, but currently have
not acquired sufficient additional funding. Our ability to continue operations
is highly dependent upon our ability to obtain immediate additional financing,
or generate revenues from our acquired oil and gas leasehold interest, and to
achieve profitability, none of which can be guaranteed. Unless additional
funding is located, it is highly unlikely that we can continue to operate. There
is no assurance that even with adequate financing or combined operations, we
will generate revenues and be profitable.
Ultimately, our success is dependent upon our ability to generate revenues from
our acquired oil and gas leasehold interests.
Subsequent Events
We plan to raise additional capital during the fiscal year, but currently have
not identified additional funding. Our ability to continue operations is highly
dependent upon our ability to obtain immediate additional financing, or generate
revenues from our acquired oil and gas leasehold interests, none of which can be
guaranteed. Unless additional funding is identified, it is highly unlikely that
we can continue to operate. There is no assurance that even with adequate
financing or combined operations, we will generate revenues and be profitable.
Contractual Obligations
Future payments due on our contractual obligations as of December 31, 2006 are
as follows:
Total 2006-2007 2008-2009 2010-2011 Thereafter
----- --------- --------- --------- ----------
Notes payable $100,000 $100,000 $ - $ - $ -
Critical Accounting Policies
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States. As such, we are required to make
certain estimates, judgments and assumptions that we believe are reasonable
based on information available. These estimates and assumptions affect the
reporting amounts of assets and liabilities at the date of the financial
22
statements and the reported amounts of revenues and expenses during the
reporting period. A summary of the significant accounting policies is described
in Note 1 to the financial statements.
ITEM 3. CONTROLS AND PROCEDURES
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.
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 nine month
period ended December 31, 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 shares of common stock in
connection with this agreement. The value of the stock issued, $0.035 per share,
was recorded at fair value based on other cash sales of restricted stock. Of the
$24,277 in services, $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 shares of common stock as compensation.
On June 8, 2006, we granted warrants to purchase 250,000 shares of common stock
at a price of $0.025 per share for website design and maintenance services.
These warrants expire on June 8, 2011.
23
On July 7, 2006, we issued UTEK Corporation 16,250,000 shares of common stock
for the purchase of Ultrasonic Mitigation Technologies, Inc., (UMTI).
On August 11, 2006, we issued an independent oil producer 500,000 shares of
common stock as additional consideration for the acquisition of a fifty percent
(50%) working interest in a leasehold in Miller County, Arkansas.
On August 21, 2006, we authorized the issuance of 2,000,000 shares of common
stock for consulting services.
On September 22, 2006, we authorized the issuance of 600,000 shares of common
stock for investor relation services.
On November 9, 2006, we issued UTEK Corporation 20,000,000 shares for the
purchase of Intelli-Well Technologies, Inc., ("IWT").
During the nine months ended December 31, 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 nine months ended December 31, 2006, 34,841,123 shares of common
stock with cash proceeds of $1,335,043 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.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
24
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.
2. Filed December 15, 2006, the Company entered into an agreement and
plan of acquisition to acquire one hundred (100%) percent of
Ultrasonic Mitigation Technologies, Inc.
3. Filed January 16, 2007, the Company announced that it has, jointly
with its partner KROG Partners, LLC, acquired an oil and gas property
in Upshur County, Texas consisting of thirteen (13) wellbores.
4. Filed January 19, 2007, the Company announced that it has employed two
expert advisors to advise Avalon with respect to its expansion program
in Latin America.
5. Filed February 2, 2007, the Company announced that it, along with
three partners, executed a letter of intent to acquire a one hundred
(100%) percent working interest in six well production properties
located in Grant Parish, Louisiana, subject to testing of the wells
and related due diligence
6. Filed February 13, 2007, the Company reported on the results of the
initial stages of testing on the wells in Grant Parish, Louisiana.
(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)
25
3.5 Bylaws of the Nevada Corporation *
(Incorporated by reference to Exhibit 3.5 to
Form 10-KSB filed February 2000)
4.1 Specimen of Common Stock (Incorporated by *
reference to Exhibit 4.1 to Registration
Statement on Form SB-2, Registration No.
33-74240C).
4.2 Certificate of Designation of Series and *
Determination of Rights and Preferences of
Series A Convertible Preferred Stock
(Incorporated by reference to Exhibit 4.2 to
Form 10-KSB filed July 12, 2002.)
10.1 Incentive Compensation and Employment *
Agreement for Kent A. Rodriguez (Incorporated
by Reference to Exhibit 10.12 of our Form
10-KSB filed July 20, 2001)
31 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Incorporated by reference to a previously filed exhibit or report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Avalon Oil & Gas, Inc.
By: /s/ Kent Rodriguez
- --------------------------
Date: February 14, 2007
Kent Rodriguez
Chief Executive Officer
Chief Financial and Accounting Officer
26