10KSB 1 avalon308.txt 10KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2008 Commission file number: 1-12850 Avalon Oil & Gas, Inc. ---------------------- (Exact name of small business issuer in its charter) Incorporated under the laws of 84-1168832 the State of Nevada I.R.S. Identification Number 7808 Creekridge Circle, Suite 105 Minneapolis, Minnesota 55439 ---------------------------- (Address of principal executive offices) (Small Business Issuer's telephone number including area code): (952) 746-9655 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [ ] Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No[X] The issuer's revenues for its most recent fiscal year were $249,856 The aggregate market value of the Company's common stock held by non-affiliates of the Company on July 10, 2008 was approximately $4,535,687 computed by reference to the average of the closing bid and ask prices as quoted on that date. Check whether the Company has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] The Company has one class of common stock outstanding, $0.001 par value per share (the "Common Stock"). On March 31, 2008, there were 31,767,463 shares outstanding. As of May 17, 2007, our common shares were subject to a 20 for 1 reverse split. All references to our shares in this Form 10-KSB include the effect of this reverse split of our common stock. The Company is also authorized to issue 1,000,000 shares of Preferred Stock, par value $0.10 per share, of which 100 Class A Convertible Preferred Shares have been issued. See "Item 5 Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities." 2 AVALON OIL & GAS, INC. FORM 10-KSB TABLE OF CONTENTS PART I PAGE Item 1. Description of Business 5 Item 2. Description of Property 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II 10 Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities 10 Item 6. Management's Discussion and Analysis or Plan of Operation 13 Item 7. Financial Statements 17 Item 8. Changes In and Disagreements with Accountants On Accounting and Financial Disclosure 17 Item 8A. Controls and Procedures 17 Item 8B. Other Information 17 PART III 17 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) Of the Exchange Act 17 Item 10. Executive Compensation 20 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 21 Item 12. Certain Relationships and Related Transactions, and Director Independence 22 Item 13. Exhibits 22 Item 14. Principal Accountant Fees and Services 24 SIGNATURES 25 FINANCIAL STATEMENTS F-1 - F-22 3 EXHIBITS 3.1 Restated Articles of Incorporation * 3.2 Restated Bylaws * 3.3 Articles of Incorporation for the State of Nevada * 3.4 Articles of Merger for the Colorado Corporation and the Nevada Corporation * 3.5 Bylaws of the Nevada Corporation * 4.1 Specimen of Common Stock * 31.1 Rule 13a-14(a)/15d-14(a) Certifications 32.1 Section 1350 Certifications * Incorporated by reference. 4 PART I References in this document to "us," "we," the "Registrant," or the "Company" refer to Avalon Oil & Gas, Inc., and its predecessors. Statements contained in the Form 10-KSB discuss future expectations and plans which are considered forward-looking statements as defined by Section 27 (a) of the Securities and Exchange Act of 1934, as amended. Sentences which incorporate words such as "believes," "intends," "expects," "predicts," "may," "will," "should," "contemplates," "anticipates," or similar statements are based on our beliefs and expectations using the most current information available to us. In view of the fact that our discussions in the Form 10-KSB are based on upon estimates and beliefs concerning circumstances and events which have not yet occurred, the anticipated results are subject to changes and variations as future operations and events actually occur and could differ materially from those discussed in forward-looking statements. Moreover, although we reasonably expect, to the best of our knowledge and belief, that the results to be achieved by us will be as set forth in the following discussion, the following discussion is not a guarantee and there can be no assurance that any of the potential results which are described will occur. Furthermore, there will usually be differences between the forecasted and actual results because events and circumstances frequently do not occur as expected, and the difference may be material. ITEM 1. DESCRIPTION OF BUSINESS 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 to sell 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, following our bankruptcy, we made a decision to re-focus to a traditional wholesale to retail distributor, and obtained the exclusive North American rights to distribute high-end European outdoor apparel and equipment. We first intended to exploit these rights over the Internet under the name XDOGS.COM, Inc. However, due to the general economic conditions and the ensuing general downturn in e-commerce and internet-based businesses, we decided that to best preserve our core assets we would need to adopt a more traditional strategy. Thus, we abandoned this approach and to better reflect our new focus, we changed our name to XDOGS, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc. ("Avalon"), and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares, par value of $0.001, and engage in the acquisition of producing oil and gas properties. Acquisition Strategy Our strategy is to acquire oil and gas producing properties that have proven reserves and established in-field drilling locations with a combination of cash, debt, and equity. We believe that acquisition of such properties minimizes our risk, allows us to generate immediate cash flow, and provides in-field drilling 5 locations to expand production within the proven oil and gas fields. We will aggressively develop these low cost/low risk properties in order to enhance shareholder value. In addition, Avalon's technology group acquires oil production enhancing technologies. Through its strategic partnership with UTEK Corporation, (UTK: ASE) a transfer technology company, Avalon is building an asset portfolio of innovative technologies in the oil and gas industry to maximize enhancement opportunities at its various oil and gas properties. In furtherance of the foregoing strategy, we have engaged in the following transactions during the last three years: On August 29, 2005 we acquired a one hundred percent (100%) working interest, seventy-eight percent (78%) net revenue interest, in 2,400 acres located in Canadian County, Oklahoma ("The Oklahoma Properties"), from Sooner Trend Leasing LLC, payable by delivering 48,000,000 authorized, but previously un-issued, shares of the Company's common stock. On February 13, 2005, the Company returned The Oklahoma Properties to Sooner Trend Leasing LLC, and sent a letter to our transfer agent canceling the 48,000,000 shares of stock issued to Sooner Trend Leasing LLC. On October 20, 2006, the District Court for the Fourth Judicial District, State of Minnesota, issued a judgment canceling the 48,000,000 shares issued to Sooner Trend Leasing, LLC. On May 4, 2007, the judgment issued by the District Court for the Fourth Judicial District, State of Minnesota was filed with the County Clerk in Tulsa County, Oklahoma. On May 17, 2006, we signed a strategic alliance agreement with UTEK Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry. 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. 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. 6 On November 15, 2006, we acquired a ten percent (10%) working interest in 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. Avalon is currently working on optimization/workover opportunities with the goal of enhancing operations and production from the shut-in wellbores. On March 29, 2007, we acquired Leak Location Technologies, Inc., ("LLT") a wholly owned subsidiary of UTEK Corporation (AMEX: UTK). LLT owns an exclusive license to a system for determining the presence and location of leaks in underground pipes. The technology was developed by researchers at Rensselaer Polytechnic Institute. The system uses a series of acoustic sensors to monitor changes in pipeline acoustic emissions, and has been proven in field application with a large multinational petroleum company. The lead scientist in charge of that project is currently under contract to Avalon to manage the technology design refresh and prototype development for commercialization. On May 22, 2007, we acquired a fifteen percent (15%) working interest in the Janssen #1A prospect in Karnes County, Texas. The Janssen Prospect will be re-completed in the existing vertical wellbore by a sidetrack drilling procedure at a depth of approximately 10,500 feet, and test the Wilcox sand. Total potential reserves are estimated to be 75,000 to 100,000 barrels of condensate and 3 to 4 BCF (billion cubic feet) of gas. On May 31, 2007 we announced the purchase of a 15% stake in the oil wells in the Janssen Prospect, Karnes County, Texas (the "Janssen Well"). On October 31, 2007, we announced in a press release that we closed upon the acquisition of non-operated production in the Lake Washington Field in Plaquemines Parish, Louisiana. Since its discovery in the 1930, the Lake Washington Field has produced approximately 350 million barrels of oil. We hold approximately a .7% working interest in 3 units that are currently producing over 1000 barrels of oil per day. On April 7, 2008 we announced in a press release our acquisition in December 2007 of a 5% working interest in the 1,280 Waters prospect. The first well is being drilled between two gas wells that the produced over 500 million cubic feet of natural gas in the two years they have been in production. Estimated recoverable reserves from the Waters well are projected to exceed 1.3 billion cubic feet of natural gas. On July 2, 2008, we announced in a press release dated July 2, 2008 that we have signed a letter agreement to acquire all of the oil and gas producing assets owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County, Oklahoma. We will increase our current interest in the Grace #2 well and acquire working interests in four other producing wells in the East Chandler Field, the Grace #1, Grace #3, Grace #5A and Grace #6 wells, as follows: o We are increasing our working interest in the Grace #2 from 2.5% to 7.5%; and increased our net revenue interest in the Grace #2 to 11.95%. We initially acquired our working interest in the Grace #2 well in June, 2008. o We are acquiring a 10% working interest and 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. o We are acquiring a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. 7 On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. Pursuant to the non-binding letter of intent, we are required to pay $1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at this time our management does not believe that the terms of the non-binding letter of intent will be complied with, or that we will enter into a definitive agreement. We plan to raise additional capital during the coming fiscal year, but currently have not identified additional funding sources. Our ability to continue operations is highly dependent upon our ability to obtain additional financing, or generate revenues from our acquired oil and gas leasehold interests, none of which can be guaranteed. Ultimately, our success is dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests, and to achieve profitability, which is dependent upon a number of factors, including general economic conditions and the sustained profitability resulting from the operation of the acquired oil and gas leaseholds. There is no assurance that even with adequate financing or combined operations, we will generate revenues and be profitable. PATENTS, TRADEMARKS, AND PROPRIETARY RIGHTS On May 17, 2006, The Company signed a strategic alliance agreement with UTEK Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry. On July 17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc. ("UMTI"). UMTI holds the exclusive worldwide license for the mitigation of paraffin wax deposition from crude oil using ultrasonic waves. This technology was developed at the University of Wyoming by Dr. Brian Towler. On November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT"). IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory. On March 29, 2007, we acquired Leak Location Technologies, Inc., ("LLT"). LLT owns an exclusive license to a system for determining the presence and location of leaks in underground pipes. On May 17, 2007, The Company renewed its strategic alliance agreement with UTEK Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry. On August 13, 2007, The Company received notice that the U.S. Patent and Trademark Offices approved the patent application for Avalon's paraffin wax mitigation system, being marketed as Ultrasonic Mitigation Solutions(TM) (the "Patent"). Currently available solutions to paraffin wax deposits and build-up in oil production rely upon chemical solvents, which not only require repeated mechanical pigging operation and costly workovers to maintain production capacity, but also can also result in environmental liabilities. In contrast, the Patent utilizes ultrasonic waves to fragment current paraffin deposits in the production's tubing and prevent future wax formation in an environmentally safe process. 8 On August 16, 2007, Kent Rodriguez, the Company's President and CEO, presented a proposal to the Board of Directors to spin-off Oiltek, which specializes in oil and gas recovery technology to Avalon's shareholders. The oil and gas technology include, but are not limited, to the Patent; a system to detect hazardous gas leaks including small leaks in natural gas pipelines; and a system for intelligent drilling and completion sensors to provide real-time oil reservoir monitoring of subsurface information. Ultimately, our success is dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests and licensed technology, 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. On September 22, 2007 the Company entered into an agreement with respect to its purchase of a 75.6% interest in Oiltek, Inc. ("Oiltek") for $50,000 and the right of Oiltek to market Avalon's intellectual property. ENVIRONMENTAL MATTERS During the last three fiscal years, compliance with environmental laws and regulations did not have a specific impact on the Company's operations. The Company does not anticipate that it will incur any material capital expenditures for environmental control facilities for environmental facilities during the next fiscal year. EMPLOYEES As of March 31, 2008 we had two full time employees consisting of our President, Mr. Kent Rodriguez, and Vice President, Ms. Jill Allison. The Board has retained William Anderson, Glen Harrod, Mark Oliver, William Graham, Thomas Bugbee, Gary Browning and Bruce Merrifield, as advisors. We do not have any part time employees at this time. RESEARCH AND DEVELOPMENT During the last three fiscal years, we did not incur research and development expenses. ITEM 2. DESCRIPTION OF PROPERTY Our corporate office is located at 7808 Creekridge Circle, Suite 105, Minneapolis, MN 55439. This office space is leased from an unaffiliated third party on three year lease, which ends on December 1, 2009, for a monthly rental of $3,100.00. On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. Pursuant to the non-binding letter of intent, we are required to pay $1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at this time our management does not believe that the terms of the non-binding letter of intent will be complied with, or that we will enter into a definitive agreement. 9 On July 2, 2008 , we announced in a press release dated July 2, 2008 that we have signed a letter agreement to acquire all of the oil and gas producing assets owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County, Oklahoma. We will increase our current interest in the Grace #2 well and acquire working interests in four other producing wells in the East Chandler Field, the Grace #1, Grace #3, Grace #5A and Grace #6 wells, as follows: o We are increasing our working interest in the Grace #2 from 2.5% to 7.5%; and increasing our net revenue interest in the Grace #2 to 11.95%. We initially acquired our working interest in the Grace #2 well in June, 2008. o We are acquiring a 10% working interest and 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. o We are acquiring a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. ITEM 3. LEGAL PROCEEDINGS Avalon Oil & Gas is not a party to any pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES (a) Principal Market or Markets Effective with the close of business on June 19, 1997, our Common Stock was delisted from the NASDAQ Small Cap Market. In June of 1997, our Common Stock began trading on the NASD Over-the-Counter Bulletin Board ("OTCBB"). Market makers and other dealers provided bid and ask quotations of our Common Stock. We trade under the symbol "AOGN.OB". The table below represents the range of high and low bid quotations of our Common Stock as reported during the reporting period herein. The following bid price market quotations represent prices between dealers and do not include retail markup, markdown, or commissions; hence, they may not represent actual transactions. For the purposes of the Fiscal Year Ended March 31, 2008, the prices have been modified to reflect the one-for-twenty (1:20) reverse stock split effectuated May 15, 2007. 10 High Low Fiscal Year Ended March 31, 2008 First Quarter $ 0.70 $ 0.33 Second Quarter 0.85 0.45 Third Quarter 0.62 0.27 Fourth Quarter 0.41 0.09 High Low Fiscal Year Ended March 31, 2007 First Quarter $ 3.00 $ 0.20 Second Quarter 4.00 2.60 Third Quarter 2.60 1.20 Fourth Quarter 1.20 .40 (b) Approximate Number of Holders of Common Stock As of June 30, 2008, 38,954,802 shares of our Common Stock were outstanding and the number of holders of record of our Common Stock at that date was approximately 947. However, we estimate that there are a significantly greater number of shareholders because a substantial number of our shares are held in nominee names by brokerage firms. (c) Dividends No dividends on the Common Stock were paid by us during the fiscal year ended March 31, 2008, or the fiscal year ended 2007, nor do we anticipate paying dividends on Common Stock in the foreseeable future. Holders of Common Stock are entitled to receive such dividends as may be declared by our Board of Directors. (c) Securities Authorized for Issuance Under Equity Compensation Plans. We have not established an Equity Compensation Plan and have not authorized the issuance of any securities under such plan. (d) Preferred Stock. Our Articles of Incorporation authorize us to issue up to 1,000,000 shares of $0.10 par value preferred stock, with such classes, series and preferences as our Board of Directors may determine from time to time. In June 2002, our Board of Directors authorized the issuance of 100 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock"). Our Board further agreed to issue all of the Series A Preferred Stock to our Chairman and President, Kent Rodriguez, in satisfaction of $500,000 in loans made by Mr. Rodriguez. 11 The Series A Preferred Stock accrues dividends at the rate of 8% per annum on the original purchase price for the shares. If declared by the Board of Directors, these dividends are payable quarterly, beginning in September 2002. We are prohibited from paying any dividends on our Common Stock until all accrued dividends are paid on our Series A Preferred Stock. If we liquidate or dissolve, and after payment of our debts, the holders of the Series A Preferred Stock are entitled to a preference payment before we make any distributions to our Common Stockholders. The preference amount is equal to the original purchase price for the Series A Preferred shares plus accrued, but unpaid dividends. The Series A Preferred Stock is convertible at anytime into 40% of the then outstanding shares of Common Stock and securities convertible into Common Stock on a fully diluted basis. However, conversion is limited to the number of shares of Common Stock available for issuance under our articles of incorporation. Regardless of whether or not the Series A Preferred Stock has been converted to our Common Stock, the Series A Preferred Stockholder is entitled to vote, at all times, on an as-if converted basis. The Preferred Stockholder, Mr. Rodriguez, has the right to vote the Series A Preferred Stock together with his other holdings in the Company. Other than the Series A Preferred Stock, no preferred stock has been issued. See Item *11, Security Ownership of Certain Beneficial Owners and Management". SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS. The Company does not have any securities authorized for issuance under equity compensation plans. RECENT SALES OF UNREGISTERED SECURITIES The Company has sold the following unregistered securities between January 1, 2008 and March 31, 2008: During the year ended March 31, 2008 the Company issued 2,813,320 shares of common stock valued at $1,570,084 for consulting services. During the year ended March 31, 2008, 4,994,739 shares of common stock with cash proceeds of $965,418 were sold pursuant to a Regulation S Stock Purchase Agreement. During the year ended March 31, 2008 the Company issued warrants with a life of five years to purchase 50,000 shares of common stock at $0.075; 50,000 shares of common stock at $1.00; 50,000 shares of common stock at $1.25 and 50,000 shares of common stock at $1.50. These warrants were valued using a Black-Sholes model at $30,325 and included in these financial statements as "Stock-based compensation". These warrants were cancelled on October 1, 2007 All other unregistered securities sold by the Company during the past three years, but prior to January 1, 2008, have been included in the Company's 10-QSB filings. 12 All of the unregistered securities sold were issued directly by the Company, and no commissions or fees were paid in connection with any of these transactions. The transactions were private, and the Company endeavored to comply both with Regulation D, and also Section 4(2) of the Securities Act of 1933, as amended, as exemption(s) from registration. The Company exercised reasonable care to assure that the purchasers of the securities are not underwriters and were "accredited investors" under Regulation D and/or sophisticated investors. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS AND PLAN OF OPERATION The following discussion and analysis should be read in conjunction with out financial statements and 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. Operations As of March 31, 2008, we had current and total assets of $335,148, and total current liabilities of $220,147. We had oil and gas sales of $249,856, for the year ended March 31, 2008. During this period, lease operating expense was $150,136, our selling, general, and administrative expenses $1,225,206, our interest income was $17,253 and our stock-based consulting and compensation expense relating to stock issued for services was $1,747,860. As of March 31, 2007, we were acquiring oil and gas producing properties with a combination of cash, debt, and equity. In addition, we have, through our strategic alliance with UTEK, Inc., acquired three innovative oil and gas technologies. We had current assets of $1,040,360, total assets of $2,993,201 and total liabilities of $201,672. We had oil and gas sales of $49,671, for the year ended March 31, 2007. During this period, lease operating expense was $54,318, our selling, general, and administrative expenses $743,137, our interest expense was $123,333 and our stock-based consulting and compensation expense relating to stock issued for services was $2,054,541. Liquidity and Capital Resources Cash balance amounted to $108,688 and $900,537 as of March 31, 2008 and March 31, 2007, respectively. Operating activities Net cash used by operating activities for the year ended March 31, 2008 was $1,080,401 compared to $815,992 provided in the year ended March 31, 2007. The Company had a net loss of $3,234,710 for the year ended March 31, 2008 compared to a net loss of $3,440,222 for the year ended March 31, 2007. Net accounts receivable for the year ended March 31, 2008 was $11,830 compared to $11,643 for the year ended March 31, 2007. Investing activities For the twelve months ended March 31, 2008 we used ($715,300) in investing activities compared to $137,303 provided in the twelve months ended March 31, 2007. 13 Financing activities Our financing activities for the period ended March 31, 2008 provided cash of $1,003,852 as compared to $1,539,867 for the period ended March 31, 2007. We plan to raise additional capital during the coming fiscal year. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Material Commitments We have no material commitments during the next twelve (12) months. Purchase of Significant Equipment During the twelve months ended March 31, 2008, we used $10,672 for the purchase of equipment, compared to $37,282 in equipment for the year ended March 31, 2007. 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, 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 can be no assurance that, even with adequate financing or combined operations, we will generate sufficient revenues to be profitable. Our success is largely dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests and from the income from the oil and gas enhancement technology we have acquired from UTEK, Inc. Acquisition Strategy On May 17, 2007, we renewed our strategic alliance agreement with UTEK Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry. On May 22, 2007, we acquired a fifteen percent (15%) working interest in the Janssen #1A prospect in Karnes County, Texas. The Janssen Prospect will be re-completed in the existing vertical wellbore by a sidetrack drilling procedure at a depth of approximately 10,500 feet, and test the Wilcox sand. Total potential reserves are estimated to be 75,000 to 100,000 barrels of condensate and 3 to 4 BCF (billion cubic feet) of gas. On October 31, 2007, we announced in a press release that we closed upon the acquisition of non-operated production in the Lake Washington Field in Plaquemines Parish, Louisiana. Since its discovery in the 1930, the Lake Washington Field has produced approximately 350 million barrels of oil. We hold approximately a .7% working interest in 3 units that are currently producing over 1000 barrels of oil per day. On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. Pursuant to the non-binding letter of intent, we are required to pay $1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at this time our management does not believe that the terms of the non-binding letter of intent will be complied with, or we will enter into a definitive agreement. On April 7, 2008 we announced in a press release our acquisition in December 2007 of a 5% working interest in the 1,280 Waters prospect. The first well is being drilled between two gas wells that the produced over 500 million cubic feet of natural gas in the two years they have been in production. Estimated recoverable reserves from the Waters well are projected to exceed 1.3 billion cubic feet of natural gas. 14 On July 2, 2008, we announced in a press release dated July 2, 2008 that we have signed a letter agreement to acquire all of the oil and gas producing assets owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County, Oklahoma. We will increase our current interest in the Grace #2 well and acquire working interests in four other producing wells in the East Chandler Field, the Grace #1, Grace #3, Grace #5A and Grace #6 wells, as follows: o We are increasing our working interest in the Grace #2 from 2.5% to 7.5%; and increased our net revenue interest in the Grace #2 to 11.95%. We initially acquired our working interest in the Grace #2 well in June, 2008. o We are acquiring a 10% working interest and 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. o We are acquiring a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. We have been funding our obligations through the issuance of our Common Stock for services rendered or for cash in private placements. We may seek additional funds in the private and public equity or debt markets in order to execute our 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 acceptable terms, in which event our ability to execute out business strategy will be impaired. RISK FACTORS Any investment in our securities is highly speculative. You should not purchase our shares if you cannot afford to lose your entire investment. You should consider the following risks before acquiring any of our shares. We have never been, and may never be, profitable. During the past several years, we have attempted, without success, to generate revenues and profits. For the year ended March 31, 2008, we incurred a net loss of $3,234,710. We cannot assure that we will ever be profitable. We need additional capital. We need additional financing to continue operations. The amount required depends upon our business operations, and the capital needs of our acquisition of the certain oil and gas leasehold interests. We may be unable to secure this additional required financing on a timely basis, under terms acceptable to us, or at all. To obtain additional financing, we will likely sell additional equity securities, which will further dilute shareholders' ownership in us. Ultimately, if we do not raise the required capital, we may need to cease operations. We are dependent upon our key personnel. We are highly dependent upon the services of Kent A. Rodriguez, our President and Chief Executive Officer. If he terminated his services with us, our business would suffer. 15 There is only a limited trading market for our securities. Our Common Stock is traded on the OTC Bulletin Board. The prices quoted may not reflect the price at which you can resell your shares. Because of the low price of our stock, we are subject to particular rules of the U.S. Securities and Exchange Commission that make it difficult for stock brokers to solicit customers to purchase our stock. This reduces the number of potential buyers of our stock and may reduce the value of your shares. There can be no assurance that a trading market for our stock will continue or that you will ever be able to resell your shares at a profit, or at all. No dividends are anticipated to be paid. We presently pay no dividends. We have never paid any cash dividends and do not expect to do so in the future. If you need current income, you should not purchase our stock. Our management controls us. Our current officers and directors own approximately 42% of our outstanding stock and are able to affect the election of the members of our Board of Directors and make corporate decisions. Mr. Rodriguez, by his ownership of Class A Preferred Stock, has the right to vote 40% of our voting securities. Accordingly, even if we issue additional shares to third parties, Mr. Rodriguez will continue to control at least 40% of our voting securities. This voting concentration may also have the effect of delaying or preventing a change in our management or control or otherwise discourage potential acquirers from attempting to gain control of us. If potential acquirers are deterred, you may lose an opportunity to profit from a possible acquisition. See "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" and "Market for Common Equity and Related Stockholder Matters". A significant number of shares will become eligible for public sale, potentially depressing our stock price. Under the SEC's Rule 144, shares issued in issuances which are not registered with the SEC generally first become eligible for public resale after six months. Shareholders who are affliates of us generally may resell only a limited number of their privately acquired shares after six months. After six months, stockholders who are not affiliated with us may resell any number of their privately acquired shares pursuant to Rule 144. The resale of the shares we have privately issued, or the potential for their future public resale, may depress our stock price. Our governing documents and Nevada law may discourage the potential acquisitions of our business. Our Board of Directors may issue additional shares of capital stock and establish their rights, preferences and classes, in most cases without stockholder approval. In addition, we may become subject to anti-takeover provisions found in Section 89.378-78.379 of the Nevada Business Corporation Act which may deter changes in control of our management which have not been approved by our Board of Directors. 16 ITEM 7. FINANCIAL STATEMENTS. Our audited Financial Statements are attached as a Schedule. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On September 24, 2007 Murrell Hall McIntosh & Co., PLLP ("MHM"), resigned as our independent certified accountant for business reasons unrelated to any disagreement between MHM and us or our management As reported on the Form 8-K filed on September 27, 2007, we engaged Bernstein & Pinchuk, LLP ("B&P") as our certifying accountant to audit our financial statements. ITEM 8A. CONTROLS AND PROCEDURES Our principal executive and financial officers, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the most recently completed quarter covered by this report, have concluded that as of the end of the most recently completed quarter, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There have been no changes in our internal controls or in other factors that could affect these controls during or subsequent to the end of the most recently completed quarter. ITEM 8B. OTHER INFORMATION None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Our Directors and Executive Officers are shown below: Name Age Position ---- --- -------- Kent Rodriguez 48 Chief Executive Officer, President, Chief Financial Officer, Secretary, Director Jill Allison 40 Vice President Douglas Barton 67 Director Menno Wiebe 60 Director Stephen Newton 56 Director 17 Each Director is serving a term of office, which will continue until the next annual meeting of shareholders and until the election and qualification of his respective successor. KENT A. RODRIGUEZ Mr. Rodriguez joined the Company as Chief Executive Officer, President, and Chief Executive Officer in January, 1997. Since 1995, he has been the Managing Partner of Weyer Capital Partners, a Minneapolis-based venture capital corporation. From 1985 to 1995, he was employed by the First National Bank of Elmore, Elmore, Minnesota, in various capacities. He has a B.A. degree from Carleton College, and an Executive MBA from the Harvard Business School. JILL ALLISON Ms. Allison has over 20 years of diversified management experience in business development and technology commercialization. Prior to joining Avalon, she managed a technology strategy consulting practice with focus in the market convergence of physical and IT security industries. Her venture development background includes market leadership positions with Monsanto, Iridian Technologies, Pinkertons and Cylink Corporation. She holds a B.A. in Economics from Gustavus Adolphus College; a Master's in International Management (MIM) in Marketing from the American Graduate School of International Management (Thunderbird), Glendale, AZ; and an MBA in Strategic and Entrepreneurial Management from the Wharton School of the University of Pennsylvania, where she focused on strategic alliances and management of technology. DOUGLAS BARTON Mr. Barton has served as a Director of the Company since November, 1998. From 1987 to the present, he has been the President and sole owner of Venture Communications, Inc., a private promotion, development, and marketing consulting firm. He has a B.S. degree in Economics/History from the University of Minnesota. MENNO WIEBE Since 2006, Menno Wiebe has been serving as Canadian Heavy Oil Aggregator at Surge Global Energy, and has also been working on private client initiation and funding. He holds a Bachelors of Science in Geology from the University of Manitoba, Canada, and a Masters of Business Administration from the University of Warwick, England. He is a member of the American Association of Petroleum, the Geologists' Geological Society of England and the Petroleum Exploration Society of Great Britain. Mr. Wiebe served as Chief Operating Officer and as a Member of the Board of Directors at Deep Well Oil and Gas from 2003-2005, and was Vice President of Exploration of Adulis Resources from 2000-2006. In addition, prior to being owner of Jacobean Resources from 2002-2004, where he served as consultant to various Energy companies around the world, Mr. Wiebe was the Chief Executive Officer of Pertacal Energy, Inc from 2000-2002. 18 STEPHEN NEWTON Stephen Newton has been working as an Independent Energy Consultant, serving companies who wish to invest in Latin America since March 2007. He received his Bachelors in Engineering in Mining and Petroleum at the University of Queensland, Brisbane, Australia, and his Masters of Science in Petroleum Engineering at the University of London, United Kingdom. He is a member of the Society of Petroleum Engineers, and is the founding President of the Colombian Petroleum Association (ACP). From 2004-2007, Mr. Newton served as Chief Executive Officer and President of Solana Petroleum Exploration Colombia, as well as serving as a Member of the Board of Directors. He served as Vice President and Member of the Board of Directors for Solana Petroleum Exploration from 2002-2004. Mr. Newton also worked as President and General Manager of AEC Colombia and Ecuador. Prior to this position, Mr. Newton served in various positions with Occidental Petroleum Corporation from 1974-1999, eventually becoming President of OXY Colombia and subsequently Vice President of Worldwide Engineering and Technical Services. The Company's Directors will serve in such capacity until the next annual meeting of the Company's shareholders and until their successors have been elected and qualified. There are no family relationships among the Company's officers and directors, nor are there any arrangements or understanding between any of the directors or officers of the Company or any other person pursuant to which any officer or director was or is to be selected as an officer or director. The Directors took action eight (8) times by written consent during the fiscal year ended March 31, 2008. In 1999, the Board of Directors established a Compensation Committee. It is currently comprised of Messrs. Barton Wiebe and Newton The Compensation Committee held one meeting in fiscal 2008. In May 2000, the Board of Directors established an Audit Committee. It is currently comprised of Messrs. Barton Wiebe and Newton.. The Audit Committee held one meeting in fiscal 2008. We have adopted a Code of Ethics which is designed to ensure that our directors and officers meet the highest standards of ethical conduct. The Code of Ethics requires that our directors and officers comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our best interest. Involvement in Legal Proceedings We are not aware that any of our officers and directors were, or have been involved in any material legal proceedings which would have any effect upon the Company. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act") requires our officers and directors and persons owning more than ten (10%) percent of our Common Stock to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Additionally, Item 405 of Regulation S-B under the 34 Act requires us to identify in our Form 10-KSB and proxy statement those individuals for whom one of the above referenced reports was not filed on a timely basis during the most recent fiscal year or prior fiscal years. Given these requirements, we have the following report to make under this section. None of our officers or directors, and all persons owning more than ten percent of its shares have filed the subject reports, if required, on a timely basis during the past fiscal year. 19
ITEM 10. EXECUTIVE COMPENSATION COMPENSATION OF BOARD OF DIRECTORS Members of the Board of Directors receive no cash compensation for their service on the Board of Directors, the Compensation Committee or the Audit Committee but are reimbursed for any out-of-pocket expenses incurred by them in connection with our business. The Company has issued Mr. Barton warrant(s) to purchase 100,000 shares of The Company's Common Stock at $0.01 per share and warrants to purchase 50,000 shares of the Company's Common Stock at $.50 per share. These warrants have been exercised pursuant to a cashless exercise, and Mr. Barton was issued 107,547 shares on May 17, 2007. On October 30, 2007, in conjunction with Menno Wiebe and Stephen Newton becoming directors of the Company, each was granted 100,000 fully paid and non-assessable shares of Common Stock of the Company for their services as Directors of the Company over the next twelve months. There are no further material plans, contracts or other arrangements (or amendments thereto) to which Mr. Barton, Mr. Wiebe or Mr. Newton is a party, or in which either person participates, that was entered into or amended, in connection with Mr. Barton Mr. Wiebe or Mr. Newton continuing as or being appointed as a director of the Company. EXECUTIVE COMPENSATION The following table sets forth the compensation received for the three fiscal years ended March 31, 2008, 2007 and 2006, by the Company's Chief Executive Officer (the "Named Executive Officer"). No executive officer of the Company received in excess of $100,000 during that period. Compensation does not include minor business-related and other expenses paid by us for our officers. Such amounts in the aggregate do not exceed $10,000. SUMMARY COMPENSATION TABLE Nonqualified Name and Stock Option Non-Equity Deferred All Other principal Salary Bonus Awards Awards Incentive Plan Compensation Compensation Total position Year ($) ($) ($) ($) Compensation ($) Earnings ($) ($) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) -------- ---- --- --- --- --- ---------------- ------------ --- --- Kent Rodriguez 2008 84,000 84,000 CEO and President 2007 84,000 84,000 2006 84,000(1) 84,000 (1) Effective on May 31, 2005, Mr. Rodriguez became subject to an employment agreement pursuant to which he is paid $7,000 per month in wages. Said employment agreement has since expired. 20
Mr. Rodriguez did not receive any other annual compensation, or other compensation during the Company's fiscal years ended March 31, 2008, 2007 or 2006. OPTION GRANTS IN LAST FISCAL YEAR The Company did not grant any options to purchase any equity securities of the Company during its fiscal ending March 31, 2008. EMPLOYMENT AGREEMENTS We do not currently have employment agreement with any of our employees. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding ownership of our Common Stock as of June 30, 2008 by (i) each person known by us to be the beneficial owner of more than five (5%) percent of our outstanding Common Stock; (ii) each director of our Company; and (iii) all executive officers and directors of our Company as a group. As of June 30, 2008, we had a total of 38,954,802 common shares issued and outstanding. Names and Addresses Beneficial Percent of Beneficial Owner Ownership of Class ------------------- --------- -------- Kent Rodriguez 26,793,945 (1) 41.29% 7808 Creekridge Circle, Suite 105 Minneapolis, MN 55439 Douglas Barton 300,000 0.46% 7808 Creekridge Circle, Suite 105 Minneapolis, MN 55439 Jill Allison 300,000 0.46% 7808 Creekridge Circle, Suite 105 Minneapolis, MN 55439 Menno Wiebe 300,000 0.46% 7808 Creekridge Circle, Suite 105 Minneapolis, MN 55439 Stephen Newton 300,000 0.46% 7808 Creekridge Circle, Suite 105 Minneapolis, MN 55439 UTEK Corporation 3,505,157 5.40% 202 South Wheeler Street Plant City, FL 33563 Officers and Directors 27,093,945(1) 43.13% as a Group (1) Includes 10,100 shares of Common Stock owned by Weyer Capital Corporation, an affiliate of Mr. Rodriguez, and 25,936,535 shares of Common Stock issuable upon conversion of 100 shares of Series A Preferred Stock. 21 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Related Party - Notes Payable As of March 31, 2005, the Company owed an officer two promissory notes totaling $229,960. The $145,120 note carried a 10 percent interest rate and matured in June 2004. The $84,840 note also carried a 10 percent interest rate and matured in July 2004. Accrued interest payable on the notes totaled 22,996 at June 29, 2005. On June 29, 2005, the officer transferred the rights to the debts and the debts were subsequently cancelled in exchange for 16,000,000 shares of the Company's common stock on June 29, 2005. On February 11, 2008, the Company borrowed $75,000 from an officer of the Company evidenced by a promissory note. The note carries a 10% interest rate and matured on March 31, 2008. The note was not extended and is currently past due. On May 8, 2005, 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 May 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 year ended March 31, 2007. Related Party - 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 year ended March 31, 2008, the Company incurred $30,000 in preferred stock dividends. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 23.1 Consent Berstein & Pinchuk, LLP * 31.1 Certification 32.1 Certification (b) Reports on Form 8-K. During the fiscal year ended March 31, 2008, and through July 14, 2008, we filed the following on Form 8-K: 22 Form 8-K 1. Filed September 28, 2007, on September 24, 2007 Murrell Hall McIntosh & Co., PLLP ("MHM"), resigned as the independent certified accountant of Avalon Oil & Gas, Inc. (the "Registrant") for business reasons unrelated to any disagreement between MHM and the Registrant or its management. On September 27, 2007, the Registrant engaged Bernstein & Pinchuk, LLP ("B&P") as its certifying accountant to audit the Registrant's financial statements. 2. Filed September 28, 2007, Avalon announced in a press release dated August 16, 2007, that Kent Rodriguez, Avalon's President and CEO, presented a proposal to the Board of Directors to create wholly owned subsidiary which would focus upon oil and gas recovery technology; and plans to spin-off such subsidiary to Avalon's shareholders. The oil and gas technology include, but are not limited, to the Patent; a system to detect hazardous gas leaks including small leaks in natural gas pipelines; and a system for intelligent drilling and completion sensors to provide real-time oil reservoir monitoring of subsurface information. 3. Filed September 28, 2007, Avalon announced in a press releases dated August 20, 2007 and August 30, 2007 that it has executed and entered into an exclusive licensing agreement with Oiltek, Inc. ("Oiltek"), whereby Oiltek acquired the exclusive rights to market Avalon's portfolio of intellectual property and fifty thousand ($50,000) dollars, in exchange for approximately eighty (80%) percent or ten million (10,000,000) of Oiltek's common stock. Oiltek is a majority owned subsidiary of Avalon, but Avalon intends to spin-off its shares to Avalon's shareholders. Oiltek is currently preparing to register its shares of common stock with the U.S. Securities and Exchange Commission ("SEC"), and will seek a listing of Oiltek's shares on the Over-the-Counter Bulletin Board ("OTCBB") upon the registration statement becoming effective. 4. Filed September 27, 2007, Avalon announced in a press release dated August 27, 2007 that it had acquired a sixteen (16%) percent working interest in the Hughs #1 well, located in Noble County, Oklahoma. When the well was drilled and completed in 1988, it was tested to have a capacity of four (4) million cubic feet per day. 5. Filed on October 23, 2007, on October 22, 2007, the stockholders (the "Stockholders") of Avalon Oil & Gas, Inc. (the "Company") acting by written consent, in accordance with Sections 78.320 and 78.335 of the Nevada Revised Statutes, terminated the directorship of Thad Kaplan. The Stockholders also directed the Company to terminate the directorship Mr. Kaplan from Oiltek, Inc. ("Oiltek"), a majority owned subsidiary of the Company. On October 22, 2007, the Stockholders acting by written consent appointed Jill Allison as a director of the Company, and directed the Company to appoint Ms. Allison as a director of Oiltek. 6. Filed October 31, 2007, on October 30, 2007, the Board of Directors acting by resolution appointed Menno Wiebe and Stephen Newton as directors of the Company. 7. Filed November 2, 2007, on October 17, 2007, Avalon Oil & Gas, Inc. ("Avalon") signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing Avalon's intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. 23 8. Filed July 2, 2008, the Avalon announced that it had entered into a letter agreement to acquire all of the oil and gas producing assets owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County, Oklahoma. 9. Filed November 13, 2007, Avalon provided additional details with respect to the oil properties which were the subject of a Letter of Intent which was detailed in the Company's Current Report on Form 8-K filed on November 2, 2007. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 1. AUDIT FEES. Our audit fees for the years ended March 31, 2008 and 2007 were as follows: 2008 2007 ------------- ------------- $ 71,389.00 $ $45,104 2. TAX FEES. Our tax return fees for the years ended March 31, 2008 and 2007 were as follows: 2008 2007 ------------- ------------- $ 10,000 $ N/A 3. ALL OTHER FEES. 2008 2007 ------------- ------------- $ 0.00 $ 0.00 24 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 15, 2008 /s/ Kent Rodriguez ------------------ Kent Rodriguez, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company in the capacities and on the dates indicated. /s/ Kent Rodriguez July 15, 2008 ------------------------ Kent Rodriguez, President and Chief Executive Officer, Director /s/ Jill Allison July 15, 2008 ------------------------ Jill Allison, Vice President, Director /s/ Douglas Barton July 15, 2008 ------------------------ Douglas Barton, Director /s/ Stephen Newton July 15, 2008 ------------------------ Stephen Newton, Director /s/ Menno Wiebe July 15, 2008 ------------------------ Menno Wiebe, Director 25 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Avalon Oil & Gas, Inc. EXHIBIT INDEX TO FORM 10-KSB For the fiscal year ended March 31, 2008 Commission File Number 1-12850 Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form SB-2, Registration No. 33-74240C).* 3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form SB-2, Registration No. 33-74240C). * 3.3 Articles of Incorporation for the State of Nevada. (Incorporated by reference to Exhibit 2.2 to Form 10-KSB filed February 2000) * 3.4 Articles of Merger for the Colorado Corporation and the Nevada Corporation (Incorporated by reference to Exhibit 3.4 to Form 10-KSB filed February 2000) * 3.5 Bylaws of the Nevada Corporation (Incorporated by reference to Exhibit 3.5 to Form 10-KSB filed February 2000) * 4.1 Specimen of Common Stock (Incorporated by reference to Exhibit to Registration Statement on Form SB-2, Registration No. 33-74240C). * 31.1 Certification 32.1 Certification * Incorporated by reference to a previously filed exhibit or report. 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Avalon Oil & Gas, Inc. We have audited the accompanying consolidated balance sheet of Avalon Oil & Gas, Inc. ("the Company") and subsidiary as of March 31, 2008 and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2008 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Bernstein & Pinchuk LLP New York, New York July 15, 2008 F-1
AVALON OIL AND GAS, INC. CONSOLIDATED BALANCE SHEETS Assets MARCH 31, ---------------------------- 2008 2007 ------------ ------------ Current assets: Cash and cash equivalents $ 108,688 $ 900,537 Marketable securities -- 31,047 Accounts receivable 23,473 11,643 Deposits 3,138 3,138 Notes receivable 90,000 65,000 Prepaid expenses 109,849 28,995 ------------ ------------ Total current assets 335,148 1,040,360 ------------ ------------ Property and equipment Equipment, net of depreciation of $7,923 and $1,502 at March 31, 2008 and 2007, respectively 41,105 37,156 Unproved oil and gas properties 339,417 -- Producing oil and gas properties, net of depletion of $125,347 and $23,335 and impairment of $93,999 at March 31, 2007 801,496 546,471 ------------ ------------ Total property and equipment 1,182,018 583,627 Goodwill 33,943 -- Intellectual property rights, net of amortization of $272,336 and $51,514 and impairment of $371,925 at March 31, 2007 1,183,392 1,369,214 ------------ ------------ $ 2,734,501 $ 2,993,201 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 81,869 $ 43,749 Due to related party 12,404 13,367 Notes payable - related party 124,500 100,000 Accrued liabilities 1,374 44,646 ------------ ------------ Total current liabilities 220,147 201,762 ------------ ------------ Accrued ARO liability 52,458 29,841 Minortiy interest in subsidary -- -- Commitments and contingencies -- -- Shareholders' equity: Preferred stock, Series A, $0.10 par value, 1,000,000 shares authorized, 100 shares issued and outstanding, including beneficial conversion feature 500,000 500,000 Common stock, $0.001 par value, 50,000,000 shares authorized, 31,767,463 and 17,073,706 shares issued and outstanding at March 31, 2008 and 2007, respectively 31,768 17,038 Additional paid-in capital 24,446,046 21,529,910 Stock subscription receivable -- (34,500) Accumulated other comprehensive income -- (4,459) Accumulated deficit (22,515,918) (19,246,391) ------------ ------------ Total shareholders' equity 2,461,896 2,761,598 ------------ ------------ $ 2,734,501 $ 2,993,201 ============ ============ F-2 AVALON OIL AND GAS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended March 31, ---------------------------- 2008 2007 ------------ ------------ Oil and Gas Sales $ 249,856 $ 49,671 Operating expenses: Lease operating expense, serverance taxes and ARO accretion 150,136 54,318 Selling, general and administrative expenses 1,225,206 743,137 Stock-based compensation 1,747,860 2,054,541 Depreciation, depletion and amortization 329,363 76,299 ------------ ------------ Total operating expenses 3,452,565 2,928,295 ------------ ------------ Loss from operations (3,202,709) (2,878,624) Other Income (Expenses) Interest income 17,253 27,659 Property impairments -- (465,924) Realized losses on marketable securites (11,523) -- Interest expense: Related party (37,731) (123,333) ------------ ------------ Loss before income taxes (3,234,710) (3,440,222) Provision (benefit) for income taxes -- -- ------------ ------------ Net loss before minority interest (3,234,710) (3,440,222) Minority interest in loss of subsidary 5,183 -- ------------ ------------ Net loss (3,229,527) (3,440,222) Preferred Stock Dividend (40,000) (40,000) ------------ ------------ Loss attributable to common stock after preferred stock dividends $ (3,269,527) $ (3,480,222) ============ ============ Basic and diluted loss per common share $ (0.15) $ (0.32) ============ ============ Basic and diluted weighted average common shares outstanding 22,020,104 10,917,440 ============ ============ The components of other comprehensive income: Net loss $ (3,229,527) $ (3,440,222) Unrealized losses on available-for-sale marketable securites -- (4,459) ------------ ------------ Comprehensive income (loss) $ (3,229,527) $ (3,444,681) ============ ============ F-3 AVALON OIL AND GAS, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Preferred Stock, Series A Common Stock Stock --------------------------- ---------------------------- Subscription Shares Par Value Shares Par Value Receivable ------------ ------------ ------------ ------------ ------------ Balance, March 31, 2006 100 $ 500,000 9,128,261 $ 9,128 $ (832,000) Common stock issued in exchange for consulting services -- -- 3,479,513 3,480 0 Common stock issued in exchange for assumption of liabilities -- -- 20,000 20 (34,500) Common stock issued for cash -- -- 1,936,906 1,937 -- Common stock issued for property acquisitions -- -- 4,073,026 4,073 -- Cancellation of stock subscription -- -- (1,600,000) (1,600) 832,000 Warrants issued in exchange for director services -- -- -- -- -- Warrants issued in exchange for services -- -- -- -- -- Syndication fees -- -- -- -- -- Beneficial conversion feature of loan -- -- -- -- -- Unrealized loss on investments held for sale -- -- -- -- -- Dividends on preferred stock -- -- -- -- -- Net Loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, March 31, 2007 100 500,000 17,037,706 17,038 (34,500) Stock subscription received -- -- -- -- 34,500 Common stock issued in exchange for consulting services -- -- 2,813,320 2,813 -- Common stock issued in exchange for director services -- -- 400,000 400 -- Common stock issued for cash -- -- 4,994,739 4,995 -- Common stock issued for property acquisitions -- -- 250,000 250 -- Common stock issued in exchange for conversion of notes payable and accrued interest -- -- 6,050,000 6,050 -- Warrants issued in exchange for services -- -- -- -- -- Warrants exercised -- -- 221,698 222 -- Syndication fees -- -- -- -- -- Beneficial conversion feature of loan -- -- -- -- -- Realized loss on investments held for resale -- -- -- -- -- Dividends on preferred stock -- -- -- -- -- Net Loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ 100 $ 500,000 31,767,463 $ 31,768 $ -- ============ ============ ============ ============ ============ Table continues below. Additional Other Paid-in Comprehensive Accumulated Capital Income Deficit Total ------------ ------------ ------------ ------------ Balance, March 31, 2006 $ 16,034,072 $ -- $(15,766,169) $ (54,969) Common stock issued in exchange for consulting services 2,013,726 -- 0 2,017,206 Common stock issued in exchange for assumption of liabilities 34,480 -- 0 -- Common stock issued for cash 1,512,589 -- 0 1,514,526 Common stock issued for property acquisitions 2,677,130 -- -- 2,681,203 Cancellation of stock subscription (830,400) -- -- -- Warrants issued in exchange for director services 33,187 -- -- 33,187 Warrants issued in exchange for services 4,148 -- -- 4,148 Syndication fees (74,660) -- -- (74,660) Beneficial conversion feature of loan 125,638 -- -- 125,638 Unrealized loss on investments held for sale -- (4,459) -- (4,459) Dividends on preferred stock -- -- (40,000) (40,000) Net Loss -- -- (3,440,222) (3,440,222) ------------ ------------ ------------ ------------ Balance, March 31, 2007 21,529,910 (4,459) (19,246,391) 2,761,598 Stock subscription received -- -- -- 34,500 Common stock issued in exchange for consulting services 1,567,271 -- -- 1,570,084 Common stock issued in exchange for director services 219,600 -- -- 220,000 Common stock issued for cash 960,423 -- -- 965,418 Common stock issued for property acquisitions 45,750 -- -- 46,000 Common stock issued in exchange for conversion of notes payable and accrued interest 73,702 -- -- 79,752 Warrants issued in exchange for services 30,325 -- -- 30,325 Warrants exercised (222) -- -- -- Syndication fees (6,565) -- -- (6,565) Beneficial conversion feature of loan 25,852 -- -- 25,852 Realized loss on investments held for resale -- 4,459 -- 4,459 Dividends on preferred stock -- -- (40,000) (40,000) Net Loss -- -- (3,229,527) (3,229,527) ------------ ------------ ------------ ------------ $ 24,446,046 $ -- $(22,515,918) $ 2,461,896 ============ ============ ============ ============ F-4 AVALON OIL AND GAS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, -------------------------- 2008 2007 ----------- ----------- Cash flows from operating activities: Net loss $(3,234,710) $(3,440,222) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation 6,529 1,450 Depletion 102,012 23,335 Amortization 220,822 51,514 Impairment of properties -- 465,924 Amortization of loan discount to interest expense -- 100,000 Stock-based compensation 1,820,410 2,054,541 Changes in operating assets and liabilities Marketable securities 35,506 (31,047) Accounts receivable (11,830) (11,643) Prepaid expenses (55,002) 11,643 Deposits -- (3,138) Accounts payable and other accrued expenses 32,470 (39,077) Asset retirement obligation 3,392 728 ----------- ----------- Net cash used in operating activities $(1,080,401) $ (815,992) ----------- ----------- Cash flows from investing activities: (Purchase) Proceeds of Leak Location Technologies (5,000) 99,999 Purchase of BIO-CAT license (10,000) -- Proceeds from UMTI stock purchase -- 269,650 Proceeds from Intell-well stock purchase -- 202,500 Purchase of Oiltek (13,593) -- Issuance of notes receivable (35,000) (65,000) Payments on notes receivable 10,000 -- Purchase of fixed assets (10,672) (37,282) Proceeds from disposal of fixed assets 194 -- Proceeds from disposal of oil and gas properties 35,000 -- Additions to oil and gas properties (686,229) (332,564) ----------- ----------- Net cash provided by (used in) investing activities (715,300) 137,303 ----------- ----------- Cash flows from financing activities: Proceeds from sale of common stock 965,417 1,514,527 Preferred stock dividends (30,000) -- Syndication fees paid (6,565) (74,660) Proceeds from issuance of note payable 75,000 100,000 ----------- ----------- Net cash provided by financing activities 1,003,852 1,539,867 ----------- ----------- Effect of unrealized gains on marketable securities held for resale -- (4,459) Net increase (decrease) in cash and cash equivalents (791,849) 856,719 Cash and cash equivalents, Beginning of period 900,537 43,818 ----------- ----------- Cash and cash equivalents, End of period $ 108,688 $ 900,537 =========== =========== F-5 AVALON OIL AND GAS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended March 31, 2008 and 2007 2008 2007 ----------- ---------- Supplemental cash flow information: Cash paid during the period for: Interest $ -- $ -- =========== ========== Income taxes $ -- $ -- =========== ========== Non-cash investing and financing transactions: Common stock issued in exchange for consulting services $ 1,570,085 $2,017,206 =========== ========== Common stock issued for directors' fees $ 220,000 $ -- =========== ========== Preferential conversion feature of loan $ 25,852 $ -- =========== ========== Warrants issued in exchange for services $ 30,325 $ 4,180 =========== ========== Warrants issued in exchange for directors' fees $ -- $ 161,153 =========== ========== Common stock issued for accrued liabilites $ -- $ 34,500 =========== ========== Common stock issued for acquisition of oil and gas properties $ -- $ 301,400 =========== ========== Common stock issued for technologies acquired $ 20,000 $2,379,803 =========== ========== Common stock issued on conversion of notes payable $ 63,000 $ -- =========== ========== F-6
AVALON OIL & GAS, INC. NOTES TO CONDENSED CONSOLIDATED 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 and related oilfield technologies, which the Company plans to develop into commercial applications. 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. The shares were valued at the average sales price received in private placements for sales of restricted common stock for cash. UMTI became a wholly owned subsidiary of the Company as of the date of acquisition. UMTI holds the technology license of a patented process for paraffin wax mitigation from crude oil using ultrasonic waves developed by the University of Wyoming. On November 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. The shares were valued at the average sales price received in private placements for sales of restricted common stock for cash. ITWI became a wholly owned subsidiary of the Company as of the date of acquisition. IWTI holds a non-exclusive license in the United States for a borehole casing technology developed by the Regents of the University of California (the "Regents") through its researchers at Lawrence Livermore National Laboratory. On March 28, 2007, the Company purchased all the outstanding shares of Leak Location Technologies, Inc. (LLTI) from UTEK Corporation for 36,710,526 shares of the Company's common stock valued at $1,090,303. The shares were valued at the average sales price received in private placements for sales of restricted common stock for cash. LLTI became a wholly owned subsidiary of the Company as of the date of acquisition. LLTI holds a non-exclusive license in the United States for a leak detection and location technology developed by the Rensselaer Polytechnic Institute ("Rensselaer") through its researcher Michael Savic. On September 22, 2007 the Company entered into an agreement with respect to its purchase of a 75.6% interest in Oiltek, Inc. (Oiltek) for $50,000 and the right of Oiltek to market Avalon's intellectual property. Oiltek is consolidated in these financial statements with a minority interest shown. Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Ultrasonic Mitigation Technologies, Inc.; Intelli-Well Technologies, Inc. and Leak Location Technologies, Inc. along with the majority owned Oiltek, Inc. All significant inter-company items have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions. F-7 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. 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 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 specific identification method. As of December 31, 2007, 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. Accounts Receivable Management periodically assesses the collectibility of the Company's accounts receivable. Accounts determined to be uncollectible are charged to operations when that determination is made. All of the Company's accounts receivable are concentrated in the Oil industry. Oil and Natural Gas 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. F-8 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. During the year ended March 31, 2008, the Company did not recognize any impairment expense. Other Property and Equipment Other property and equipment is reviewed on an annual basis for impairment and as of March 31, 2008, the Company had not identified any such impairment. Repairs and maintenance are charged to operations when incurred and improvements and renewals are capitalized. Other property and equipment are stated at cost. Depreciation is calculated using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Their estimated useful lives are as follows: Office Equipment: 5-7 Years Asset Retirement Obligations In accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations, the Company records the fair value of its liability for asset retirement obligations in the period in which it is incurred and a corresponding increase in the carrying amount of the related long live assets. Over time, the liability is accreted to its present value at the end of each reporting period, and the capitalized cost is depreciated over the useful life of the related assets. Upon settlement of the liability, the Company will either settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company's asset retirement obligations relate to the plugging and abandonment of its oil properties. Intangible Assets The cost of licensed technologies acquired is capitalized and will be amortized over the shorter of the term of the licensing agreement or the remaining life of the underlying patents. F-9 The Company evaluates recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that intangible assets carrying amount may not be recoverable. Such circumstances include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of cost significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the assets against the estimated undiscounted future cash flows associated with it. 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. For the year ended March 31, 2007, the Company recognized an impairment loss of $371,925 related to Intelli-Well Technologies. Estimated amortization of intangible assets over the next five years is as follows: 03/31/09 $ 220,822 03/31/10 220,822 03/31/11 220,822 03/31/12 220,822 03/31/13 220,822 ---------- $1,104,110 ========== 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. F-10 Warrants The value of warrants issued is recorded at their fair values as determined by use of a Black Scholes Model at such time or over such periods as the warrants vest. 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. In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is intended to clarify the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under FIN 48, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. F-11 The adoption of FIN 48 at January 1, 2007 did not have a material effect on the Company's financial position. Revenue Recognition In accordance with the requirements of SEC Staff Accounting Bulletin Topic 13A "Revenue Recognition", revenues are recognized at such time as (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable and (4) collectibility is reasonably assured. Specifically, oil and gas sales are recognized as income at such time as the oil and gas are delivered to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned. Recently Issued Accounting Standards 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 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 adopted 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 adopted 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. F-12 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 adopted this Statement on April 1, 2007 The adoption of SFAS No. 158 had no 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. The initial adoption of SAB No. 108 did not have a material impact on the Company's financial position, results of operations, or cash flows. In February 2007, the FASB issued Statement No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159). This statement permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 159 on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) will change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141(R) will impact the Company in the event of any future acquisition. In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements--an amendment of Accounting Research Bulletin No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believe that SFAS 160 will have a material impact on its consolidated financial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities--an amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161. F-13 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, 2005, 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 May 8, 2008. The note holder has the right to convert the note and accrued interest at the rate of $0.20 per share as adjusted for the May 2007 1-for-20 reverse stock split. 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 year ended March 31, 2007. On May 8, 2007 the loan was extended for one year. The conversion feature of the note was valued at $25,852 and was treated as prepaid loan costs. During the nine months ended December 30, 2007 $25,852 was amortized to interest expense. This note was not extended and is currently past due. On October 19, 2007, the note holder converted $30,000 of principal plus accrued interest of $16,152 for 1,350,000 shares of common stock. On November 30, 2007, the note holder converted $10,000 of principal for 950,000 shares of common stock. On January 31, 2008, the note holder converted $10,000 of principal and accrued interest of $600 for 1,250,000 shares of common stock. On February 29, 2008, the note holder converted $8,000 of principal for 1,250,000 shares of common stock. On March 31, 2008, the note holder converted $5,000 of principal for 1,250,000 shares of common stock. The balance of the note as of March 31, 2008 and 2007 was $124,500 and $100,000, respectively. On February 11, 2008, the Company borrowed $75,000 from an officer of the corporation. The note carries a 10% interest rate and matures on March 31, 2008. This note was not extended and is currently past due. Convertible notes payable in the amount of $12,500 dated November 28, 2006 were issued by Oiltek. The notes bear interest at the rate of 8% per annum, and were due in full on October 1, 2007. The notes are convertible by the holder into common stock of Oiltek at a conversion of $0.01 per share. Accrued interest is convertible by the holders into common stock of Oiltek at maturity of the note at a price of $0.02 per share. F-14 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 years ended March 31, 2008 and 2007, the Company incurred $40,000 in preferred stock dividends, respectively. 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. Note 3: STOCK-BASED COMPENSATION During the year ended March 31, 2007, the Company issued its directors an option to purchase 100,000 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". On October 30, 2007, the Company issued its directors 400,000 shares of common stock for directors' fees. The stock was recorded at the quoted market price of the stock on the date of issuance. The services, valued at $220,000, are included in the accompanying financial statements as "Stock-based compensation". During the year ended March 31, 2007, 3,479,513 of the 3,486,349 shares issued during the year ended March 31, 2006 for consulting services valued at $2,017,206 were earned and included in the accompanying financial statements as "Stock-based compensation". During the year ended March 31, 2007 the Company issued 49,682 shares of common stock valued at $34,777 for consulting services. Of these shares 6,835 valued at $4,785 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". During the year ended March 31, 2008 6,835 shares were earned and the value of $4,785 was included in the accompanying financial statements as "Stock-based compensation". During the year ended March 31, 2008 the Company issued 4,994,739 shares of common stock valued at $1,570,084 for consulting services. During the year ended March 31, 2007 the Company issued warrants with a life of five years to purchase 50,000 shares of common stock at $0.075; 50,000 shares of common stock at $1.00; 50,000 shares of common stock at $1.25 and 50,000 shares of common stock at $1.50. These warrants were valued using a Black-Sholes model at $30,325 and included in these financial statements as "Stock-based compensation". On October 1, 2007 these warrants were cancelled. F-15 Note 4: NOTE RECEIVABLE On December 11, 2006 the Company loaned to an individual $65,000, whih was due on April 1, 2007 with an interest rate of 13%. The Company received a promissory note evidencing the loan. The note is secured by real property. An Interest only payment of $3,163 was made on the note and it was extended until October 1, 2007. The loan is now past due. On September 12, 2007 the Company loaned to a company $25,000, which was due on November 5, 2007 with an interest rate of 10%. The Company received a promissory note evidencing the loan. The note is unsecured. The loan is now past due. Note 5: OIL AND GAS PROPERTY ACTIVITY 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 October 9, 2007, the Company acquired a ten (10%)percent working interest in the Lake Washington Field, Plaquemines Parish, LA., for $200,000. On October 15, 2007, the Company acquired a five (5%) percent working interest in the Waters well for $12,800. On October 19, 2007 the Company acquired a ten (10%) percent working interest in the California Creek Field for 50,000 shares of common stock valued at $26,000. On October 17, 2007, the Company signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing Avalon's intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. Pursuant to the non-binding letter of intent, the Company is required to pay $1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at this time the Company's management does not believe that the terms of the non-binding letter of intent will be complied with, or that we will enter into a definitive agreement. On January 15, 2008 the Company sold its working interest in the Aloha field for $35,000. Note 6: INCOME TAXES In July 2006, the Financial Accounting Standards Board (FASB) issued interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is intended to clarify the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under FIN 48, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to F-16 measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The adoption of FIN 48 at January 1, 2007 did not have a material effect on the Company's financial position. The company is delinquent filing tax returns with the Internal Revenue Service and state taxing authorities. The Company is currently in the process of filing these delinquent returns. The filing of these returns should result in a net operating loss (NOL) carry forward which would create a deferred tax asset that would be fully reserved. Note 7: SHAREHOLDERS' EQUITY On May 15, 2007, the Board of Directors approved and implemented a reverse stock split and established a ratio of 1-for 20. This move followed a vote by written consent of the stockholders dated April 23, 2007 and an action by written consent of the Board of Directors on April 25, 2007. The Company's common stock began trading on a reverse-split basis on May 15, 2007. As a result of the reverse stock split, every 20 shares of common stock were combined into one share of common stock. The reverse stock split affects all shares of common stock, stock options and warrants outstanding as of and immediately prior to the effective time of the reverse stock split. Fractional shares equal or greater to one-half share are rounded up, and fractional shares less then one-half are rounded down. The effect of this reverse stock split has been applied in the consolidated financial statements and notes to consolidated financial statements. On April 18, 2006, the Company authorized the issuance of 135,000 shares of common stock valued at $94,500 for consulting services. In May 2006, the Company issued 109,000 shares of common stock and warrants to purchase 50,000 shares of common stock at a price of $2.00 per share. These warrants expire in May 2014. The purchase price for the shares and the warrants was $100,000. On May 1, 2006, the Company granted to each of its directors, other than Mr. Rodriguez, warrants to purchase 100,000 shares of common stock at a price of $0.50 per share for director services. These warrants were exercised on May 17, 2007, pursuant to a cashless exercise, and 26,415 shares were issued to each of the directors. On May 15, 2006, the Company entered into a strategic alliance agreement with UTEK Corporation for consulting services. The Company issued 34,682 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, $21,242 was included in "Stock-based compensation" with the balance not shown as issued until services are rendered. F-17 On May 18, 2006, the Company issued 375,000 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 as stock subscriptions receivable until the underlying assumed payroll taxes have been paid by the shareholder at which time the payroll tax liability will be removed from the Company's books and the stock will be treated as issued. On June 1, 2006, the Company executed a six-month consulting agreement with a Consultant and issued 15,000 shares of common stock as compensation. The stock was valued at $10,500 of which $8,750 was recognized as compensation expense during the year ending March 31, 2007. On June 8, 2006 the Company granted warrants to purchase 12,500 shares at a price of $0.5 per share at a value of $4,148 for website design and maintenance services. These warrants expire on September 8, 2011 On August 18, 2006, the Company authorized the issuance of 25,000 shares of common stock for consulting services. The stock was valued at $21,400 and was charged to expense during the year ending March 31, 2007. On August 29, 2006 the Company authorized the issuance of 50,000 shares of common stock for consulting services. This transaction was valued at $42,800 and was charged to expense for the year ending March 31, 2007. On September 12, 2006 the Company authorized the issuance of 60,000 shares of common stock for consulting services. The stock was valued at $68,480 and was recognized as compensation expense during the year ending March 31, 2007. During the year ended March 31, 2007, the Company issued 206,262 shares of its common stock to 8 accredited investors, at an average price of approximately $1.00 per share, pursuant to the exemptions afforded by Section (4)2 of the Securities Act of 1933, as amended, for which the Company received total cash proceeds of $196,404. All stock transactions for services with third parties were valued as of the earlier of the date at which a commitment for performance by the third party to earn the stock was reached or the date at which the third party's performance was complete. On May 15, 2006, the Company entered into a Regulation S Stock Purchase agreement. During the year ended March 31, 2007, 1,730,644 shares of common stock with cash proceeds of $1,199,123 were sold pursuant to the Regulation S Stock Purchase agreement. During the year ended March 31, 2008 the Company issued 2,813,320 shares of common stock valued at $1,570,084 for consulting services. During the year ended March 31, 2008, 4,994,739 shares of common stock with cash proceeds of $965,418 were sold pursuant to the Regulation S Stock Purchase agreement. During the year ended March 31, 2008 the Company issued warrants with a life of five years to purchase 50,000 shares of common stock at $0.075; 50,000 share of common stock at $1.00; 50,000 shares of common stock at $1.25 and 50,000 shares of common stock at $1.50. These warrants were valued using a Black-Sholes model at $30,325 and included in these financial statements as "Stock-based compensation". Pursuant to cancellation of the consulting agreement on October 1, 2007 these warrants were cancelled. F-18 Information with respect to stock warrants outstanding is follows: Expired, Exercise Outstanding Exercised or Outstanding Expiration Price June 30, 2007 Granted Cancelled Mar. 31, 2008 Date ----- ------------- ------- --------- ------------- ---- Warrants: $0.20 125,000 -0- -0- 125,000 12/8/2012 $0.20 100,000 -0- 100,000 -0- 3/31/2011 $0.60 150,000 -0- -0- 150,000 3/6/2013 $0.50 -0- 100,000 100,000 -0- 5/1/2011 $0.50 -0- 12,500 12,500 -0- 6/8/2011 $0.75 -0- 50,000 50,000 -0- 7/16/2012 $1.00 -0- 50,000 50,000 -0- 7/16/2012 $1.25 -0- 50,000 50,000 -0- 7/16/2012 $1.50 -0- 50,000 50,000 -0- 7/16/2012 $2.00 -0- 50,000 50,000 -0- 5/1/2001 Note 8: TECHNOLOGY LICENSE AGREEMENTS On July 12, 2006 UMTI entered into a technology license of a patented process for paraffin wax mitigation from crude oil using ultrasonic waves from the University of Wyoming. This license calls for an earned royalty of five percent on net sales of licensed technologies and services; twenty-five percent of all sublicense fees and revenues with an escalating minimum annual royalty which will be credited toward the total royalties due. On March 27, 2007 LLTI entered into non-exclusive license in the United States for a leak detection and location technology developed by the Rensselaer Polytechnic Institute ("Rensselaer") through its researcher Michael Savic. The agreement calls for a milestone license fee of $10,000 sixteen months following the effective date of the agreement or the first production introduction which ever is sooner. A royalty fee of four and one-half percent (4.5%) of gross sales of licensed products required with annual minimum royalty payments. On February 11, 2008 the Company entered into a technology license of a patented process for enzyme based technology for the improvement and increase of the extraction of hydrocarbons from underground. The original terms of the agreement called for a payment of $75,000, however the agreement was modified for a payment of $10,000 in cash and 200,000 shares of common stock which were valued at $20,000. Terms of the agreement call for a annual renew fee of $100,000 on the anniversary date of the agreement. The license calls for royalties of six percent of the net sale of licensed products or services. All royalties earned during the first 365 days of the agreement shall be forgiven until such amount equals $100,000. Minimum obligations under license agreements for the next five years: 3/31/09 $ 110,000 3/31/09 20,000 3/31/10 30,000 3/31/11 40,000 3/31/12 40,000 --------- $ 240,000 ========= F-19 Note 9: OILTEK, INC. PURCHASE On September 22, 2007 the Company entered into an agreement with respect to its purchase for $25,000 in cash and a $25,000 note payable and the right of Oiltek to market its intellectual property for 10,000,000 shares of Oiltek, Inc., a 75.6% ownership interest. The purchase price was allocated as follows: Cash $ 11,407 Accounts payable assumed (2,667) N/P (12,500) Minority interest (5,183) Stock subscription 25,000 Goodwill 33,943 -------- $ 50,000 ======== As part of the transaction Oiltek received a license of the UMTI, IWTI and LLTI technologies for a period of 5 years. Oiltek was controlled by officers of the Company prior to the acquisition. Note 10: 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 anti-dilutive. For the years ended March 31, 2008 and 2007, dilutive shares do not include outstanding warrants to purchase 125,000 shares of common stock at an exercise price of $0.20; 150,000 shares of common stock at an exercise price of $0.60; because the effects were anti-dilutive. 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 anti-dilutive. The following reconciles the components of the EPS computation: Income Shares Per Share Numerator) (Denominator) Amount ----------- ----------- --------- For the year ended March 31, 2008: Net loss $(3,234,710) Minority interest in loss of Subsidiary 5,183 Preferred stock dividends (40,000) ----------- Basic EPS loss available to common shareholders $(3,269,527) 22,020,104 $ (0.15) Effect of dilutive securities: None -- -- -- ----------- ----------- --------- Diluted EPS loss available to common shareholders $(3,269,527) 22,020,104 $ (0.15) =========== =========== ========= For the year ended March 31, 2007: Net loss $(3,440,222) Preferred stock dividends (40,000) ----------- Basic EPS loss available to common shareholders $(3,480,222) 10,917,440 $ (0.32) Effect of dilutive securities: None -- -- -- ----------- ----------- --------- Diluted EPS loss available to common shareholders $(3,480,222) 10,917,440 $ (0.32) =========== =========== ========= F-20 Note 11: SFAS 69 SUPPLEMENTAL DISCLOSURES (Unaudited) Net Capitalized Costs The Company's aggregate capitalized costs related to natural gas and oil producing activities are summarized as follows: March 31, March 31, 2008 2007 ----------- ----------- Natural gas and oil properties and Related lease equipment: Proved $ 1,020,842 $ 663,806 Unproved 339,417 Accumulated depreciation, depletion and impairment (219,346) (117,335) ----------- ----------- Net capitalized costs $ 1,140,913 $ 546,471 =========== =========== Costs Incurred Costs incurred in natural gas and oil property acquisition, exploration and development activities that have been capitalized are summarized as follows: Years Ended March 31, 2008 2007 -------- -------- Acquisition of properties $620,717 $628,919 Development costs 91,513 34,892 -------- -------- $712,230 $663,806 ======== ======== Results of Operations for Natural Gas and Oil Producing Activities The Company's results of operations from natural gas and oil producing activities are presented below for the fiscal years ended March 31, 2008 and 2007. The following table includes revenues and expenses associated directly with the Company's natural gas and oil producing activities. It does not include any interest costs and general and administrative costs and, therefore, is not necessarily indicative of the contribution to consolidated net operating results of the Company's natural gas and oil operations. Years Ended March 31, 2008 2007 --------- --------- Production revenues $ 249,856 $ 49,671 Production costs (150,136) (54,318) Impairment of property -- (93,999) Depletion expense (102,012) (23,335) --------- --------- (2,292) (121,981) Imputed income tax provision (1) -- -- --------- --------- Results of operation for natural gas/ Oil producing activity $ (2,292) $(121,981) ========= ========= (1) The imputed income tax provision is hypothetical (at the statutory rate) and determined without regard to the Company's deduction for general and administrative expenses, interest costs and other income tax credits and deductions, nor whether the hypothetical tax provision will be payable. F-21 Natural Gas and Oil Reserve Quantities The following schedule contains estimates of proved natural gas and oil reserves attributable to the Company. Proved reserves are estimated quantities of natural gas and oil that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. Reserves are stated in thousand cubic feet (mcf) of natural gas and barrels (bbl) of oil. Geological and engineering estimates of proved natural gas and oil reserves at one point in time are highly interpretive, inherently imprecise and subject to ongoing revisions that may be substantial in amount. Although every reasonable effort is made to ensure that the reserve estimates are accurate, due to their nature reserve estimates are generally less precise than other estimates presented in connection with financial statement disclosures. Oil - bbls ---------- Proved reserves: ------- Balance, March 31, 2006 -- ------- Purchase of reserves-in-place 29,815 Extensions and discoveries Production (1,043) ------- Balance, March 31, 2007 28,772 Purchase of reserves-in-place 11,560 Extensions and discoveries 4,216 Changes in estimates (11,911) Production (3,504) ------- Balance, March 31, 2008 29,133 ======= Proved developed reserves: Balance, March 31, 2007 28,772 Balance, March 31, 2008 29,133 Standardized Measure of Discounted Future Net Cash Flows: The following schedule presents the standardized measure of estimated discounted future net cash flows from the Company's proved reserves for the fiscal years ended March 31, 2008 and 2007. Estimated future cash flows are based on independent reserve data. Because the standardized measure of future net cash flows was prepared using the prevailing economic conditions existing at March 31, 2008 and 2007, it should be emphasized that such conditions continually change. Accordingly, such information should not serve as a basis in making any judgment on the potential value of the Company's recoverable reserves or in estimating future results of operations. Years Ended March 31, 2008 2007 ----------- ----------- Future production revenues (1) $ 2,727,073 $ 1,805,253 Future production costs (752,597) (743,727) Future development costs -- (3,250) ----------- ----------- Future cash flows before income taxes 1,975,073 1,058,276 Future income tax (399,016) (141,664) ----------- ----------- Future net cash flows 1,579,057 916,612 Effect of discounting future annual cash flows at 10% (685,752) (368,994) ----------- ----------- Standardized measure of discounted net cash flows $ 890,305 $ 547,618 =========== =========== (1) The weighted average oil wellhead price used in computing the Company's reserves were $101.58 per bbl and $65.94 per bbl at March 31, 2008 and 2007. The weighted average gas wellhead price used in computing the Company's reserves were $9.86/mmbtu at March 31, 2008. The following schedule contains a comparison of the standardized measure of discounted future net cash flows to the net carrying value of proved natural gas and oil properties at March 31, 2008 and 2007: Years Ended March 31, 2008 2007 -------- -------- Standardized measure of discounted future net cash flows $890,305 $547,618 Proved natural gas & oil property net of Accumulated depreciation, depletion and amortization, including impairment of $93,999 801,496 547,618 -------- -------- Standardized measure of discounted future net cash flows in excess of net carrying value of proved natural gas & oil properties $ 88,809 $ -- ======== ======== F-22 NOTE 12 SUBSEQUENT EVENT