10-Q 1 avalon608.txt 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 Or |_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 1-12850 AVALON OIL & GAS, INC. ---------------------- (Exact Name of Small Business Issuer as specified in its charter) Nevada 84-1168832 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 7808 Creekridge Circle, Suite 105 Minneapolis, MN 55439 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (952) 746-9652 Indicate by check mark whether the Issuer: (1) Has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports): Yes |X| No | | 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| (2) Has been subject to such filing requirements for the past 90 days. Yes |X| No | | 40,067,084 shares of the registrant's Common Stock, $.0001 per share, were outstanding as of August 13, 2008.
Avalon Oil & Gas, Inc. FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED June 30, 2008 PART I FINANCIAL INFORMATION Item Number Page Item 1. Financial Statements 3 Consolidated Balance Sheets as of June 30, 2008 (Unaudited) 3 Consolidated Statements of Income and Other Comprehensive Income for the Three Months 4 June 30, 2008 and 2007 (Unaudited) Consolidated Statements of Cash Flows for The Three Months Ended June 30, 2008 and 2007 5 (Unaudited) Notes to Financial Statements 7 - 18 Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation 19 Item 3. Qualitative and Quantitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II OTHER INFORMATION 23 Item 1. Legal Proceedings 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 25 2 AVALON OIL AND GAS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2008 AND MARCH 31, 2008 Assets June 30, 2008 March 31, (unaudited) 2008 ------------ ------------ Current assets: Cash and cash equivalents $ 10,582 $ 108,688 Accounts receivable 46,362 23,473 Deposits 3,138 3,138 Notes receivable 90,000 90,000 Prepaid expenses 49,000 109,849 ------------ ------------ Total current assets 199,082 335,148 ------------ ------------ Property and equipment Equipment, net of depreciation of $9,833 and $9,923 at June 30, and March 31, 2008, respectively 40,196 41,105 Unproved oil and gas properties 339,417 339,417 Producing oil and gas properties, net of depletion of $157,654 and $125,347 and impairment of $93,999 at June 30, and March 31, 2008, respectively 900,917 801,496 ------------ ------------ Total property and equipment 1,280,530 1,182,018 Goodwill 33,943 33,943 Intellectual property rights, net of amortization of $327,541 and $272,336 and impairment of $371,925 at June 30, and March 31, 2008 respectively 1,128,187 1,183,392 ------------ ------------ $ 2,641,742 $ 2,734,501 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable 56,130 81,869 Due to related party 21,104 12,404 Notes payable - related party 72,500 124,500 Accrued liabilities 3,767 1,374 ------------ ------------ Total current liabilities 153,501 220,147 ------------ ------------ Accrued ARO liability 53,666 52,458 Minority interest in subsidiary -- -- 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, 39,074,830 and 31,767,463 shares issued and outstanding at June 30, and March 31, 2008, respectively 39,075 31,768 Additional paid-in capital 24,803,598 24,446,046 Accumulated deficit (22,908,098) (22,515,918) ------------ ------------ Total shareholders' equity 2,434,575 2,461,896 ------------ ------------ $ 2,641,742 2,734,501 ============ ============ 3 AVALON OIL AND GAS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For The Three Months Ended June 30, 2008 and 2007 (Unaudited) Three months ended, June 30, 2008 2007 ------------ ------------ Oil and Gas Sales $ 113,140 $ 42,964 ------------ ------------ Operating expenses: Lease operating expense, severance taxes and ARO accretion 39,889 29,605 Selling, general and administrative expenses 184,084 353,788 Stock-based compensation 176,000 1,340,760 Depreciation, depletion and amortization 89,422 81,450 ------------ ------------ Total operating expenses 489,395 1,805,603 ------------ ------------ Loss from operations (376,255) (1,762,639) Other Income (Expenses) Interest income 89 10,875 Realized losses on marketable securities -- (8,012) Interest expense: Related party (6,014) (16,215) ------------ ------------ Loss from Continuing Operations before Income Taxes (382,180) (1,775,991) Provision (benefit) for income taxes -- -- ------------ ------------ Net loss before minority interest (382,180) (1,775,991) Minority interest in loss of subsidiary -- -- ------------ ------------ Net loss (382,180) (1,775,991) ------------ ------------ Preferred Stock Dividend (10,000) (10,000) Loss attributable to common stock after preferred stock dividends $ (392,180) $ (1,785,991) ------------ ------------ Basic and diluted loss per common share $ (0.01) $ (0.10) ============ ============ Basic and diluted weighted average common shares outstanding 34,961,729 18,536,501 ============ ============ The components of other comprehensive income: Net loss $ (382,180) $ (1,775,991) Unrealized gains on available-for-sale marketable securites -- 6,815 ------------ ------------ Comprehensive income (loss) $ (382,180) $ (1,769,176) ------------ ------------ 4 AVALON OIL AND GAS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For The Three Months Ended June 30, 2008 and 2007 (Unaudited) 2008 2007 ----------- ----------- Cash flows from operating activities: Net loss $ (382,180) $(1,775,991) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation 1,909 1,577 Depletion 32,307 24,668 Amortization 55,205 55,205 Stock-based compensation 176,000 1,340,759 Changes in operating assets and liabilities Marketable securities -- (22,146) Accounts receivable (22,889) (14,264) Prepaid expenses 60,849 25,357 Accounts payable and other accrued expenses (22,880) (8,737) Asset retirement obligation 1,208 728 Net cash used in operating activities $ (100,471) $ (372,844) =========== =========== Cash flows from investing activities: Purchase of Leak Location Technologies -- (5,000) Issuance of notes receivable -- (10,000) Purchase of fixed assets (1,000) Disposal of fixed assets -- 456 Additions to oil and gas properties (131,728) (32,534) ----------- ----------- Net cash used in investing activities (132,728) (47,078) =========== =========== Cash flows from financing activities: Proceeds from sale of common stock 179,824 -- Preferred stock dividends -- (10,000) Syndication fees paid (9,731) -- Payments on note payable (35,000) -- Net cash provided by (used in) financing activities 135,093 (10,000) ----------- ----------- Effect of unrealized gains on marketable securities held for resale -- 6,815 Net increase (decrease) in cash and cash equivalents (98,106) (423,107) Cash and cash equivalents, Beginning of period 108,688 900,537 ----------- ----------- Cash and cash equivalents, End of period $ 10,582 $ 477,430 5 AVALON OIL AND GAS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For The Three Months Ended June 30, 2008 and 2007 (Unaudited) 2008 2007 ---------- ---------- Supplemental cash flow information: Cash paid during the period for: Interest $ 1,027 $ -- Income taxes $ -- $ -- Non-cash investing and financing transactions: Common stock issued in exchange for consulting $ 16,000 $1,340,759 services Common stock issued for directors' fees $ 160,000 $ -- Preferential conversion feature of loan $ -- $ 25,852 Common stock issued on conversion of notes payable $ 17,000 $ -- 6
AVALON OIL & GAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2008 (Unaudited) Note 1: DESCRIPTION OF BUSINESS Avalon Oil & Gas, Inc. (the "Company") was originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. The Company was the general partner of Snow Runner (USA) Ltd., a Colorado limited partnership to sell proprietary snow skates under the name "Sled Dogs" which was dissolved in August 1992. In late 1993, the Company relocated its operations to Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc., and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares, par value of $0.001, and engage in the acquisition of producing oil and gas properties. Avalon Oil & Gas, Inc., ("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 812,5000 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 1,000,000 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 1,835,526 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 granting Oiltek, Inc. the right to market Avalon's intellectual property and providing to Oiltek, Inc. $50,000 in exchange for a 78.6% interest in Oiltek. Oiltek is consolidated in these financial statements with a minority interest shown. Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Preparation of Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended March 31, 2008. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the balance sheets of Avalon Oil and Gas Inc. and subsidiaries as of June 30, 2008 and the results of their operations for the three months ended June 30, 2008 and 2007, and cash flows for the three months ended June 30, 2008 and 2007. The results of operations for the three months ended June 30, 2008 and 2007 are not necessarily indicative of the results to be expected for the entire year. 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. 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 June 30, 2008, 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. 8 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. All capitalized costs of natural gas and oil properties, including the estimated future costs to develop reserves, are amortized (depleted) 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 three months ended June 30, 2008 and 2007, 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 June 30, 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. 9 Intangible Assets The cost of licensed technologies (intellectual property rights) acquired is capitalized and is being amortized over the shorter of the term of the licensing agreement or the remaining life of the underlying patents. The Company evaluates recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that intangible assets carrying amount may not be recoverable. Such circumstances include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of cost significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the assets against the estimated undiscounted future cash flows associated with it. Should the sum of the expected cash flows be less than the carrying amount of assets being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying amount of the assets, exceed fair value. Estimated amortization of intangible assets over the next five years is as follows: 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. 10 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. 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. 11 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. 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 under contract to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned. Recently Issued Accounting Standards 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. The adoption of SFAS No. 157 had no material impact to the Company's financial position, results of operations, or cash flows. 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. 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 adoption of SFAS No. 157 had no material impact to the Company's financial position, results of operations, or cash flows. 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. 13 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 does not believe that SFAS 161 will have a material impact on its consolidated financial statements. 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 3: 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 noteholder 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 was amortized to interest expense over the life of the loan. 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 three months ended June 30, 2008 $2,298 was amortized to interest expense. 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. On June 6, 2008, the note holder converted $7,000 of principal for 1,550,000 shares of common stock. 14 On June 23, 2008, the note holder converted $10,000 of principal for 1,500,000 shares of common stock. The balance of the note as of June 30, 2008 and March 31, 2008 was $20,000 and $37,000, respectively. This note has not been further expanded and is currently past due. On February 11, 2008, the Company borrowed $75,000 from an officer of the corporation. The note carries a 10% interest rate and matured on March 31, 2008. On April 18, 2008 the Company repaid $35,000 of the note plus accrued interest. The balance of the note at June 30, 2008 and March 31, 2008 was $40,000 and $75,000, respectively. This note was not extended, and the balance remains 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. These convertible notes are currently past due. 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 three months ended June 30, 2008 and 2007, the Company incurred $10,000 in preferred stock dividends, respectively. The holders of the Series A Preferred Stock have the right to convert the preferred stock into shares of common stock such that if converted simultaneously, they shall represent represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise, conversion or exchange of outstanding options, warrants, or convertible securities. Note 4: STOCK-BASED COMPENSATION On April 14, 2008, the Company issued its directors 1,000,000 shares of common stock each for directors' fees. The transactions were recorded at the quoted market price of the stock on the date of issuance. The services, valued at $160,000 are included in the accompanying financial statements as "Stock-based compensation". On April 14, 2008, the Company issued 100,000 shares of common stock for consulting services. The stock was recorded at the quoted market price of the stock on the date of issuance. The services, valued at $16,000, are included in the accompanying financial statements as "Stock-based compensation". 15 Note 5: NOTE RECEIVABLE On December 11, 2006 the Company loaned $65,000 to an individual, which 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, and the Company anticipates collection before September 30, 2008. On September 12, 2007 the Company loaned $25,000 to a company, 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, and the Company anticipates collection before September 30, 2008. Note 6: OIL AND GAS PROPERTY ACTIVITY In April 2008, the Company increased its working interest in the Janssen #1A well to 7.5% interest for $37,500. In June 2008, the Company acquired a 2.5% working interest in the Grace #2 well in the East Chandler Field in Oklahoma for $40,000. Note 7: 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 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 in a deferred tax asset that would be fully reserved. 16 Note 8: SHAREHOLDERS' EQUITY On April 14, 2008, the Company issued directors 1,000,000 shares of common stock each for directors' fees. The transactions were recorded at the quoted market price of the stock on the date of issuance. The services, valued at $160,000 are included in the accompanying financial statements as "Stock-based compensation". On April 14, 2008, the Company issued 100,000 shares of common stock for consulting services. The stock was recorded at the quoted market price of the stock on the date of issuance. The services, valued at $16,000, are included in the accompanying financial statements as "Stock-based compensation". Information with respect to stock warrants outstanding is follows: Expired, Exercise Outstanding Exercised or Outstanding Expiration Price March 31, 2008 Granted Cancelled June 30, 2008 Date ----- -------------- ------- --------- ------------- ---- Warrants: $0.20 125,000 -0- -0- 125,000 12/8/2012 $0.60 150,000 -0- -0- 150,000 3/6/2013 Note 9: 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. 17 Minimum obligations under license agreements for the next five years: 3/31/09 $ 110,000 3/31/10 20,000 3/31/11 30,000 3/31/12 40,000 3/31/13 40,000 --------- $ 240,000 ========= 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 three months ended June 30, 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 three months ended June 30, 2008: Net loss $ (382,180) Minority interest in loss of Subsidiary -- Preferred stock dividends (10,000) ----------- Basic EPS loss available to common shareholders $ (392,180) 34,968,222 $ (0.01) Effect of dilutive securities: None -- -- -- ----------- ----------- -------- Diluted EPS loss available to common shareholders $ (392,180) 34,968,222 $ (0.01) =========== =========== ======== For the three months ended June 30, 2007: Net loss $(1,775,991) Preferred stock dividends (10,000) ----------- Basic EPS loss available to common shareholders $(1,785,991) 18,536,501 $ (0.10) Effect of dilutive securities: None -- -- -- ----------- ----------- -------- Diluted EPS loss available to common shareholders $(1,785,991) 18,536,510 $ (0.10) =========== =========== ======== Note 11: SUBSEQUENT EVENTS On July 3, 2008 the Company signed a letter agreement with a company to acquire all the company's oil and gas producing assets in the East Chandler Field, Lincoln County, Oklahoma for $1,750,000. The Company will increase its 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. The Grace #2 working interest was initially acquired by Avalon in June, 2008, and the well is currently producing 350 MCF of gas per day. The Company has raised funds for the foregoing purchase through private placements of equity. The Company's management believes that as a result of the acquisition of the oil and gas producing properties in the East Chandler Field and other funds raised, it will have sufficient cash flow to support the Company's operations for the next 12 months. 18 References in this document to "us," "we," "our," "the Registrant" or "the Company" refer to Avalon Oil & Gas, Inc., and its predecessors. This report contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on certain assumptions and describe future plans, strategies and expectations of the Company. They are generally identifiable by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions. These statements are not guarantees of future performance, events or results and involve potential risks and uncertainties. Accordingly, actual performance, events or results may differ materially from such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from current expectations include, but are not limited to, changes in general economic conditions, changes in interest rates, legislative and regulatory changes, the unavailability of equity and debt financing, unanticipated costs associated with our potential acquisitions, expanding a new line of business, ability to meet competition, loss of existing key personnel, ability to hire and retain future personnel, our failure to manage our growth effectively and the other risks identified in this filing or other reports of the Company filed with the U.S. Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our other filings with the U.S. Securities and Exchange Commission. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our financial statements and the notes related thereto. The discussion of results, causes and trends should not be construed to infer conclusions that such results, causes or trends necessarily will continue in the future. Business Development We were originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. We were the general partner of Snow Runner (USA) Ltd., a Colorado limited partnership 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., 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 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 19 production enhancing technologies. Through our strategic partnership with UTEK Corporation, (UTK: ASE) a transfer technology company, we are 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 and subsequent to the period covered by this report: 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%, which is producing 350 thousand cubic feet of gas per day. We initially acquired its 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. The Grace #5A has an initial potential of 50 barrels of oil per day and 300 thousand cubic feet of gas per day. The Grace #1, the Grace #3, the Grace #5 and the Grace #6 wells will be completed in the Hunton Lime. o We are acquiring a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, We will also acquire total reserves of 90,000 barrels of oil and 559 million cubic feet of gas. We plan to raise additional capital during the current 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 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 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. 20 Financing Activities We have been funding our obligations through the issuance of our Common Stock for services rendered or for cash in private placements. The Company may seek additional funds in the private or public equity or debt markets in order to execute its plan of operation and business strategy. There can be no assurance that we will be able to attract capital or obtain such financing when needed or on acceptable terms in which case the Company's ability to execute its business strategy will be impaired. Operations for the Three Months ended June 30, 2008 As of June 30, 2008, we had $10,582 in cash and cash equivalents compared with $477,430 on June 30, 2008, a decrease of 97.8%, total assets of $199,082 at June 30, 2008 compared with $664,158 on June 30, 2008, a decrease of 69.1% and $335,148 at March 31, 2008, a decrease of 40.6%, and outstanding liabilities of $153,501, compared with $193,025 on June 30, 2007, a decrease of 20.5% and $220,147 on March 31, 2008, a decrease of 30.3%. We had oil and gas sales of $113,140 for the three months ended June 30, 2008, as compared with $42,964 for the three month period ended June 30, 2007, an increase of 163%. Revenues from the sale of oil and gas increased as a result of the purchase of additional oil and gas interests We had interest income of $89 for the three month period ended June 30, 2008, as compared to interest income of $10,875 for the three month period ending June 30, 2007, a decrease of $10,786. This reduction was due to the conversion of most of the Company's debt for equity. During the three month period ending June 30, 2008, our lease operating expense was $39,889 as compared with $29,605 for the three month period ended June 30, 2007, an increase of 38%, as a result of the acquisition of several properties over the course of the last 12 months ended June 30, 2008. Our selling, general, and administrative expenses were for the period ended June 30, 200 was $184,084 as compared to $353,788 for the three month period ended June 30, 2007. Our stock based compensation for the three month period ended June 30, 2007 were $176,000 as compared to $1,340,760 for the three month period ended June 30, 2006. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents were $10,582 on June 30, 2008, compared to $477,430 on June 30, 2007. We met our liquidity needs through the issuance of our common stock for cash and the revenue derived from oil and gas operations. During the three month period ended June 30, 2008 we sold 3,157,537 shares of our common stock and received $179,824 in cash. We need to raise additional capital during the fiscal year, but currently have not acquired sufficient additional funding. Our ability to continue operations is highly dependent upon our ability to obtain immediate additional financing, or generate revenues from our acquired oil and gas leasehold interest, and to achieve profitability, none of which can be guaranteed. Unless additional funding is located, it is highly unlikely that we can continue to operate. There is no assurance that even with adequate financing or combined operations, we will generate revenues and be profitable. Ultimately, our success is dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests. Subsequent Events On July 3, 2008 the Company signed a letter agreement with a company to acquire all the company's oil and gas producing assets in the East Chandler Field, Lincoln County, Oklahoma for $1,750,000. The Company will increase its 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. The Grace #2 working interest was initially acquired by Avalon in June, 2008, and the well is currently producing 350 MCF of gas per day. The Company has raised funds for the foregoing purchase through private placements of equity. The Company's management believes that as a result of the acquisition of the oil and gas producing properties in the East Chandler Field and other funds raised, it will have sufficient cash flow to support the Company's operations for the next 12 months. We plan to raise additional capital during the fiscal year, but currently have not identified additional funding. Our ability to continue operations is highly dependent upon our ability to obtain immediate additional financing, or generate revenues from our acquired oil and gas leasehold interests, none of which can be guaranteed. Unless additional funding is identified, it is highly unlikely that we can continue to operate. There is no assurance that even with adequate financing or combined operations, we will generate revenues and be profitable. 21 Notes Payable - Related Party Future payments due on our contractual obligations as of June 30, 2008 are as follows: Total 2008 2009-2010 2011-2012 Notes payable $72,500 $ - $ - $ - Critical Accounting Policies The financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on information available. These estimates and assumptions affect the reporting amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of the significant accounting policies is described in Note 1 to the financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information has been omitted, as the Company qualifies as a smaller reporting company. ITEM 4T. CONTROLS AND PROCEDURES Evaluation of Disclosure 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 end of the period covered by this report (the "Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Our auditors identified material adjustments in the areas of valuation of marketable securities. There have been no changes in our internal controls or in other factors that could affect these controls subsequent to the Evaluation Date. 22 PART II ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) The common stock described below has been issued through the date hereof without registration under the Securities Act. Unless otherwise indicated, the shares were valued at the quoted market price of the shares on the date of issuance. On April 14, 2008, we issued our directors 1,000,000 shares of common stock for directors' fees. The transactions were recorded at the quoted market price of the stock on the date of issuance. The services were valued at $160,000. On April 14, 2008, we issued 100,000 shares of common stock for consulting services. The stock was recorded at the quoted market price of the stock on the date of issuance. The services were valued at $16,000. (b) None. (c) None. ITEM 3. - DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Form 8-K 1. Filed on July 2, 2008 we announced that we had 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. 2. Filed August 1, 2008 we announced that Menno Wiebe, who has been a director since October 30, 2007, resigned his directorship of the Company effective August 1, 2008 23 (b) Exhibits Exhibit Number Description Page ------ ----------- ---- 3.1 Restated Articles of Incorporation * (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form SB-2, Registration No. 33-74240C). 3.2 Restated Bylaws (Incorporated by reference to * Exhibit 3.2 to Registration Statement on Form SB-2, Registration No. 33-74240C). 3.3 Articles of Incorporation for the State of * Nevada. (Incorporated by reference to Exhibit 2.2 to Form 10-KSB filed February 2000) 3.4 Articles of Merger for the Colorado * Corporation and the Nevada Corporation (Incorporated by reference to Exhibit 3.4 to Form 10-KSB filed February 2000) 3.5 Bylaws of the Nevada Corporation * (Incorporated by reference to Exhibit 3.5 to Form 10-KSB filed February 2000) 4.1 Specimen of Common Stock (Incorporated by * reference to Exhibit 4.1 to Registration Statement on Form SB-2, Registration No. 33-74240C). 4.2 Certificate of Designation of Series and * Determination of Rights and Preferences of Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 4.2 to Form 10-KSB filed July 12, 2002.) 10.1 Incentive Compensation and Employment * Agreement for Kent A. Rodriguez (Incorporated by Reference to Exhibit 10.12 of our Form 10-KSB filed July 20, 2001) 31 Certification pursuant to Section 302 of the * Sarbanes-Oxley Act of 2002 32 Certification pursuant to Section 906 of the * Sarbanes-Oxley Act of 2002 * Incorporated by reference to a previously filed exhibit or report. 24 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Avalon Oil & Gas, Inc. By: /s/ Kent Rodriguez ------------------------------- Date: August 19, 2008 Kent Rodriguez Chief Executive Officer Chief Financial and Accounting Officer 25