U

10QSB 1 q2final.htm U

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-QSB

(Mark One)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 for the period ended June 30, 2006

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE Act of 1934 for the transition period from ___ to ___.

Commission file number: 000-23319

AVANI INTERNATIONAL GROUP INC.

(Name of Small Business Issuer in its charter)

Nevada 88-0367866

(State of (I.R.S. Employer

Incorporation) I.D. Number)

108-2419 Bellevue Ave. West Vancouver, B.C. V7V 4T4 Canada

(Address of principal executive offices) (Zip Code)

#328-17 Fawcett Road, Coquitlam, B.C. (Canada) V3K 6V2

(Former Address if changed from last report)

Issuer's telephone number (604)-913 2386

Securities registered under Section 12 (b) of the Act:

Title of each class Name of exchange on which

to be registered each class is to be registered

None None

Securities registered under Section 12(g) of the Act:

Common Stock

(Title of Class)

Check whether issuer (1) filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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.

(1). [X] Yes [ ] No: (2). [X] Yes [ ] No:

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

The number of shares issued and outstanding of issuer's common stock, $.001 par value, as of July 26, 2006 was 15,082,571.

Transitional Small Business Issuer Format (Check One):

Yes: No: X

PART I - FINANCIAL INFORMATIONY

Item 1. Financial Statements. Page No.

-Consolidated Interim Balance Sheets as of June 30, 2006

(unaudited) and December 31, 2005 (audited). 3

-Consolidated Interim Statements of Operations and

Comprehensive Loss for the Three and Six Months Ended

June 30, 2006 and 2005 (unaudited). 4

-Consolidated Interim Statements of Changes in Capital

Deficit for the Three and Six Months Ended

June 30, 2006 (unaudited). 5

-Consolidated Interim Statements of Cash Flows

for the Three and Six Months Ended June 30, 2006

and 2005 (unaudited). 6

-Notes to Consolidated Interim Financial Statements. 7

Item 2. Management's Discussion and Analysis. 11

Item 3. Effectiveness of the Registrant’s Disclosure Controls and

Procedures 14

PART II - OTHER INFORMATION

Item 1. Legal Proceedings. 14

Item 2. Unregistered Sales of Securities of Equity Securities

and Use of Proceeds. 14

Item 3. Defaults upon Senior Securities. 14

Item 4. Submission of Matters to Vote of Securityholders. 14

Item 5. Other Information. 14

Item 6. Exhibits and Reports on Form 8-K. 14

Signatures 15

Item 1. Financial Statements.

Avani International Group Inc.

Consolidated Interim Balance Sheets

(Expressed in US dollars)

June 30

December 31

2006

2005

Assets

(Unaudited)

Current

Cash and cash equivalents

1,055,394

168,310

Accounts receivable (net of allowance for doubtful accounts

in 2006 - $Nil; 2005 - $1,066)

1,180

5,470

Inventories

107,227

Prepaid expenses

6,216

5,750

1,062,790

286,757

Property, plant and equipment

52,878

916,246

Other assets

25,210

27,131

1,140,878

1,230,134

Liabilities and Capital Deficit

Liabilities

Current

Accounts payable

774,712

677,924

Accrued liabilities

59,442

133,031

Debts payable

140,954

131,843

Unearned revenue and deposits

8,800

33,758

983,908

976,556

Obligations payable (Note 3)

285,745

285,745

1,269,653

1,262,301

Capital Deficit

Capital stock (Note 4)

Authorized

400,000,000 common shares, par value of $0.001

Issued and outstanding

15,082,571 (2005 – 14,582,571) common shares

15,083

14,583

Additional paid-in capital

7,717,620

7,693,120

Accumulated deficit

(7,873,681)

(7,691,019)

Accumulated other comprehensive loss

- foreign exchange translation

12,203

(48,851)

(128,775)

(32,167)

1,140,878

1,230,134

The accompanying notes are an integral part of these consolidated interim financial statements.

Avani International Group Inc.
Consolidated Interim Statements of Operations and Comprehensive Loss
(Expressed in US Dollars)
(Unaudited)
			Three-month periods ended				Six-month periods ended
			June 30				June 30
				2006		2005		2006		2005

Revenue
	Bottled water and supply sales		$	84,827	$	471,006	$	101,093	$	853,319
	Cooler rentals and equipment sales		-			3,218		-		9,326
				84,827		474,224		101,093		862,645
Cost of revenue
	Cost of goods sold (excluding
		depreciation)		125,106		244,339		142,950		431,537
	Depreciation		22,724			43,754		48,213		88,366
				147,830		288,093		191,163		519,903
Gross profit				(63,003)		186,131		(90,070)		342,742
Operating expenses
	Marketing			9,440		10,528		24,750		26,285
	General and administration		178,842			198,606		284,172		375,822
	Write off of receivable		-			1,240,811		-		1,240,811
	Gains on sale of assets (Note 5)		(252,230)					(252,230)
	Foreign exchange loss (gain)		18,189			(31,796)		32,386		(7,202)
			(45,759)			1,418,149		89,078		1,635,716
Income (loss) from operations			(17,244)			(1,232,018)		(179,148)		(1,292,974)
Other income (expenses)
	Interest on debts payable			(1,782)		(1,607)		(3,514)		(3,238)
	Miscellaneous income			-		652		-		2,278
			(19,026)			(1,232,973)		(182,662)		(1,293,934)
Non-controlling interest				-		1,129,188		-		1,018,934
Net loss for the period				(19,026)		(103,785)		(182,662)		(275,000)
Foreign currency translation adjustment				(60,056)		(5,761)		61,054		(36,139)
Comprehensive loss for the period			$	41,030	$	(109,546)	$	(121,608)	$	(311,139)
Gain(Loss) per share - basic and diluted			$	(0.01)	$	(0.01)	$	(0.01)	$	(0.02)
Weighted average shares outstanding				14,832,5711		14,582,571		15,082,5711		14,582,571
The accompanying notes are an integral part of these consolidated interim financial statements. 3

Avani International Group Inc.
Consolidated Interim Statements of Changes in Capital Deficit
(Expressed in US Dollars)
(Unaudited)
									Accumulated
					Additional				Other		Total
	Common Shares				Paid-in		Accumulated		Comprehensive		Capital
	Shares		Amount		Capital		Deficit		Loss		Deficit
Balance, January 1, 2005		14,582,571	$	14,583	$	7,693,120	$	(7,757,091)	$	(61,123)	$	(110,511)
		-		-		-						-
								-		-
						-		-		-		-
Net profit (loss) for the year		-		-		-		66,072		-		66,072
Foreign exchange translation adjustment		-		-		-		-		12,272		12.272
Balance, December 31, 2005		14,582,571		14,583		7,693,120		(7,691,019)		(48,851)		(32,167)
Issuance of common stock on exercise of warrants		500,000		500		24,500						25,000
Net loss for the period		-		-		-		(182,662)		-		(182,662)
Foreign exchange translation adjustment		-		-		-		-		61,054		61,054
Balance, June 30, 2006		15,082,571	$	15,083	$	7,717,620	$	(7,873,681,)	$	12,203	$	(128,775)
The accompanying notes are an integral part of these consolidated interim financial statements.

Avani International Group Inc.
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
(Unaudited)

For the six-month periods ended June 30					2006		2005
Cash provided by (used in)
Operating activities
	Net loss for the year			$	(182,662)	$	(275,000)
	Adjustments to reconcile net loss for the year to
	net cash provided by (used in) operating activities
			Depreciation		57,981		88,366
	Non-controlling interest				-		(1,018,934)
	Stock option compensation				-		1,240,811
	Cumulative effect of change in accounting policy				-		-
	(Increase) decrease in assets
			Accounts receivable		4,290		(177,022)
			Inventories		107,227		23,926
			Prepaid expenses		(466)		(17,585)
	Increase (decrease) in liabilities
		Accounts payable			105,899		354,005
		Accrued liabilities			(73,589)		(341,186)
		Unearned revenue and deposits			(24,958)		(7,644)
					(6,278)		(130,263)
Investing activities
	Acquisition of property and equipment				-		(9,317)
	Proceeds from sale of assets				1,018,895
Financing activities
	Proceeds from share issuance				25,000

Increase (Decrease) in cash during the period					1,037,617		(139,580)
Effect of foreign exchange on cash					(150,533)		(9,270)
Cash and cash equivalents, beginning of period					168,310		501,633
Cash and cash equivalents, end of period				$	1,055,394	$	352,783
Supplemental Information:
	Interest paid			$	3,514	$	2,522
The accompanying notes are an integral part of these consolidated interim financial statements.

Basis of Presentation and Ability to Continue as a Going Concern

The consolidated interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

The consolidated interim financial statements for the six-month period ended June 30, 2006 include the accounts of the Company and its wholly owned subsidiaries. Prior to July 1, 2005, the consolidated interim financial statements for the period from January 1, 2005 to June 30, 2005, include the account of the Company, its subsidiaries, and its related party Avani O2 Water Sdn. Bhd (“Avani O2”). Accordingly, Avani O2 was consolidated for the six-month period ended June 30, 2005. All material inter-company balances and inter-company transactions have been eliminated. These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein.

Results of operations for the interim periods are not indicative of annual results.

These accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred accumulated losses to June 30, 2006 of $7,873,681. The continuation of the Company is dependent upon the continuing financial support of creditors and stockholders, obtaining additional long-term financing, as well as achieving and maintaining a profitable level of operations. The Company plans to raise additional equity and debt capital as necessary to finance the operating and capital requirements of the Company. Amounts raised will be used to provide financing for the marketing and promotion of the Company's business, capital expansion and for other working capital purposes. While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate sufficient funds for operations.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.

Variable Interest Entity

Avani O2 was incorporated in July 1999 in Malaysia mainly to explore the opportunities of developing and marketing bottled water in South East Asia. In 2000, Avani O2 entered into a joint-venture agreement with the Company for the world-wide rights and licenses, except in Canada, to access and use, for all purposes, the Company’s technology of producing oxygen enriched bottled water. Avani O2 was considered a VIE of the Company because, pursuant to the original joint-venture agreement, the Company is entitled to, among other things, receive a 2% royalty on all revenue from all Avani O2 licensed products, 30% of the before tax profits generated by the bottling line contributed by the Company to Avani O2, and appoint two of the three directors on the Board of Directors of Avani O2. As a result, the equity investors of Avani O2 did not have a controlling financial interest in Avani O2 and the Company was the primary beneficiary of Avani O2, the VIE. Accordingly, the Company commenced consolidating Avani O2 in 2004 and in the six-month period ended at June 30, 2005. Effective July 1, 2005, Avani O2 was no longer determined as a VIE of the Company. Subsequent to the elimination of intercompany balances and transactions, Avani O2 had net assets of $204,507 as at June 30, 2005 and net loss of $1,018,934 for the six-month period then ended. These amounts were recorded as non-controlling interests in these consolidated interim financial statements.

Obligations Payable

		June 30,		December 31,
		2006		2005
		(Unaudited)
Assignment of net profits interest	$	285,745	$	285,745

During 2002, the Company assigned a fully reserved account receivable in the amount of $200,944 to certain lenders, along with the assignment of a net profits interests (“Net Profits Interest”) in certain production equipment located in Malaysia in full settlement of a $475,771 loan payable. The assignment of Net Profits Interest to these lenders will revert back to the Company when the lenders have received from such interest, an amount equal to $285,745, the principal amount of the cancelled loans. The Company will record reductions in this account as Net Profits Interests are received by the lenders

Capital Stock

Transactions not disclosed elsewhere in these consolidated interim financial statements are as follows:

As at December 31, 2005, the Company had 22,862,557 fully exercisable share purchase warrants outstanding. Of this amount, 1,500,000 warrants that were granted August 2003 are exercisable at any time within 5 years at an exercise price of $0.06 per share on or before September 2, 2008, and 550,000 warrants that were granted September 26, 2001 are exercisable at any time within 5 years at an exercise price of $0.06 on or before September 26, 2005 and $0.07 on or before September 26, 2006. The remaining 20,812,557 warrants were granted on May 13, 2002 and July 15, 2002 and were exercisable at any time within 5 years at a price of $0.03 in the first two years, $0.05 in the third and fourth year and $0.07 in the last year.

On June 21, 2006, 500,000 share purchase warrants were exercised at the price of $0.05 per share.

A summary of share purchase warrant transactions for the periods presented is as follows:

		Weighted
		Average
		Exercise
	Number	Price
Outstanding at December 31, 2005	22,862,557	$0.05
Exercise of warrants	500,000	$0.05
Outstanding at June 30, 2006	22,362,557	$0.05

22,362,557 of the share purchase warrants granted are exercisable and remain outstanding at June 30, 2006, of which 1,500,000 were granted August 2003, 550,000 granted September 26, 2001, and 20,312,557 granted May 13 and July 15, 2002.

On June 10, 2003, the Company granted 1,950,000 stock options to Company’s employees and directors. Of this amount 1,150,000 stock options have an exercise period of two years. Each option entitles the holder to purchase one share of the Company’s common stock at $0.05 per share during the first year and $0.30 per share in the second year. Only 30% of the options granted during the period are exercisable immediately with the remaining 70% to be vested on the one year anniversary of the date of grant. Another 800,000 fully vested stock options have an exercisable period of 3 years and an exercise price of $0.05 per share.

The Company applies Accounting Principles Board (“APB”) Opinion 25 and related interpretations in accounting for stock options granted to employees. Generally, under APB No. 25 compensation expense is recognized for the difference between the market price of the underlying stock and the exercise price of the stock options. Accordingly, no compensation has been recognized in connection with options granted to employees. Had compensation cost been determined based upon the fair value of the stock options at the grant date consistent with the fair value method prescribed in SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts as indicated below.

		Six-month period ended June 30
			2006		2005
Net loss, as reported		$	(182,662)	$	(275,000)
Deduct: stock-based employee compensation expense
	determined under fair-value based method for all awards
	not included in net loss		-		-
Pro-forma net loss		$	(182,662)	$	(275,000)
Loss per share:
	Basic and diluted – as reported	$	(0.01)	$	(0.02)
	Basic and diluted – pro-forma	$	(0.01)	$	(0.02)

As there was no stock-based compensation awarded to employees during the period ended June 30, 2006, the pro-forma information for the periods ended June 30, 2006 equals the information as reported on the Statement of Operations and Comprehensive Income (Loss).

A summary of stock option transactions for the period presented is as follows:

		Weighted
		Average
		Exercise
	Number	Price
Outstanding at December 31, 2005	1,000,000	$ 0.05
Expired at June 9, 2006	1,000,000
Outstanding and Exercisable at June 30, 2006	Nil

Sale of Assets

On June 15, 2006, the Company sold its real property including land, building and building improvements, for proceeds of approximately $1,018,895. The net book value of its real property was approximately $766,665 on June 15, 2006, and the sale generated a gain of $252,230. After the sale of its real property, its production of water was discontinued.

Related Party Transactions

During the six-month period ended June 30, 2006, the president of the Company was reimbursed $14,170 (2005 – 13,580) as transportation expenses. The Company accrued $36,000 as salary (2005 - $36,000) and $22,290 (2005 - $22,210) of overseas living allowance, all of which are payable to the President of the Company.

Item 2. Management's Discussion and Analysis.

As discussed elsewhere herein, the Company has had significant business relationships with Avani O2 Water Sdn. Bhd. (“Avani O2”), a Malaysian company. In addition, Avani O2 was formerly controlled by a significant shareholder of the Company.

As described in the Notes of the Company’s consolidated audited financial statements included herein and as discussed in greater detail in the Company’s Form 10-KSB for the period ended December 31, 2005 (the “Company’s 2005 Form 10-KSB”), the Company was the primary beneficiary of Avani O2, a variable interest entity (“VIE”) as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46R during the period from January 1, 2004 to July 1, 2005, which includes the fiscal period ended March 31, 2005, the results of which are included herein. Accordingly, the Company consolidated Avani O2 in the results for the period ended March 31, 2005. All material inter-company balances and inter-company transactions have been eliminated. The financial statements as of March 31, 2006 include the accounts of the Company and its subsidiaries only.

During 2005, due to the Company’s termination of the joint venture and asset sale agreements between the parties and the divestiture of the his ownership in Avani O2 by the Company’s largest shareholder, the Company no longer considers Avani O2 to be a VIE of the Company. Consequently, the results of operations and the financial position of the consolidated accounts of the Company for fiscal 2005 includes the Company and only its two wholly owned subsidiaries; Avani Oxygen Water Corporation, and Avani International Marketing Corporation.

The following discusses the results of operations and the financial position of the consolidated accounts of the Company, and its two wholly owned subsidiaries for the period ended March 31, 2006. As discussed above, Avani O2 was considered to be a VIE for the 2005 period and its operations have been consolidated into the operations of the Company commencing in the first quarter of 2004 in accordance with US GAAP. Accordingly, decrease in expenses between the year end periods of December 31, 2005 and 2004 are principally due to the consolidation of Avani O2 in the 2004 period. Readers should consider the effect of such change in accounting policy and the limitations on balance sheet resources when reviewing the discussion below.

The 2005 results from operations were not restated to remove the results of Avani O2. Therefore, due to the fact that the results of 2005 includes the operations of Avani O2, the year to year comparisons set forth below will not be representative of the actual changes in the Company’s operations for such periods.

Results of Operations.

Six Months Ended June 30, 2006 compared with Six Months Ended June 30, 2005.

Revenues for the six months ended June 30, 2006 were $101,093 representing a decrease of $761,552 or 88.28% from revenues of $853,319 for the same period in 2005. The significant decrease in revenues reflects the deterioration and ultimately the termination of the business relationship with Avani O2, as well as the de-consolidation of Avani O2 as a VIE, all of which occurred during the 2005 period. Revenues for the 2005 period also included $9,326 in cooler rentals and sales. The Company sold its cooler rental and sales business in July 2005, and thus had no corresponding revenue for the 2006 period.

Cost of revenue which includes depreciation for the six-month period in 2006 totaled $191,163, a decrease of $328,740 or 63.2% from $519,903 for the same period in 2005. Cost of revenue as a percentage of sales was 189% for the 2006 period representing an increase of 128.8% from 60.2% for the prior period. The increase in cost of revenue as a percentage of sales for the 2006 period reflects the effect of relatively consistent fixed costs and depreciation against significantly reduced revenue for the period. Cost of revenue for the six-month period ended June 30, 2006 consisted of costs of goods sold consisting of $142,950 in bottled water, supplies, coolers, and related equipment, and delivery costs (a decrease of $288,587 or 66.9% from $431,537 for the prior period) and $48,366 in depreciation (a decrease of $40,153 or 45.4% from $88,366 for the same period in prior year). The decrease in cost of goods sold for the 2006 period compared with the prior period is due mainly to lower material and labor costs associated with the reduced production levels. The reduction in depreciation for the 2006 period is due to the write off of the Malaysian equipment held by Avani O2 in July 2005. Gross profit for the six-month period ended June 30, 2006 was $(90,070), a decrease of $252,672 or 126% from gross profit of $342,742 for the same period in 2005.

Operating expenses which includes marketing expenses, and general and administrative expenses for the six-month period ended June 30, 2006 totaled $24,750, a decrease of $1,535 or 5.8% from $26,285 for the same period in 2005. General and administrative costs were $284,172 in 2006, a decrease of $91,650 or 24.45% from $375,822 in the prior period. The decrease is due principally to reduced employees and payroll which resulted from sale of 5 gallon business. Marketing expenses totaled $26,285 for the six-month period in 2006 representing a decrease of $1,535 or 5.8% from $26,285 for the prior period. The relatively constant marketing expenses reflect the Company’s decision in the fourth quarter of 2004 to reduce overall international marketing expenses, particularly in Malaysia. During 2005, the Company wrote off a receivable from Avani O2 in the amount of $1,240,811. There was no write off for the 2006 period. The Company experienced a foreign exchange loss of $32,386 in 2006 compared with a gain of $7,202 in 2005 due to a reduction in the volume of currency exchange transactions and limited fluctuation of the exchange rates between US currency and Canadian currency compared to the same period of prior year. For the 2006 period, and as stated in Note 4 to its financial statements herein, the Company experienced a gain in the amount of $252,230 on the sale of its real estate assets. Loss from operations for the 2006 period is $179,148 compared to a loss of $1,292,974 for the comparable period 2005 due to the reasons discussed above.

During the 2006 period, the Company recorded interest on debts payable of $3,514 compared with $3,238 for the 2005 period. Miscellaneous income was $0 in 2006 compared with $2,278 in 2005 which principally represents taxes paid by Avani O2.

Comprehensive loss for the 2006 period was $121,608 compared with a loss of $311,139 for the same period in 2005. Loss per share was $0.01 in 2006 and $0.02 in 2005.

Liquidity and Capital Resources.

As of June 30, 2006, the Company had working capital of $78,882. Working capital deficit as of December 31, 2005 was $689,799. The increase in working capital is principally a result of the sale of gain experienced on the sale of the Company’s real estate, partially offset by the consolidated loss of the Company for the first fiscal quarter of 2006.

Property, plant and equipment, net of accumulated depreciation, totaled $52,878 on June 30, 2006. Property, plant and equipment, net of accumulated depreciation, totaled $916,246 on December 31, 2005. The decrease is due sale as of the Company’s real estate as discussed in Note 5 to the financial statements herein.

The Company continues to experience significant losses from operations. The Company is uncertain as to when it will achieve profitable operations. As discussed in greater detail in the Company’s 2005 Form 10-KSB, the Company has entered into an agreement to sell its real estate located in Canada and intend to re-locate is water manufacturing business to Malaysia. The Company intends to use the proceeds from the sale of its real estate to fund re-location efforts, and to fund in initial operating capital. At this time, the Company has not completed its plan of operations, however, it is likely that the Company will need additional capital to re-commence operations in Malaysia, however, it can not predict the exact amount of such funds.

If the Company is required to raise additional funds, it likely will attempt to do so pursuant to the private placement of debt or equity. The private placement of its capital stock may result in significant dilution to shareholders (See disclosure relating to cautionary statements below). At this time, the Company has no commitments for any such financing, and no assurances can be given that the Company will be successful in these endeavors. If the Company is unsuccessful in raising required funds, it will have a material adverse impact on the Company and its ability to conduct its business in the future. Accordingly, the Company’s financial statements contain note disclosures describing the circumstances that lead to doubt over the ability of the Company to continue as a going concern. In their report on the consolidated financial statements for the year ended December 31, 2005, the Company’s independent registered accountants included an explanatory paragraph regarding the Company’s ability to continue as going concern.

Cautionary Statements. Readers are urged to refer to the section entitled "Cautionary Statements in the Company's 2005 Form 10-KSB and elsewhere therein for a broader discussion of such risks and uncertainties. These risks include the lack of profitable operations, the need for additional capital to sustain operations, and significant dilution to existing shareholders.

Off-Balance Sheet Arrangement

As the Company has adopted FIN 46R effective January 1, 2004, there are no off-balance sheet arrangement at the end of the 2005 fiscal year.

Critical Accounting Policies

Revenue Recognition. Revenue on sales of bottled water and sales of cooler and equipment is recognized when the products are delivered and title transfers to customers. Sales terms generally do not permit a right of return. Revenue from leasing of water coolers and filters are accounted for as operating leases and, accordingly, rental income is reported over the terms of the leases. Deposits received for bottles and coolers are accrued as liabilities until refunded upon return of bottles and coolers. Freight charges billed to customers are included in Revenue while associated freight costs are included in Cost of Revenue.

As part of the settlement of the loan payables from two lenders, the Company assigned its Net Profits Interest referred to above to these lenders. The Company will recognize the revenue from the Net Profits Interest (subsequently amended to become a monthly rental fee) and reduce the amount of obligation payable related to the assignment of such interest when the lenders receive their assigned Net Profits Interest payments. For the six-month period ended June 30, 2005, all intercompany balances and transactions have been eliminated upon consolidation.

Stock Based Compensation. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro-forma information regarding net income as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The value of stock options granted to consultants is recognized in these consolidated financial statements as compensation expense using the Black-Scholes option pricing model. Such compensation is amortized over the contract services period or, if none exists, from the date of grant until the options vest. Compensation associated with unvested options is remeasured on each balance sheet date using the Black Scholes option pricing model. The Company has not adopted the fair value method of accounting for stock-based compensation awarded to employees. The pro-forma loss per share equals the loss per share as reported. During the six months ended June 30, 2006 and 2005, no stock based compensation was granted.

Off Balance Sheet Arrangements. As the Company has adopted FIN 46R effective January 2004, there are no off balance sheet arrangements as of June 30, 2006.

New Accounting Pronouncement. There were no new accounting pronouncement that impacted the Company since the issuance of the audited consolidated financial statements.

Item 3. Effectiveness of the registrant’s disclosure controls and procedures.

(a) Under the supervision and with the participation of management, including the Company’s President and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operations of its disclosure controls and procedures, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as of June 30, 2006 for this Form 10-QSB. Based on this evaluation, the Company’s President and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission ("SEC") reports is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms relating to the Company’s reporting obligations, and was made known to them by others within the Company, particularly during the period when this report was being prepared.

(b) There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company first fiscal quarter of 2006 that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting.

Part II OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. Changes in Securities.

None

Item 3. Defaults upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Securityholders.

None

Item 5. Other Information.

None

Item 6. Exhibits.

Exhibit 31 – Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002.

Exhibit 32 – Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.

(b) Reports on Form 8-K.

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AVANI INTERNATIONAL GROUP, INC.

Date: August 10, 2006 /s/Dennis Robinson

Dennis Robinson

Treasurer and Principal

Financial Officer