10-Q 1 grve063016form10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

 

FORM 10-Q

____________

 

☒  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

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

 

GROOVE BOTANICALS, INC.

(Exact Name of Small Business Issuer as specified in its charter)

 

Nevada   84-1168832
(State or other jurisdiction of incorporation or organization)   (I.R.S. employer identification no.)

 

310 Fourth Avenue South, Suite 7000

Minneapolis, MN 55415

(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  ☒  No ☐

 

(2) Has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☒  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

 

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

 

28,293,062 shares of our common stock were issued and outstanding as of January 11, 2019.

 

 1 

 

 

Table of Contents

 

  Page
PART I FINANCIAL INFORMATION  
Item 1. Financial Statements 3
  Condensed Consolidated Balance Sheets as of  June 30, 2016  (Unaudited)  and March 31, 2016 3
  Condensed Consolidated Statements of Operations for the Three months ended June 30, 2016 and 2015 (Unaudited) 4
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2016 and 2015 (Unaudited) 5
  Notes to Condensed Consolidated Financial Statements (Unaudited) 6
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 17
Item 3. Qualitative and Quantitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
     
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Mine Safety Disclosures 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24

 

 2 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

Groove Botanicals, Inc.
Condensed Consolidated Balance Sheets
       
       
  

June 30,

2016

(Unaudited)

 

March 31,

2016

Assets          
Current Assets:          
Cash and cash equivalents  $107,302   $108,220 
Total current assets   107,302    108,220 
Property and equipment, net   12,459    13,592 
Unproven oil & gas properties   177,000    177,000 
Producing oil & gas properties, net   68,972    74,816 
Total Assets  $365,733   $373,628 
Liabilities and Equity          
Current Liabilities:          
Accounts payable and accrued liabilities   210,290    194,691 
Accrued payroll - related parties   210,962    205,462 
Dividends payable   260,606    205,488 
Accrued liabilities to joint interest   11,140    9,965 
Notes payable - related party   20,000    20,000 
Notes payable   149,200    149,200 
Total current liabilities   862,198    784,806 
Accrued asset retirement obligation (ARO) liability   139,748    136,642 
Total Liabilities   1,001,946    921,448 
           
Equity          
Preferred Stock, 1,000,000 authorized;          
Preferred stock, Series A, $.10 par value, 100 shares authorized; 100 shares issued and outstanding stated at redemption value, as of June 30, 2016 and March 31, 2016, liquidation preference of $546,450 and $537,450 as of June 30, 2016 and March 31, 2016, respectively.   10    10 
Preferred stock, Series B, $.10 par value 2,000 shares authorized; 1,983 and 1,983 shares issued and outstanding stated at redemption value, as of June 30, 2016 and March 31, 2016 liquidation preference of $2,192,660 and $2,148,038 as of June 30, 2016 and March 31, 2016.   198    198 
Common Stock, $0.001 par value: 200,000,000 shares authorized, 18,198,062 and 18,198,062 shares issued and outstanding as of June 30, 2016 and March 31, 2016   18,198    18,198 
Additional paid in capital   32,993,499    32,993,499 
Accumulated deficit   (33,699,087)   (33,610,746)
Total Stockholders' (Deficit)   (687,182)   (598,841)
 Non-Controlling Interest   50,969    51,021 
Total  (Deficit)   (636,213)   (547,820)
Total Liabilities and  Stockholders’ Deficit   365,733    373,628 
           
The accompanying notes are an integral part of these financial statements.

 

 3 

 

 

Groove Botanicals, Inc.
Condensed Consolidated Statements of Operations
       
       
    

For the three Months ended

June 30,

2016

(Unaudited) 

    

For the three Months ended

June 30,

2015

(Unaudited) 

 
Oil & Gas Sales  $17,898   $8,531 
Operating expenses:          
Lease operating expense, severance taxes and ARO accretion   19,115    10,547 
Selling, general and administrative expenses   21,937    74,053 
Stock based compensation   —      20,333 
Depreciation, depletion, and amortization   6,253    14,568 
Total operating expenses   47,305    119,501 
Operating loss   (29,407)   (110,970)
           
Other income (expense):          
Gain on settlement of trade payables   —      (244,972)
Interest income (expense), net   (2,868)   4,950 
Total other income (expense)   (2,868)   249,922 
           
Income (loss) before income tax   (32,275)   138,952 
Provision for income taxes   —      —   
Net income (loss)  $(32,275)  $138,952 
Less net loss attributable to non-controlling interests  $52    —   
Net income (loss) attributable to the Company  $(32,223)   138,952 
Preferred stock dividends  $(56,118)  $(48,250)
Net income (loss) attributable to common shareholders  $(88,341)  $90,702 
           
Net income (loss) per share - basic   (0.005)   0.005 
Net income (loss) per share - diluted   (0.005)   0.003 
           
Weighted average shares outstanding - basic   18,198,062    16,877,183 
Weighted average shares outstanding - diluted   18,198,062    28,542,558 
           
The accompanying notes are an integral part of these financial statements.

 

 4 

 

 

Groove Botanicals, Inc.
Condensed Consolidated Statement of Cash Flows
       
       
  

For the three Months ended

June 30,

2016

(Unaudited)

 

For the three Months ended June 30,

2015

(Unaudited)

Cash flows from operating activities:          
Net income (loss)  $(32,275)  $138,952 
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock issued for services   —      12,000 
Non-cash consulting services   —      8,333 
(Gain) on forgiveness of debt   —      (244,972)
(Gain) on forgiveness of interest payable   —      (11,375)
Depreciation   1,133    1,133 
Depletion   5,120    2,789 
Depreciation and ARO liability   724    724 
Amortization of intangible assets   —      10,646 
Net change in operating assets and liabilities:          
Accounts receivable   —      4,386 
Accounts payable and other accrued expenses   21,274    (19,831)
Asset retirement obligation   3,106    3,106 
Net cash (used in) operating activities   (918)   (94,109)
           
Cash flows from investing activities:          
Principal payments received on notes receivable   —      714 
Net cash provided by investing activities   —      714 
           
Cash flows from financing activities:          
Series B Preferred Stock issued for cash   —      100,000 
Dividends paid   —      (13,500)
Net cash provided by financing activities   —      86,500 
Net (decrease) in cash and cash equivalents   (918)   (6,895)
           
Cash and cash equivalents at beginning of period   108,220    135,713 
Cash and cash equivalents at end of period  $107,302   $128,818 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest  $—     $—   
Taxes  $—     $—   
Common stock issued in exchange for consulting services  $—     $12,000 
Common stock issued for payment of accounts payable  $—     $26,000 
Note payable issued for payment of accounts payable  $—     $5,000 
Preferred stock issued for extinguishment of note payable, accrued interest, and assumption of debt  $—     $25,000 
           
The accompanying notes are an integral part of these financial statements.

 

 5 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Corporate Structure

 

Groove Botanicals, Inc. (the "Company") (formally known as Avalon Oil & Gas, Inc.), 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. On November 16, 2011, a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock from 1,000,000,000 shares to 3,000,000,000 shares par value of $0.001.  This amendment was not filed with the Nevada Secretary of State.  

 

On June 4, 2012 the Board of Directors approved an amendment to our Articles of Incorporation to a reverse split of the issued and outstanding shares of Common Stock of the Corporation (“Shares”) such that each holder of Shares as of the record date of June 4, 2012 shall receive one (1) post-split Share on the effective date of June 4, 2012 for each three hundred (300) Shares owned.  The reverse split was effective on July 23, 2012.   On September 28, 2012, we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock.  We filed an amendment with the Nevada Secretary of State on April 10, 2013, to increase our authorized shares to 200,000,000.

 

On March 21, 2018 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 Groove Botanicals, Inc. We filed an amendment to our Articles of Incorporation with the State of Nevada on May 18, 2018.

 

Principles of consolidation

 

The condensed consolidated financial statements include the accounts of the Company and the Company’s subsidiary’s Oiltek, Inc., AFS Holdings, Inc., and Weyer Partners, LLC. All significant inter-company items have been eliminated in consolidation.

 

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.  They do not include all of the information and footnotes required by Accounting Principles generally accepted accounting principles in United States America (“US GAAP”) 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, 2016.

 

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 Groove Botanicals, Inc. and subsidiaries as of June 30, 2016 and the results of their operations and cash flows for the three months ended June 30, 2016 and 2015, and are not necessarily indicative of the results to be expected for the entire year.

 

 6 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

Going Concern

 

The June 30, 2016, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $33,699,087, from inception through June 30, 2016, and has a working capital deficiency of $754,896 and stockholders’ deficit of $687,182, respectively, at June 30, 2016.

 

The Company has minimal revenues from our remaining oil and gas assets. We are in need additional cash resources to maintain our operations. The Company has a working capital deficit of $754,896, has incurred losses since inception of $33,699,087, and have not yet received any revenue from the sale our CBD skincare products. These factors raise substantial doubt about its ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital or obtain necessary debt financing. The Company is presently dependent on its controlling shareholder to provide us funding for its daily operation and expenses, including professional fee and fees charged by regulators, although he is under no obligation to do so.

  

The Company intends to meet the cash requirements for the next 12 months from the issuance date of this report through a combination of debt and equity financing by way of private placements, friends, family and business associates. The Company currently does not have any arrangements in place to complete any private placement financings and there is no assurance that the Company will be successful in completing any such financings on terms that will be acceptable to it.

 

If we do not have sufficient working capital to pay our operating costs for the next 12 months, we will require additional funds to pay our legal, accounting and other fees associated with our Company and our filing obligations under United States federal securities laws, as well as to pay our other accounts payable generated in the ordinary course of our business. Once these costs are accounted for, we will focus on the manufacture and sale of our CBD skincare products.

 

Any failure to raise money will have the effect of delaying the timeframes in the business plan as set forth above, and the Company may have to push back the dates of such activities.

 

The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses and further losses are anticipated as a result of the development of business which raises substantial doubt about the Company’s ability to continue as a going concern within the next twelve months from the issuance date of this report.  The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining financing necessary to meet the Company’s obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand and loans from directors and/or private placement of the Company’s common stock.

 

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 condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.

 

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.

 

 7 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash on deposit. The Company maintains its cash balances at several financial institutions. Accounts at the institutions are insured by the Federal Deposit Insurance Corporation up to $250,000.

 

Fair Value of Financial Instruments

 

The Company's financial instruments are cash and cash equivalents, accounts receivable, accounts payable, notes payable, notes receivable 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, notes receivable and long-term debt approximate their fair values, as interest approximates market rates.

 

Accounts Receivable and Receivables from the Joint Interest

 

Management periodically assesses the collectability of the Company's accounts receivable and receivables from the Joint Interest. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company determined that the accounts receivable from the Joint Interest accounts were uncollectable for the year ended March 31, 2016.

 

Oil and Natural Gas Properties

 

The Company follows the full cost method of accounting for natural gas and oil properties.  Under the full cost concept, all costs incurred in acquiring, exploring, and developing properties cost center are capitalized when incurred and are amortized as mineral reserves in the cost center are produced, subject to a limitation that the capitalized costs not exceed the value of those reserves.  The unamortized costs relating to a property that is surrendered, abandoned, or otherwise disposed of are accounted for as an adjustment of accumulated amortization, rather than as a gain or loss that enters into the determination of net income, until all of the properties constituting the amortization base are disposed of, at which point gain or loss is recognized. 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.  During the three month period ended June 30, 2016, no acquisition costs were capitalized. Oil and natural gas properties are reviewed for recoverability at least annually or when events or changes in circumstances indicate that its carrying value may exceed future undiscounted cash inflows. As of June 30, 2016 and March 31, 2016 the Company impaired $-0- and $128,462 in Proven Oil and Gas Properties and $-0- and $1,690,183 in Unproved Oil and Gas Properties.

 

Property and Equipment, net

 

Property and equipment is reviewed for recoverability when events or changes in circumstances indicate that its carrying value may exceed future undiscounted cash inflows. As of June 30, 2016 and March 31, 2016, the Company had not identified any such impairment. Repairs and maintenance are charged to operations when incurred and improvements and renewals are capitalized.

 

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
Vehicles 5 Years

 

 8 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

Asset Retirement Obligations

 

In accordance with the provisions of Financial Accounting Standards Board “FASB” Accounting Standard Codification “ASC” 410-20-15, “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.

 

Stock Based Compensation

 

Share awards granted to employees and independent directors are accounted for under ASC 718, "Share-Based Payment". ASC 718-10 eliminates accounting for share-based compensation transaction using the intrinsic value method and requires instead that such transactions be accounted for using a fair-value-based method. The Company has elected to adopt the provisions of ASC 718-10 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 ASC 718-10 for all share-based payments granted after the effective date and (b) based on the requirements of ASC 718-10 for all awards granted to employees prior to the effective date of ASC 718-10 that remain unvested on the effective date.

 

The Company records share-based compensation expense for awards granted to non-employees in exchange for services at fair value in accordance with the provisions of ASC 505-50, "Equity Based" payment to non-employees. For the awards granted to non-employees, the Company will record compensation expenses equal to the fair value of the share options at the measurement date, which is determined to be the earlier of the performance commitment date or the service completion date. 

 

Earnings (loss) per Common Share

 

ASC 260-10-45, “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 anti-dilutive 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 carry forwards, 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.

 

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GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

ASC 740-10-25, “Accounting for Uncertainty in Income Taxes”, 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. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Under ASC 740-10-25, 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.

 

Revenue Recognition

 

In accordance with the requirements ASC topic 605 "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) collectability is reasonably assured. Specifically, oil and gas sales are recognized as income at such time as the oil and gas are delivered to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned.

 

Recently Issued Accounting Policies

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and sets rules for how this information should be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. The Company adopted ASU 2014-15 prospectively for the annual period ending December 31, 2016. Pursuant to ASU 2014-15, the Company is required to consider whether there are adverse conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued and the probability that management’s plans will mitigate the adverse conditions or events (if any). Adverse conditions or events would include, but not be limited to, negative financial trends (such as recurring operating losses, working capital deficiencies, or insufficient liquidity), a need to restructure outstanding debt to avoid default, and industry developments (for example commodity price declines and regulatory changes). 

 

In May 2014, the FASB issued ASU 2014-9, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in ASC Topic 605, "Revenue Recognition," and most industry-specific guidance. ASU 2014-9 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-9 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-9 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified retrospective approach to adopt ASU 2014-9.

 

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GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus agent considerations (reporting revenue gross versus net), which clarifies the implementation guidance on principal versus agent considerations on such matters. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying performance obligations and licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope improvements and practical expedients, which addresses narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies the guidance or corrects unintended application of guidance.

 

The Company completed its assessment of the new accounting standard and does not expect the adoption of this standard to have a material impact to our revenue recognition based on our existing contracts with customers. We adopted the new standard during the first quarter of 2018 using the modified retrospective approach and there will be no material impact to our previously recorded revenue under the new standard.

 

NOTE 2: PROPERTY AND EQUIPMENT, NET

 

A summary of property and equipment at June 30, 2016 and March 31, 2016 is as follows:

 

  

June 30,

2016

 

March 31,

2016

Office Equipment  $41,778   $41,778 
Vehicles   22,657    22,657 
    64,435    64,435 
Less: Accumulated depreciation   (51,976)   (50,843)
Total  $12,459   $13,592 

 

Depreciation expense for the three month periods ended June 30, 2016 and 2015 was $1,133 and $1,133, respectively.

 

NOTE 3: OIL AND GAS PROPERTY ACTIVITY

 

Producing oil and gas properties consist of the following at June 30, 2016 and March 31, 2016: 

 

  

June 30,

2016

(Unaudited)

 

March 31,

2016

Lincoln County, Oklahoma  $111,402   $111,402 
           
Lipscomb County, Texas   250,082    250,082 
Miller County, Arkansas   139,909    139,909 
Ward Petroleum Assets   290,500    290,500 
Kensington Energy Assets   120,000    120,000 
Other Properties   325,185    325,185 
 Total Properties   1,237,078    1,237,078 
           
           
Asset retirement cost, net   34,056    34,870 
Property impairments   (609,534)   (609,534)
Less: Depletion   (592,628)   (587,508)
Net  $68,972   $74,816 

 

For the three month period ended June 30, 2016 and 2015, depletion per Bbl was $8.81 and $6.85.

 

 11 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

NOTE 4: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consisted of the following:

 

  

June 30,

2016

 

March 31,

2016

    (Unaudited)      
Accounts payable  $143,412   $130,747 
Accrued interest   66,878    63,944 
Total  $210,290   $194,691 

 

NOTE 5: NOTES PAYABLE

 

Notes Payable are summarized as follows:

   Note
   Amount
March 31, 2016:     
Notes payable – long-term portion  $—   
Notes payable – current portion   149,200 
Total  $149,200 

  

   Note
   Amount
June 30, 2016 (Unaudited):     
Notes payable – long-term portion  $—   
Notes payable – current portion   149,200 
Total  $149,200 

 

NOTE 6: RELATED PARTY TRANSACTIONS

 

Notes Payable

 

On April 21, 2011, Mr. Rodriguez advanced the Company $35,000. As of June 30, 2016 and March 31, 2016, amount outstanding is $20,000. This note does not accrue interest and is due on demand.

 

Preferred Stock

 

The 100 shares of Series A Preferred Stock were issued on June 3, 2002 as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent forty percent (40%) of the fully diluted shares outstanding after their issuance The holder of these shares of Series A Preferred Stock is our President, Kent Rodriguez. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.

 

During the years ended March 31, 2016 and 2015, the Company incurred $40,000 in Series A preferred stock dividends, respectively.

 

During the three months ended June30, 2015 and 2016, the Company incurred $10,000 in Series A Preferred Stock dividends.

 

The holders of the Series A Preferred Stock have the right to convert each share of preferred stock into a sufficient number of shares of common stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise, conversion or exchange of outstanding options, and warrants. In the event that the Company does not have an adequate number of shares of Common Stock authorized, upon a conversion request, only the maximum allowable number of shares of Series A preferred stock shall convert into Common Stock and the remaining shares of Series A preferred Stock shall convert upon lapse of the applicable restrictions.

 

 12 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

On January 12, 2018, our Board of Directors agreed to amend Designation of the Series A Convertible Preferred Stock be amended by changing the ratio for conversion, in Article IV, subparagraph (a), from .4% to .51% so that upon conversion the number of shares of common stock to be exchanged shall equal 51% of then issued and outstanding common stock.

  

During the three months ended June 30, 2016 and 2015, the Company incurred $10,000 in Series A preferred stock dividends, and paid $1,000 and $13,500 for the three months ended June 30, 2016 and 2015. As of June 30, 2016 and March 31, 2016, the accrued balance due Mr. Rodriguez was $46,450 and $37,450 respectively. The liquidation preference as of June 30, 2016 and March 31, 2016 was $546,450 and $537,450 or $5,464.50 and $5,374.50 per share. 

 

Employment Agreements

 

In 2009, Mr. Rodriguez, our President, was under an employment agreement dated April 1, 2008 that expires on March 31, 2016, pursuant to which he was compensated at an annual rate of $120,000. On April 1, 2011 Mr. Rodriguez voluntarily reduced his compensation to an annual rate of $48,000, subject to an increase by the Company’s Board of Directors.  The Company charged to operations the amount of $12,000 for the three month periods ended June 30, 2016 and 2015, of which $6,500 and $21,882 was paid to him during the three month periods ending June 30, 2016 and 2015, respectively.  As of June 30, 2016, and March 31, 2016, the balances of accrued and unpaid salaries were $210,962 and $205,462.

 

NOTE 7: INCOME TAXES

 

Deferred income taxes result from the temporary difference arising from the use of accelerated depreciation methods for income tax purposes and the straight-line method for financial statement purposes, and an accumulation of Net Operating Loss carry-forwards for income tax purposes with a valuation allowance against the carry-forwards for book purposes.

 

In assessing the value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carry forwards of $33,699,087, which will expire beginning in 2028.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon our cumulative losses through June 30, 2016, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at June 30, 2016.  The amount of the deferred tax asset considered realizable could change in the near term if projected future taxable income is realized.  Due to significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.

 

NOTE 8: STOCKHOLDERS' EQUITY

 

Preferred Stock

 

The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.10 per share.  

 

Series A Preferred Stock

 

The 100 shares of Series A Preferred Stock were issued on June 3, 2002 as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent forty percent (40%) of the fully diluted shares outstanding after their issuance The holder of these shares of Series A Preferred Stock is our President, Kent Rodriguez. 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.

 

 13 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

During the years ended March 31, 2016 and 2015, the Company incurred $40,000 in Class A preferred stock dividends, respectively.

 

The holders of the Series A Preferred Stock have the right to convert each share of preferred stock into a sufficient number of shares of common stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise, conversion or exchange of outstanding options, and warrants. In the event that the Company does not have an adequate number of shares of Common Stock authorized, upon a conversion request, only the maximum allowable number of shares of Series A preferred stock shall convert into Common Stock and the remaining shares of Series A preferred Stock shall convert upon lapse of the applicable restrictions.

 

On January 12, 2018, our Board of Directors agreed to amend Designation of the Series A Convertible Preferred Stock be amended by changing the ratio for conversion, in Article IV, subparagraph (a), from .4% to .51% so that upon conversion the number of shares of common stock to be exchanged shall equal 51% of then issued and outstanding common stock.

 

As of June 30, 2016, the Company has 100 shares of Series A preferred stock issued and outstanding.

 

During the three months ended June 30, 2016 and 2015, the Company incurred $10,000 in Series A preferred stock dividends, and paid $1,000 and $13,500 for the three months ended June 30, 2016 and 2015. As of June 30, 2016 and March 31, 2016, the accrued balance due Mr. Rodriguez was $46,450 and $37,450 respectively. The liquidation preference as of June 30, 2016 and March 31, 2016 was $546,450 and $537,450 or $5,464.50 and $5,374.50 per share. 

 

Series B Preferred Stock

 

In March, 2013, our Board of Directors authorized the issuance of 2,000 shares of Series B Preferred Stock, (the "Series B Preferred Stock").  The face amount of share of the Series B Preferred Stock is $1,000.  As of June 30, 2016 and March 31, 2016, the Company has 1,983 shares of Series B preferred stock respectively issued and outstanding.  

 

The Series B Preferred Stock accrues dividends at the rate of 9% per annum on the original purchase price for the shares. These dividends are payable annually, beginning in January 2014. We are prohibited from paying any dividends on our Common Stock until all accrued dividends are paid on our Series B Preferred Stock.  The Series B Preferred Stock ranks junior to the Series A Preferred Stock owned by our President and Chief Executive Officer, as to Dividends and to a distribution of assets in the event of a liquidation of assets.

 

The Holders of Series B Preferred Stock do not have any voting rights and their consent is not required to take any sort of corporate action.

 

During the three month period ended June 30, 2016, the Company did not issue any shares of Series B Preferred Stock.

 

During the three month period ended June 30, 2015, the Company issued 125 shares of Series B Preferred Stock, 25 shares in exchange for a $25,000 promissory note and 100 shares for an investment of $100,000.

 

During the three month periods ended June 30, 2016 and 2015, the Company incurred $44,618 and $38,250 in dividends on Series B preferred stock.  The Company did not pay any dividends for the three month periods ended June 30, 2016 and ended June 30, 2015. The accrued dividends as of June 30, 2016 and March 31, 2016 were 209,660 and 165,038, respectively. The liquidation preference as of June 30, 2016 and March 31, 2016 was $2,192,660 and $2,148,038 or $1,105.73or $1,083.23 per share, respectively.

 

Total dividends payable from both A and B preferred shares at June 30, 2016 and March 31, 2016 were $256,106 and $205,488 respectively.

 

 14 

 

  

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

AFS Holdings, Inc. Series A Preferred Stock

 

On October 5, 2015, the Articles of Incorporation of AFS were amended to authorize the issuance of 5,000,000 shares of Preferred Stock, par value $0.001, of which 1,000 shares are designated as Series A Preferred Stock.

 

AFS Series A Preferred Stock accrues dividends at the rate of 12% per annum on the original purchase price for the shares. These dividends are payable annually in cash or the AFS Common Stock at the discretion of the Board of Directors, beginning in March 2016. AFS is prohibited from paying any dividends on AFS Common Stock until all accrued dividends are paid on our Series A preferred Stock. Upon liquidation, the Series A Preferred Stock shareholders shall be entitled to the stated value of each shares held, in addition to accrued and unpaid dividends, as long as AFS possesses the funds necessary to make payments. AFS may, at any time, redeem the shares of Series A Preferred Stock without the prior written consent of the Series A Preferred Stock shareholders. The Series A Preferred Stock ranks senior to AFS Common Stock in a distribution of assets in the event of a liquidation of assets. As of June 30, 2016 and March 31, 2016, the Company has 50 shares of Series A preferred stock issued and outstanding.  

 

During the ended June 30, 2016 we did not issue any AFS Series A Preferred Stock.

 

During the three month periods ended June 30, 2016 and 2015, the Company incurred – 0- and $1,500 in dividends on Series A preferred stock.  The Company did not pay any dividends for the three months periods ended June 30, 2015 and June 30, 2016. Dividends payable for Series A Preferred Stock at June 30, 2016 and March 31, 2016 were $4,500 and $3,000 respectively. The liquidation preference of Series A Preferred Stock as of June 30, 2016 and March 31, 2016 was $54,500 and $53,000 or $1,090.00 and $1,060 per share, respectively.

 

Common Stock

 

During the three month period ended June 30, 2016, the Company did not issue and shares.

 

During the three month period ended June 30, 2015 the Company issued the following shares:

 

On April 2, 2015 we issued 300,000 shares of our Common Stock to our directors for their services. The shares were valued at $12,000 or $0.04 per share and were valued based on the midpoint between the closing bid and offer price of the Company's common stock on the date the shares were issued.

 

On June 25, 2015, the company issued 650,000 shares of Common Stock, paid $5,000 in cash and issued a $5,000 promissory note for settlement of an account payable of $280,972.06. The shares were valued at $26,000 or $0.04 per share. The value of the shares was based on the closing bid price of the Company's common stock on the date the Agreement was executed by the Company. $244,972 was treated as a gain from this transaction. 

 

NOTE 9: TECHNOLOGY LICENSE AGREEMENTS

 

On December 1, 2014, the Company entered into an exclusive license agreement for anti-corrosion technology from Ronald Knight in exchange for three hundred thousand (300,000) shares of our common stock. This license calls for an earned royalty of three percent (3.00%) on sales of licensed products and services as they may relate to corrosion prevention and maintenance of sump pumps at gasoline and diesel dispensing locations, including, but not limited to gas stations, convenience stores, trucking companies, bus companies, and any other locations where gasoline and/or diesel is dispensed. We did not have any revenue for the period from December 1, 2014 through June 30, 2016. The Company terminated this agreement on May 9, 2017.

 

 15 

 

 

GROOVE BOTANICALS, INC.  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  
June 30, 2016  
(Unaudited)  

 

NOTE 10: EARNINGS (LOSS) PER SHARE

 

ASC 260-10-45 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. We have included the basic and diluted earnings per share (EPS) computation for the three month period ended June 30, 2016.

 

Basic and diluted earnings per share for each of the periods presented is calculated as follows: 

 

  

For the three months ended

June 30,

2016

(Unaudited) 

 

For the three months ended

June 30,

 2015

(Unaudited) 

Net income (loss) attributable to Avalon Oil & Gas, Inc.  $(32,223)  $138,952 
Preferred stock dividends   (56,118)   (48,250)
Net income (loss) attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for basic earnings per share)   (88,341)   90,702 
Dividend for Series A convertible preferred stock   10,000    10,000 
Net income (loss) attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for diluted earnings per share)   (88,341)   100,702 
           
Weighted average number of common shares outstanding - Basic   18,198,062    16,877,183 
Effect of diluted securities:          
Convertible amount of Common Shares   —      11,665,375 
Weighted average number of common shares outstanding - Diluted   —      28,542,558 
           
Earnings (loss) per share- Basic  $(0.005)  $0.005 
Earnings (loss) per share- Diluted  $(0.005)  $0.003 

 

For the three months end June 30, 2016, convertible notes payable with the principal amount of $149,200 were not included in the calculation of the diluted earnings per share because the effect is anti-dilutive.

 

For the three months end June 30, 2015, convertible notes payable with the principal amount of $164,300 were not included in the calculation of the diluted earnings per share because the effect is anti-dilutive.

 

NOTE 11: COMMITMENTS AND CONTINGENCIES

 

Commitments and contingencies through the date of these financial statements were issued have been considered by the Company and none were noted which were required to be disclosed.

 

NOTE 12: SUBSEQUENT EVENTS

 

The company has reviewed the subsequent event through the date of this report. Below are our subsequent events:

 

On January 29, 2018 the Company executed a Promissory Note between the Company and Carebourn Capital, LLC in the amount of $230,000.

 

On March 21, 2018 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 Groove Botanicals, Inc. We filed an amendment to our Articles of Incorporation with the State of Nevada on May 18, 2018. Our Company’s new name reflects our new corporate direction as a consumer health products company dedicated to improving people’s health and well-being. We will assemble a portfolio of assets via royalty agreements, equity investments, and licensing agreements, as well as develop our own proprietary CB3 skin care products. Our products will contain premium hemp extracts with a broad range of cannabinoids, including cannabidiol (CBD). CBD is a cannabinoid compound naturally derived from the hemp plant. It is not a drug and has no intoxicating effects, but has a long history of natural uses. Recent breakthroughs in research have shown the powerful health benefits of CBD on the body. CBD is also rich in vitamins A, B, D, and E, antioxidants, and fatty acids, all of which dramatically improve skin health. When applied topically to the skin, CBD has been shown to reduce inflammation, retain skin moisture levels, reduce cellular damage, inhibit oil production leading to breakouts, and protect skin from free radicals that damage collagen and elastin.

 

 16 

 

 

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.

 

Corporate Structure

 

Groove Botanicals, Inc. (the "Company") (formally known as Avalon Oil & Gas, Inc.), 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. On November 16, 2011, a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock from 1,000,000,000 shares to 3,000,000,000 shares par value of $0.001.  This amendment was not filed with the Nevada Secretary of State.  

 

On June 4, 2012 the Board of Directors approved an amendment to our Articles of Incorporation to a reverse split of the issued and outstanding shares of Common Stock of the Corporation (“Shares”) such that each holder of Shares as of the record date of June 4, 2012 shall receive one (1) post-split Share on the effective date of June 4, 2012 for each three hundred (300) Shares owned.  The reverse split was effective on July 23, 2012.   On September 28, 2012, we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock.  We filed an amendment with the Nevada Secretary of State on April 10, 2013, to increase our authorized shares to 200,000,000.

 

On March 21, 2018 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 Groove Botanicals, Inc. We filed an amendment to our Articles of Incorporation with the State of Nevada on May 18, 2018.

 

Corporate Strategy

 

Our Company’s new name reflects our new corporate direction as a consumer health products company dedicated to improving people’s health and well-being. We will assemble a portfolio of assets via royalty agreements, equity investments, and licensing agreements, as well as develop our own proprietary CB3 skin care products. Our products will contain premium hemp extracts with a broad range of cannabinoids, including cannabidiol (CBD). CBD is a cannabinoid compound naturally derived from the hemp plant. It is not a drug and has no intoxicating effects, but has a long history of natural uses. Recent breakthroughs in research have shown the powerful health benefits of CBD on the body. CBD is also rich in vitamins A, B, D, and E, antioxidants, and fatty acids, all of which dramatically improve skin health. When applied topically to the skin, CBD has been shown to reduce inflammation, retain skin moisture levels, reduce cellular damage, inhibit oil production leading to breakouts, and protect skin from free radicals that damage collagen and elastin.

 

We have partnered with top leaders in CBD research, cultivation, and extraction to create the world’s finest cannabis skincare product line. Our Groove Botanicals, Inc. proprietary CB3 launches with three foundational products: Revita Wash, a gentle yet effective daily wash that removes toxins and smooths skin; Phyto Lotion, a light-weight, long-lasting daily moisturizer that hydrates, softens, and protects; and Eye Matter, a powerfully effective eye cream that diminishes dark circles, puffiness, expression lines, and wrinkles. Together, these products offer a minimalist skincare routine designed to deliver immediate and transformative results to all skin types. We are also proud to say that our products are 100% American made and non-toxic, paraben free, sulfate free, artificial fragrance free, dye free, vegan, animal by-product free, and 100% pet friendly. We look forward to announcing further developments in the coming months as we expand and develop both our CBD skin care line and our other innovative new product lines.

 

 17 

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

We plan to raise additional capital during the coming fiscal year, but currently have not identified additional funding sources. Our ability to continue operations is highly dependent upon our ability to obtain additional financing, or generate revenues from the sale of our CBD skincare products, none of which can be guaranteed.

 

Ultimately, our success is dependent upon our ability to generate revenues from the sale our CBD skincare products, and to achieve profitability, which is dependent upon a number of factors, including general economic conditions and the sustained profitability resulting from the sale of our CBD skincare products. 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 July 18, 2018 the Company filed five trademark applications with the United States Patent and Trademark Office for CB3SKINCARE: U.S. Trademark Application Serial No. 88/040,563, CB3: U.S. Trademark Application Serial No. 88/040,571, EYE MATTER: U.S. Trademark Application Serial No. 88/040,574, REVITA WASH: U.S. Trademark Application Serial No. 88/040,580, and TAKE YOUR SKIN HIGHER: U.S. Trademark Application Serial No. 88/040,584.

 

Financing Activities

 

We have been funding our obligations through the issuance of our Common Stock for services rendered and for notes payable owed 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.

 

Results of Operations

 

Results of Operations

 

Three month periods ended June 30, 2016 compared to the three month period ended June 30, 2015:

 

Revenues

 

Revenues for the three months ended June 30, 2016 were $17,898, an increase of $9,367 or approximately 110% compared to revenue of $8,531 for the three months ended June 30, 2015.  Revenues increased as a result of consulting income.

 

Lease Operating Expenses

 

During the three months ended June 30, 2016, our lease operating expenses were $19,115, an increase of $8,568 or approximately 81% compared to $10,547 for the three months ended June 30, 2015.  The increase was due to the workover expense on the Company's properties in Miller County, Arkansas.

 

 18 

 

 

Selling, General, and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended June 30, 2016 were $21,937, a decrease of $52,116 or approximately 70% compared to selling, general and administrative expenses of $74,053 during the three months ended June 30, 2016.   Selling, general and administrative expenses for the three months ended June 30, 2015 consisted primarily of payroll and related costs of $12,000, legal and accounting fees in the amount of $500, travel and entertainment expenses of $1,549, facilities costs in the amount of $3,000, and office and miscellaneous expenses of $7,888.

 

Stock Based Compensation

 

We did not have any stock based compensation for the three months ended June 30, 2016, compared to stock based compensation of $20,333 for the three months ended June 30, 2015.

 

Depreciation, Depletion, and Amortization

 

Depreciation, Depletion, and Amortization was $6,253 for the three months ended June 30, 2016, a decrease of $8,315 or approximately 57% compared to $14,568 for the three months ended June 30, 2015.  The decrease was due to no amortization and lower depletion costs during the three months ended June 30, 2016.

 

Interest Income, net of Interest Expense

 

Interest expense was $2,868 for the three months ended June 30, 2016 compared to interest income of $4,950 for the three months ended June 30, 2015. The interest income for the three months ended June 30, 2015 was due to the forgiveness of interest on a $25,000 promissory note that was exchanged for 25 shares of the Company’s Series B Preferred Stock.

 

Net Income (Loss)

 

Our net loss for the three months ended June 30, 2016, was $32,275. We had net income of $138,952 for the three months ended June 30, 2015 due to a gain on the settlement of an account payable of $280,972.06 for $5,000 in cash, a $5,000 promissory note and the issuance of 650,000 shares of the Company’s common stock.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company has minimal revenues from our remaining oil and gas assets. We are in need of additional cash resources to maintain our operations. Our cash and cash equivalents were $107,302 on June 30, 2016, compared to $108,220 on March 31, 2015. We met our liquidity needs through the issuance of our common and preferred stock for cash and the revenue derived from our oil and gas operations.

 

As of June 30, 2016, the Company had a working capital deficit of $754,896, had incurred losses since inception of $33,699,087, and have not yet received any revenue from the sale our CBD skincare products. These factors raise substantial doubt about its ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital or obtain necessary debt financing. The Company is presently dependent on its controlling shareholder to provide us funding for its daily operation and expenses, including professional fee and fees charged by regulators, although he is under no obligation to do so.

  

The Company intends to meet the cash requirements for the next 12 months from the issuance date of this report through a combination of debt and equity financing by way of private placements, friends, family and business associates. The Company currently did not have any arrangements in place to complete any private placement financings and there is no assurance that the Company will be successful in completing any such financings on terms that will be acceptable to it.

 

If we do not have sufficient working capital to pay our operating costs for the next 12 months, we will require additional funds to pay our legal, accounting and other fees associated with our Company and our filing obligations under United States federal securities laws, as well as to pay our other accounts payable generated in the ordinary course of our business. Once these costs are accounted for, we will focus on the manufacture and sale of our CBD skincare products.

 

 19 

 

 

Any failure to raise money will have the effect of delaying the timeframes in the business plan as set forth above, and the Company may have to push back the dates of such activities.

 

The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses and further losses are anticipated as a result of the development of business which raises substantial doubt about the Company’s ability to continue as a going concern within the next twelve months from the issuance date of this report.  The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining financing necessary to meet the Company’s obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand and loans from directors and/or private placement of the Company’s common stock.

 

Ultimately, our success is dependent upon our ability to generate revenues from the sale of our CBD skincare products.

 

Investing activities

 

We did not invest any funds during the three months ended June 30, 2016, we invested $714 during the three months ended June 30, 2015.

 

Financing Activities

 

We did not receive any funds from investing activities during the three months ended June 30, 2016. During the three months ended June 30, 2015, we received $100,000 from the sale of preferred stock and paid dividends on preferred stock of $13,500.

 

Operating activities

 

Our net loss for the three months ended June 30, 2016, was $32,275 compared to net income of $138,952, during the three months ended June 30, 2015. The net income for the three months ended June 30, 2015 was due to a gain on the settlement of an account payable of 280,972.06, for $5,000 in cash, the issuance of a $5,000 promissory note and the issuance of 650,000 shares of the Company’s common stock. The common stock was valued at $.04 per share, and was based on the closing bid price.

 

Critical Accounting Policies

 

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. 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. 

 

Recently Issued Accounting Policies

 

For a discussion of recent accounting pronouncements, see Note 1 to our Financial Statements – “DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.”

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

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Material Commitments

 

We have no material commitments during the next twelve (12) months.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This information has been omitted, as the Company qualifies as a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Management has assessed the effectiveness of our internal control over financial reporting under COSO Framework 2013 as of June 30, 2016 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of June 30, 2016, our internal control over financial reporting was not effective. The material weaknesses identified related to (i) a lack of accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements; (ii) a lack of sufficient documented financial closing policies and procedures; and (iii) a lack of independent directors and an audit committee.

 

We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the following changes during our fiscal year ending March 31, 2019: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; (ii) adopt sufficient written policies and procedures for accounting and financial reporting, and (iii) strengthen our financial team by employing more qualified accountant(s) conversant with US GAAP to enhance the quality of our financial reporting function. The remediation efforts set out in (i), (ii) and (iii) are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

 

Changes in Internal Control

 

There have been no changes in our internal control over financial reporting identified during this quarter ended June 30, 2016, which have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

N/A

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Form 8-K

 

NONE 

 

(b) Exhibits

 

Exhibit

Number

Description
3.1 Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form SB-2, Registration No. 33-74240C).*
3.2 Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form SB-2, Registration No. 33-74240C). *
3.3 Articles of Incorporation for the State of Nevada. (Incorporated by reference to Exhibit 2.2 to Form 10-KSB filed February 2000) *
3.4 Articles of Merger for the Colorado Corporation and the Nevada Corporation (Incorporated by reference to Exhibit 3.4 to Form 10-KSB filed February 2000) *
3.5 Bylaws of the Nevada Corporation (Incorporated by reference to Exhibit 3.5 to Form 10-KSB filed February 2000) *
4.1 Specimen of Common Stock (Incorporated by reference to Exhibit to Registration Statement on Form SB-2, Registration No. 33-74240C).*
10.1 Employment Agreement between the Company and Kent Rodriguez dated April 1, 2011 *
10.2 Promissory Note between the Company and Peter Messerli  dated January 6, 2011, in the amount of $200.000 *
10.3 Promissory Note between the Company and Maerki Baumann & Company AG dated January 11, 2011, in the amount of $250,000*

10.4

Promissory Note between the Company and Maerki Baumann & Company AG dated January 27, 2012, in the amount of $200,000*

10.5 Certificate of Designation Series B Preferred Stock*
10.6 Certificate of Designation AFS Series A Preferred Stock*
10.7 Promissory Note between the Company and Carebourn Capital, LLC dated January 29, 2018 in the amount of $230,000*
31.1 Certification
32.1 Certification

 ____________

 

* Incorporated by reference to a previously filed exhibit or report.

 

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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.  
       
Date: January 11, 2019 By: /s/ Kent Rodriguez                                        
    Kent Rodriguez  
    Chief Executive Officer  
    Chief Financial and Accounting Officer  

 

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