ITEM 1. DESCRIPTION OF BUSINESS
Business Development
We were originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. We were the general partner of Snow Runner (USA) Ltd., a Colorado limited partnership to sell proprietary snow skates under the name "Sled Dogs" which was dissolved in August 1992. In late 1993, we relocated our operations to Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. In August 2000, following our bankruptcy, we made a decision to re-focus to a traditional wholesale to retail distributor, and obtained the exclusive North American rights to distribute high-end European outdoor apparel and equipment. We first intended to exploit these rights over the Internet under the name XDOGS.COM, Inc. However, due to the general economic conditions and the ensuing general downturn in e-commerce and internet-based businesses, we decided that to best preserve our core assets we would need to adopt a more traditional strategy. Thus, we abandoned this approach and to better reflect our new focus, we changed our name to XDOGS, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc. ("Avalon"), and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares, par value of $0.001, and engage in the acquisition of producing oil and gas properties.
Acquisition Strategy
Our strategy is to acquire oil and gas producing properties that have proven reserves and established in-field drilling locations with a combination of cash, debt, and equity. We believe that acquisition of such properties minimizes our risk, allows us to generate immediate cash flow, and provides in-field drilling locations to expand production within the proven oil and gas fields. We will aggressively develop these low cost/low risk properties in order to enhance shareholder value. In addition, Avalon's technology group acquires oil production enhancing technologies. Through its strategic partnership with UTEK Corporation, (UTK: ASE) a transfer technology company, Avalon is building an asset portfolio of innovative technologies in the oil and gas industry to maximize enhancement opportunities at its various oil and gas properties.
In furtherance of the foregoing strategy, we have engaged in the following transactions during the last four years:
On August 29, 2005 we acquired a one hundred percent (100%) working interest, seventy-eight percent (78%) net revenue interest, in 2,400 acres located in Canadian County, Oklahoma ("The Oklahoma Properties"), from Sooner Trend Leasing LLC, payable by delivering 48,000,000 authorized, but previously un-issued, shares of the Company's common stock. On February 13, 2005, the Company returned The Oklahoma Properties to Sooner Trend Leasing LLC, and sent a letter to our transfer agent canceling the 48,000,000 shares of stock issued to Sooner Trend Leasing LLC. On October 20, 2006, the District Court for the Fourth Judicial District, State of Minnesota, issued a judgment canceling the 48,000,000 shares issued to Sooner Trend Leasing, LLC. On May 4, 2007, the judgment issued by the District Court for the Fourth Judicial District, State of Minnesota was filed with the County Clerk in Tulsa County, Oklahoma.
On May 17, 2006, we signed a strategic alliance agreement with UTEK Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry.
On June 15, 2006, we acquired a fifty percent (50%) working interest in the J.C. Kelly wellbore, a 121.9 acre lease in Wood County, Texas, in addition to the E.A. Chance #1 and #2 wellbores, a 40 acre lease in Camp County, Texas and all of the surface equipment for the properties, from KROG Partners LLC. The J. C. Kelly well produces from the Paluzy Interval and the Change # 1 and #2 wells produce from the Sub-Clarksville zone, within an active waterflood area.
On July 17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc., ("UMTI")a wholly owned subsidiary of UTEK Corporation. UMTI holds the exclusive worldwide license for the mitigation of paraffin wax deposition from crude oil using ultrasonic waves. Varying ultrasonic transducers are positioned in production tubing walls as a means to inhibit the wax from attaching to the pipes. The use of this technology helps prevent precipitates from forming on pipes, and also breaks wax bonds thereby increasing flow rates and production efficiency. This technology was developed at the University of Wyoming by Dr. Brian Towler.
On August 11, 2006, we acquired a fifty percent (50%) working interest in the Dixon Heirs #1, Deltic Farms & Timber #1 and the Gunn #1 wells and associated units and leases, in Miller County, Arkansas. These are mature wells with stable production, and were originally drilled in the early 1980's.
On November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT") a wholly owned subsidiary of UTEK Corporation. IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory. The technology uses a densely spaced network of sensors which are installed along and outside of the oil well casings before they are grouted into place. The sensors monitor critical parameters in the subsurface oil reservoir. Data from multiple sensors provides real-time information regarding the status of the reservoir and the primary and secondary oil recovery process. Sensors located deep within the reservoir are much more sensitive than sensors located on the surface. The type of sensors that can be installed include seismic sensors, electrical resistance tomography electrodes, electromagnetic induction tomography coils and thermocouples.
On November 15, 2006, we acquired a ten percent (10%) working interest in 13 wellbores, which include six (6) producing oil wells, three (3) salt water disposal wells, three (3) shut-in or marginally producing wells, and one (1)well that has been plugged and abandoned since the effective date, located in Upshur County, Texas. These wells produce from the Woodbine interval. Avalon is currently working on optimization/workover opportunities with the goal of enhancing operations and production from the shut-in wellbores.
On March 29, 2007, we acquired Leak Location Technologies, Inc.,("LLT") a wholly owned subsidiary of UTEK Corporation. LLT owns an exclusive license to a system for determining the presence and location of leaks in underground pipes. The technology was developed by researchers at Rensselaer Polytechnic Institute. The system uses a series of acoustic sensors to monitor changes in pipeline acoustic emissions, and has been proven in field application with a large multinational petroleum company. The lead scientist in charge of that project is currently under contract to Avalon to manage the technology design refresh and prototype development for commercialization.
On May 22, 2007, we acquired a fifteen percent (15%) working interest in the Janssen #1A prospect in Karnes County, Texas. The Janssen Prospect will be re-completed in the existing vertical wellbore by a sidetrack drilling procedure at a depth of approximately 10,500 feet, and test the Wilcox sand. Total potential reserves are estimated to be 75,000 to 100,000 barrels of condensate and 3 to 4 BCF (billion cubic feet) of gas.
On May 31, 2007 we announced the purchase of a 15% stake in the oil wells in the Janssen Prospect, Karnes County, Texas (the "Janssen Well").
On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. Pursuant to the non-binding letter of intent, we are required to pay $1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at this time our management does not believe that the terms of the non-binding letter of intent will be complied with, or that we will enter into a definitive agreement
On October 31, 2007, we announced in a press release that we closed upon the acquisition of non-operated production in the Lake Washington Field in Plaquemines Parish, Louisiana. Since its discovery in the 1930, the Lake Washington Field has produced approximately 350 million barrels of oil. We hold approximately a .7% working interest in 3 units that are currently producing over 1000 barrels of oil per day.
On April 7, 2008 we announced in a press release our acquisition in December 2007 of a 5% working interest in the 1,280 Waters prospect. The first well is being drilled between two gas wells that the produced over 500 million cubic feet of natural gas in the two years they have been in production. Estimated recoverable reserves from the Waters well are projected to exceed 1.3 billion cubic feet of natural gas.
In June 2008, the Company entered into an agreement with Bedford Energy to acquire a 2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which had been producing 350 thousand cubic feet of gas per day. In August 2008, the Company entered into an additional agreement with Bedford Energy (the “Expanded Bedford Agreement”) to increase its working interest in the Grace #2 from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 to 11.95%. In addition, the Company acquired a 10% working interest and a 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. In March, 2009 Avalon additionally increased its working interest in the Grace wells as follows: in the Grace #1 to 42.125%; in the Grace # 2 to 30.5%; in the Grace #3 to 39.0%, in the Grace #5A to 40.0%, and in the Grace #6 to 34.0%. The Hunton Lime Reserves from the Grace #1, the Grace #3 and the Grace #6 wells are estimated to be 48,000 barrels of oil and 423 million cubic feet of gas. The Upper Red Fork Sand reserves for the Grace #5A are estimated to be 30 million cubic feet of gas.
In September 2008, the Company sold 15% of its recently acquired interest in the Bedford Assets, for cash in the amount of $262,500.
The Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field, and total reserves of 90,000 barrels of oil and 559 million cubic feet of gas. In addition, the Company also acquired Prue Sand potential in the Grace #3, Grace #5A and the Grace #6 wells. Estimated Prue Sand reserves for these three wells are 33,000 barrels of oil and 81 million cubic feet of gas
As part of the Expanded Bedford Agreement, the Company also acquired the right to operate Grace Wells #1, #2, #3, #5A, and #6 (the “Grace Wells”). The Company hired a third party to operate the Grace Wells and to upgrade the operation of the Grace Wells (“Workover”). In February and March 2009, the Company made formal buyout offers (the “Grace Wells Buyout Offer”) to the approximately 93 additional working interest holders in the Grace Wells (the “Additional Grace Wells Owners”). The Grace Wells Buyout Offer provided three options to the Additional Grace Wells Owners: (1) The Additional Grace Wells Owners would continue to participate in the operation of the Grace Wells, and would remit to the Company fund representing their pro rata portion of the Workover costs; (2) The Additional Grace Wells Owners would sell their interests in the Grace Wells to the Company for cash and stock in the Company; (3) The Additional Grace Wells Owners could do nothing. If this option was chosen, the Additional Grace Well Owner would retain their interest in the Grace Wells, but their pro-rata portion of the costs would be subject to a 500% penalty; in addition, their pro-rata portion of the revenue generated by the Grace Wells would be applied to their portion of the costs, including the 500% penalty, before they would receive any payment. At March 31, 2009, the approximately 93 Grace Wells investors had selected the following options: Approximately 22 selected option 1, continued participation; 29 selected option 2, the Company buyout; 17 were in Option 3, non-consent; and 25 were still pending and had not made a selection.
We plan to raise additional capital during the coming fiscal year, but currently have not identified additional funding sources. Our ability to continue operations is highly dependent upon our ability to obtain additional financing, or generate revenues from our acquired oil and gas leasehold interests, none of which can be guaranteed.
Ultimately, our success is dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests, and to achieve profitability, which is dependent upon a number of factors, including general economic conditions and the sustained profitability resulting from the operation of the acquired oil and gas leaseholds. There is no assurance that even with adequate financing or combined operations, we will generate revenues and be profitable.
PATENTS, TRADEMARKS, AND PROPRIETARY RIGHTS
On May 17, 2006, The Company signed a strategic alliance agreement with UTEK Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry.
On July 17, 2006, we acquired Ultrasonic Mitigation Technologies, Inc. ("UMTI"). UMTI holds the exclusive worldwide license for the mitigation of paraffin wax deposition from crude oil using ultrasonic waves. This technology was developed at the University of Wyoming by Dr. Brian Towler.
On November 9, 2006, we acquired Intelli-Well Technologies, Inc., ("IWT"). IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory.
On March 29, 2007, we acquired Leak Location Technologies, Inc., ("LLT"). LLT owns an exclusive license to a system for determining the presence and location of leaks in underground pipes.
On May 17, 2007, The Company renewed its strategic alliance agreement with UTEK Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry.
On August 13, 2007, The Company received notice that the U.S. Patent and Trademark Offices approved the patent application for Avalon's paraffin wax mitigation system, being marketed as Ultrasonic Mitigation Solutions(TM) (the "Patent"). Currently available solutions to paraffin wax deposits and build-up in oil production rely upon chemical solvents, which not only require repeated mechanical pigging operation and costly workovers to maintain production capacity, but can also result in environmental liabilities. In contrast, the Patent utilizes ultrasonic waves to fragment current paraffin deposits in the production's tubing and prevent future wax formation in an environmentally safe process.
On August 16, 2007, Kent Rodriguez, the Company's President and CEO, presented a proposal to the Board of Directors to spin-off Oiltek Inc. ("Oiltek"), which specializes in oil and gas recovery technology to Avalon's shareholders. The oil and gas technology include, but are not limited, to the Patent; a system to detect hazardous gas leaks including small leaks in natural gas pipelines; and a system for intelligent drilling and completion sensors to provide real-time oil reservoir monitoring of subsurface information.
On September 22, 2007 the Company entered into an agreement with respect to its purchase of a 75.6% interest in Oiltek for $50,000 and the right of Oiltek to market Avalon's intellectual property.
ENVIRONMENTAL MATTERS
During the last three fiscal years, compliance with environmental laws and regulations did not have a specific impact on the Company's operations. The Company does not anticipate that it will incur any material capital expenditures for environmental control facilities during the next fiscal year.
EMPLOYEES
As of March 31, 2009 we had two full time employees consisting of our President, Mr. Kent Rodriguez, and Vice President, Ms. Jill Allison. The Board has retained William Anderson, Glen Harrod, Mark Oliver, William Graham, Thomas Bugbee, Gary Browning and Bruce Merrifield, as advisors who have been compensated by the issuance of securities. We do not have any part time employees at this time.
RESEARCH AND DEVELOPMENT
During the last three fiscal years, we did not incur research and development expenses.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate office is located at 7808 Creekridge Circle, Suite 105, Minneapolis, MN 55439. This office space is leased from an unaffiliated third party on three year lease, which ends on December 1, 2009, for a monthly rental of $3,100.
On October 17, 2007, we signed a non-binding letter of intent with Gran Tierra Energy Colombia, Ltd. ("Gran Tierra"), a Colombian Energy company, expressing our intent to acquire Gran Tierra's interest in the Mecaya Block and the Talora Block. Pursuant to the non-binding letter of intent, we are required to pay $1,500,000 in cash for Gran Tierra's interest in the Mecaya Block. However, at this time our management does not believe that the terms of the non-binding letter of intent will be complied with, or that we will enter into a definitive agreement.
On July 2, 2008, we signed a letter agreement to acquire all of the oil and gas producing assets owned by Bedford Energy, Inc. in the East Chandler Field, Lincoln County, Oklahoma. We increased our current interest in the Grace #2 well and acquire working interests in four other producing wells in the East Chandler Field, the Grace #1, Grace #3, Grace #5A and Grace #6 wells, as follows:
We increased our working interest in the Grace #2 from 2.5% to 7.5%; and increasing our net revenue interest in the Grace #2 to 11.95%. We initially acquired our working interest in the Grace #2 well in June, 2008.
We are acquiring a 10% working interest and 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells.
We are acquiring a 50% working interest in a salt water disposal well and offset and development acreage in the two quarter sections (320 acres) adjoining the Grace Wells in the East Chandler Field.
As of March 2009, we have increased our working interests in the Grace Wells as shown in the table below:
As of March 31, 2009, our working interests in the Grace Wells are shown in the table below:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(a) Principal Market or Markets
Effective with the close of business on June 19, 1997, our Common Stock was delisted from the NASDAQ Small Cap Market. In June of 1997, our Common Stock began trading on the NASD Over-the-Counter Bulletin Board ("OTCBB"). Market makers and other dealers provided bid and ask quotations of our Common Stock. We trade under the symbol "AOGN.OB".
The table below represents the range of high and low bid quotations of our Common Stock as reported during the reporting period herein. The following bid price market quotations represent prices between dealers and do not include retail markup, markdown, or commissions; hence, they may not represent actual transactions.
As of June 8, 2009, 99,265,002 shares of our Common Stock were outstanding and the number of holders of record of our Common Stock at that date was approximately 990. However, we estimate that there are a significantly greater number of shareholders because a substantial number of our shares are held in nominee names by brokerage firms.
(c) Dividends
No dividends on the Common Stock were paid by us during the fiscal year ended March 31, 2009, or the fiscal year ended 2008, nor do we anticipate paying dividends on Common Stock in the foreseeable future. Holders of Common Stock are entitled to receive such dividends as may be declared by our Board of Directors.
(c) Securities Authorized for Issuance Under Equity Compensation Plans.
We have not established an Equity Compensation Plan and have not authorized the issuance of any securities under such plan.
(d) Preferred Stock.
Our Articles of Incorporation authorize us to issue up to 1,000,000 shares of $0.10 par value preferred stock, with such classes, series and preferences as our Board of Directors may determine from time to time. In June 2002, our Board of Directors authorized the issuance of 100 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock"). Our Board further agreed to issue all of the Series A Preferred Stock to our Chairman and President, Kent Rodriguez, in satisfaction of $500,000 in loans made by Mr. Rodriguez.
The Series A Preferred Stock accrues dividends at the rate of 8% per annum on the original purchase price for the shares. If declared by the Board of Directors, these dividends are payable quarterly, beginning in September 2002. We are prohibited from paying any dividends on our Common Stock until all accrued dividends are paid on our Series A Preferred Stock.
If we liquidate or dissolve, and after payment of our debts, the holders of the Series A Preferred Stock are entitled to a preference payment before we make any distributions to our Common Stockholders. The preference amount is equal to the original purchase price for the Series A Preferred shares plus accrued, but unpaid dividends.
The Series A Preferred Stock is convertible at anytime into 40% of the then outstanding shares of Common Stock and securities convertible into Common Stock on a fully diluted basis. However, conversion is limited to the number of shares of Common Stock available for issuance under our articles of incorporation.
Regardless of whether or not the Series A Preferred Stock has been converted to our Common Stock, the Series A Preferred Stockholder is entitled to vote, at all times, on an as-if converted basis. The Preferred Stockholder, Mr. Rodriguez, has the right to vote the Series A Preferred Stock together with his other holdings in the Company.
Other than the Series A Preferred Stock, no preferred stock has been issued. See Item 11, Security Ownership of Certain Beneficial Owners and Management.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The Company does not have any securities authorized for issuance under equity compensation plans.
RECENT SALES OF UNREGISTERED SECURITIES
The Company sold the following unregistered securities between January 1, 2009 and March 31, 2009:
During the three months ended March 31, 2009, the Company issued 10,000 shares of common stock for cash in the amount of $300.
During the three months ended March 31, 2009, the Company issued 7,000,000 shares of common stock to note holder valued at $158,000. These shares are considered discounts to the notes payable.
During the three months ended March 31, 2009, the Company issued 4,200,000 shares of common stock valued at $144,420 for consulting services.
During the three months ended March 31, 2009, the Company issued 7,859,250 shares of common stock valued at $188,622 to interest holders in the Grace wells.
All other unregistered securities sold by the Company during the past three years, but prior to January 1, 2009, have been included in the Company's 10-Q filings.
All of the unregistered securities sold were issued directly by the Company, and no commissions or fees were paid in connection with any of these transactions. The transactions were private, and the Company endeavored to comply both with Regulation D, and also Section 4(2) of the Securities Act of 1933, as amended, as exemption(s) from registration. The Company exercised reasonable care to assure that the purchasers of the securities are not underwriters and were "accredited investors" under Regulation D and/or sophisticated investors.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS AND PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with our financial statements and notes related thereto. The discussion of results, causes and trends should not be construed to infer conclusions that such results, causes or trends necessarily will continue in the future.
For the year ended March 31, 2009 compared to the year ended March 31,
Revenues
Revenues for the year ended March 31, 2009 were $320,712, an increase of approximately 28% compared to revenue of $249,856 for the year ended March 31, 2008. Revenues from the sale of oil and gas increased as a result of the acquisition of additional oil and gas properties.
Lease Operating Expenses
During the year ending March 31, 2009, our lease operating expenses were $71,970, an decrease of $78,166 or approximately 52% compared to $150,136 for the year ended March 31, 2008. This decrease was the result of the lower workover costs and a reduction in lease operating expenses
Selling, General, and Administrative Expenses
Selling, general and administrative expenses for the year ended March 31, 2009 were $1,245,812 an increase of $20,606 or approximately 2% compared to selling, general and administrative expenses of $1,225,206 during the year ended March 31, 2008. Selling, general and administrative expenses for 2009 consisted primarily of and related costs of $212,768; legal and accounting fees in the amount of $377,151; payroll consulting fees in the amount of $140,271; travel and entertainment expenses of $147,608; licensing fees of $110,000; office expenses of $70,746; facilities costs in the amount of $61,001; investor relations costs of $40,238; bad debt expense of $28,260; and insurance expense in the amount of $24,314. Selling, general and administrative expenses in the current period included an increase in legal expenses as we completed acquisitions of oil and gas properties during the year ended March 31, 2009.
Non-Cash Compensation
Non-cash compensation for the year ended March 31, 2009 was $430,425, a decrease of $1,317,440 or approximately 75% compared to non-cash compensation of $1,747,860 for the year ended March 31, 2008. This decrease was the result of a reduction of common stock issuances to consultants as payment and the reduction of the use of outside consultants.
Acquisition Costs
Acquisition costs for the year ended March 31, 2009 were $122,500; there were no such costs during the comparable period of the prior year. These costs represent the commissions paid for the acquisition of the Bedford Energy assets.
Depreciation, Depletion, and Amortization
Depreciation, Depletion, and Amortization were $438,221 for the year ended March 31, 2009, an increase of $108,858 or approximately 33% compared to $329,363 for the year ended March 31, 2008. The reason for the increase is due to the acquisition of additional oil and gas producing properties.
Interest Expense, net of Interest Income
Interest expense, net of interest income of $43,472 for the year ended March 31, 2009, an increase of $22,994 or approximately 112% compared to interest expense, net of $20,478 for the year ending March 31, 2008. This increase is due to an increase in notes payable and the amortization of the discount on the notes payable.
Loss on Sale of Property
During the year ended March 31, 2009, the Company sold an oil and gas property for a loss of $16,000; there were no such losses during the year ended March 31, 2008.
Loss on Sale of Minority Interest
During the year ended March 31, 2009, the Company sold a minority interest in an oil and gas property for a loss of $37,500; there were no such losses during the year ended March 31, 2008.
Realized Gains on Marketable Securities
There was no loss on marketable securities during the current year, compared to a gain of $11,523 during the prior year. The Company no longer has any marketable securities.
Net Loss
For the reasons stated above, our net loss for the year ended March 31, 2009, amounted to $2,085,183, a decrease of $1,144,344 or approximately 35% compared to a net loss of $3,229,527 during the prior period.
Liquidity and Capital Resources
The March 31, 2009, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $24,601,101 from inception through March 31, 2009, and has a working capital deficiency of $1,152,826, and shareholder’s equity of $2,762,090, respectively, at March 31, 2009. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
Our cash and cash equivalents were $26,406 on March 31, 2009, compared to $108,688 on March 31, 2008. We met our liquidity needs through the issuance of our common stock and notes payable for cash and the revenue derived from oil and gas operations.
We need to raise additional capital during the fiscal year, but currently have not acquired sufficient additional funding. Our ability to continue operations is highly dependent upon our ability to obtain immediate additional financing, or generate revenues from our acquired oil and gas leasehold interest, and to achieve profitability, none of which can be guaranteed. Unless additional funding is located, it is highly unlikely that we can continue to operate. There is no assurance that even with adequate financing or combined operations, we will generate revenues and be profitable.
Ultimately, our success is dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests.
Operating activities
Net cash used by operating activities for the year ended March 31, 2009 was $1,045,969 compared to $1,081,401 provided in the year ended March 31, 2008.
The Company had a net loss of $2,085,183 for the year ended March 31, 2009 compared to a net loss of $3,234,710 for the year ended March 31, 2008. Net accounts receivable for the year ended March 31, 2009 was $40,827 compared to $23,473 for the year ended March 31, 2008.
Investing activities
For the twelve months ended March 31, 2009 we used $740,221 in investing activities compared to $715,300 in the twelve months ended March 31, 2008. The primary use of cash for investing activities in the current year was $900,000 used for the acquisition of the Grace Wells assets from Bedford Energy.
Financing activities
Our financing activities for the period ended March 31, 2009 provided cash of $1,703,908 as compared to $1,003,852 for the period ended March 31, 2008. We plan to raise additional capital during the coming fiscal year. Cash generated by financing activities consisted of $1,044,191 for the sale of common stock and $660,000 from the issuance of notes payable.
Critical Accounting Policies
The 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Material Commitments
We have no material commitments during the next twelve (12) months.
Purchase of Significant Equipment
During the twelve months ended March 31, 2009, we used $1,000 for the purchase of equipment, compared to $10,672 in equipment for the year ended March 31, 2008.
Our ability to continue operations is highly dependent upon our ability to obtain immediate additional financing, or generate revenues from our acquired oil and gas leasehold interests, and to achieve profitability, which is dependent upon a number of factors, including general economic conditions and the sustained profitability resulting from the operation of the acquired oil and gas leaseholds.
There can be no assurance that, even with adequate financing or combined operations, we will generate sufficient revenues to be profitable.
Our success is largely dependent upon our ability to generate revenues from our acquired oil and gas leasehold interests and from the income from the oil and gas enhancement technology we have acquired from UTEK, Inc.
RISK FACTORS
Any investment in our securities is highly speculative. The Company's business and ownership of shares of our common stock are subject to numerous risks You should not purchase our shares if you cannot afford to lose your entire investment. You should consider the following risks before acquiring any of our shares.
We have never been, and may never be, profitable.
During the past several years, we have attempted, without success, to generate revenues and profits. For the year ended March 31, 2009, we incurred a net loss of $2,085,183. We cannot assure that we will ever be profitable.
We need additional capital.
We need additional financing to continue operations. The amount required depends upon our business operations, and the capital needs of our acquisition of the certain oil and gas leasehold interests. We may be unable to secure this additional required financing on a timely basis, under terms acceptable to us, or at all. To obtain additional financing, we will likely sell additional equity securities, which will further dilute shareholders' ownership in us. Ultimately, if we do not raise the required capital, we may need to cease operations.
We are dependent upon our key personnel.
We are highly dependent upon the services of Kent A. Rodriguez, our President and Chief Executive Officer. If he terminated his services with us, our business would suffer.
There is only a limited trading market for our securities.
Our Common Stock is traded on the OTC Bulletin Board. The prices quoted may not reflect the price at which you can resell your shares. Because of the low price of our stock, we are subject to particular rules of the U.S. Securities and Exchange Commission that make it difficult for stock brokers to solicit customers to purchase our stock. This reduces the number of potential buyers of our stock and may reduce the value of your shares. There can be no assurance that a trading market for our stock will continue or that you will ever be able to resell your shares at a profit, or at all.
Our management controls us.
Our current officers and directors own approximately 46% of our outstanding stock and are able to affect the election of the members of our Board of Directors and make corporate decisions. Mr. Rodriguez, by his ownership of Class A Preferred Stock, has the right to vote 40% of our voting securities. Accordingly, even if we issue additional shares to third parties, Mr. Rodriguez will continue to control at least 40% of our voting securities. This voting concentration may also have the effect of delaying or preventing a change in our management or control or otherwise discourage potential acquirers from attempting to gain control of us. If potential acquirers are deterred, you may lose an opportunity to profit from a possible acquisition. See "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" and "Market for Common Equity and Related Stockholder Matters".
A significant number of shares will become eligible for public sale, potentially depressing our stock price.
Under the SEC's Rule 144, shares issued in issuances which are not registered with the SEC generally first become eligible for public resale after six months. Shareholders who are affliates of us generally may resell only a limited number of their privately acquired shares after six months. After six months, stockholders who are not affiliated with us may resell any number of their privately acquired shares pursuant to Rule 144. The resale of the shares we have privately issued, or the potential for their future public resale, may depress our stock price.
Our governing documents and Nevada law may discourage the potential acquisitions of our business.
Our Board of Directors may issue additional shares of capital stock and establish their rights, preferences and classes, in most cases without stockholder approval. In addition, we may become subject to anti-takeover provisions found in Section 89.378-78.379 of the Nevada Business Corporation Act which may deter changes in control of our management which have not been approved by our Board of Directors.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS.
Our audited Financial Statements begin on page.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Our principal executive and financial officers, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the most recently completed quarter covered by this report, have concluded that as of the end of the most recently completed quarter, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.
There have been no changes in our internal controls or in other factors that could affect these controls during or subsequent to the end of the most recently completed quarter.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our Directors and Executive Officers are shown below:
Each Director is serving a term of office, which will continue until the next annual meeting of shareholders and until the election and qualification of his respective successor.
KENT A. RODRIGUEZ
Mr. Rodriguez joined the Company as Chief Executive Officer, Secretary, and Principal Financial Officer in May 2005. Since 1995, he has been the Managing Partner of Weyer Capital Partners, a Minneapolis-based venture capital corporation. From 1985 to 1995, he was employed by the First National Bank of Elmore, Elmore, Minnesota, in various capacities. He has a B.A. degree from Carleton College, and an Executive MBA from the Harvard Business School.
JILL ALLISON
Ms. Allison joined the Company as Vice President and Director in June 2006. She has over 20 years of diversified management experience in business development and technology commercialization. Prior to joining Avalon, Ms. Allison managed a technology strategy consulting practice with focus in the market convergence of physical and IT security industries. Her venture development background includes market leadership positions with Monsanto, Iridian Technologies, Pinkertons and Cylink Corporation. She holds a B.A. in Economics from Gustavus Adolphus College; a Master's in International Management (MIM) in Marketing from the American Graduate School of International Management (Thunderbird), Glendale, AZ; and an MBA in Strategic and Entrepreneurial Management from the Wharton School of the University of Pennsylvania, where she focused on strategic alliances and management of technology.
DOUGLAS BARTON
Mr. Barton has served as a Director of the Company since May 2005. From 1987 to the present, he has been the President and sole owner of Venture Communications, Inc., a private promotion, development, and marketing consulting firm. He has a B.S. degree in Economics/History from the University of Minnesota.
STEPHEN NEWTON
Mr. Newton joined the Company as a director in October 2007. He has been working as an Independent Energy Consultant, serving companies who wish to invest in Latin America since March 2007. He received his Bachelors in Engineering in Mining and Petroleum at the University of Queensland, Brisbane, Australia, and his Masters of Science in Petroleum Engineering at the University of London, United Kingdom. He is a member of the Society of Petroleum Engineers, and is the founding President of the Colombian Petroleum Association (ACP). From 2004-2007, Mr. Newton served as Chief Executive Officer and President of Solana Petroleum Exploration Colombia, as well as serving as a Member of the Board of Directors. He served as Vice President and Member of the Board of Directors for Solana Petroleum Exploration from 2002-2004. Mr. Newton also worked as President and General Manager of AEC Colombia and Ecuador. Prior to this position, Mr. Newton served in various positions with Occidental Petroleum Corporation from 1974-1999, eventually becoming President of OXY Colombia and subsequently Vice President of Worldwide Engineering and Technical Services.
The Company's Directors will serve in such capacity until the next annual meeting of the Company's shareholders and until their successors have been elected and qualified. There are no family relationships among the Company's officers and directors, nor are there any arrangements or understanding between any of the directors or officers of the Company or any other person pursuant to which any officer or director was or is to be selected as an officer or director. The Directors took action eight (8) times by written consent during the fiscal year ended March 31, 2008.
In 1999, the Board of Directors established a Compensation Committee. It is currently comprised of Messrs. Barton and Newton The Compensation Committee held one meeting in fiscal 2008.
In May 2000, the Board of Directors established an Audit Committee. It is currently comprised of Messrs. Barton and Newton. The Audit Committee held one meeting in fiscal 2008.
We have adopted a Code of Ethics which is designed to ensure that our directors and officers meet the highest standards of ethical conduct. The Code of Ethics requires that our directors and officers comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our best interest.
Involvement in Legal Proceedings
We are not aware that any of our officers and directors were, or have been involved in any material legal proceedings which would have any effect upon the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act") requires our officers and directors and persons owning more than ten (10%) percent of our Common Stock to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Additionally, Item 405 of Regulation S-B under the 34 Act requires us to identify in our Form 10-KSB and proxy statement those individuals for whom one of the above referenced reports was not filed on a timely basis during the most recent fiscal year or prior fiscal years. Given these requirements, we have the following report to make under this section. None of our officers or directors, and all persons owning more than ten percent of its shares have filed the subject reports, if required, on a timely basis during the past fiscal year.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for services in all capacities rendered to us for the year ended March 31, 2009, of our Chief Executive Officer and our other executive officers whose annual compensation exceeded $100,000 in the fiscal year ended March 31, 2009, if any. We refer to the Chief Executive Officer and these other officers as the named executive officers.
SUMMARY COMPENSATION TABLE
(1) Effective on May 31, 2005, Mr. Rodriguez became subject to an employment agreement pursuant to which he is paid $7,000 per month in wages.
(2) Mr. Rodriguez owns the 100 shares of Preferred Stock outstanding. These shares pay an 8% dividend.
(3) Effective On April 1, 2008, Mr. Rodriguez became subject to a new employment agreement pursuant to which he is paid $10,000 per month in wages.
(4) We paid Mr. Rodriguez in 2007, in 2008 and in 2009 and accrued the balance.
Outstanding Equity Awards at Fiscal Year-End as of March 31, 2009
Option Awards
Stock Awards
Director Compensation
(1) Menno Wiebe resigned from the Company’s Board of Directors on August 1, 2008.
(2) On April 14, 2008, the Company issued 200,000 shares of common stock to the 5 Directors of the Company. These shares were valued at $32,000 each.
(3) On October 8, 2008, the Company issued 250,000 shares of common stock to each of its 4 directors. The shares were valued at $7,500 each.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its two officers. The employment agreements provide for salaries and benefits and extend up to five years. In addition to salary and benefits provisions, the agreements include defined commitments should the employer terminate the employee with or without cause.
KENT RODRIGUEZ
In 2009, Mr. Rodriguez was under an employment agreement dated April 1, 2008 that expires on March 31, 2013, pursuant to which he was compensated at an annual rate of $120,000. The agreement also provides for the increase of Mr. Rodriguez’s base salary by 5% each year for the five year term of the agreement.
JILL ALLISON
In 2009, Ms. Allison was under an employment agreement dated April 1, 2008 that expires on March 31, 2011, pursuant to which she was compensated at a rate of $5,000 per month, for an annual rate of $60,000.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding ownership of our Common Stock as of June 8, 2009 by (i) each person known by us to be the beneficial owner of more than five (5%) percent of our outstanding Common Stock; (ii) each director of our Company; and (iii) all executive officers and directors of our Company as a group. As of June 8, 2009, we had a total of 99,265,002 common shares issued and outstanding.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Promissory Notes
On February 11, 2008, the Company borrowed $75,000 from an officer of the corporation. The note carried a 10% interest rate and matured on March 31, 2008. On April 18, 2008 the Company repaid $35,000 of the note plus accrued interest. During the three months ended September 30, 2008, the Company made payments in the amount of $40,000 to repay the remaining balance of the note, and the Company also repaid accrued interest in the amount of $762. The balance of the note at March 31, 2009 and 2008 was $0 and $75,000, respectively.
Preferred Stock
The 100 shares of Series A Preferred Stock, issued to an officer/director as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.
During the years ended March 31, 2009 and 2008, the Company incurred $40,000 in preferred stock dividends, respectively.
The Series A Preferred Stock is convertible at any time into a sufficient number of shares of common stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exerciser, conversion or exchange of outstanding options, warrants, or convertible securities.
Employment Agreements
KENT RODRIGUEZ
In 2009, Mr. Rodriguez employed pursuant to an employment agreement dated April 1, 2008 that expires on March 31, 2013, pursuant to which he was compensated at an annual rate of $120,000. The agreement also provides for the increase of Mr. Rodriguez’s base salary by 5% each year for the five year term of the agreement.
JILL ALLISON
In 2009, Ms. Allison employed pursuant to an employment agreement dated April 1, 2008 that expires on March 31, 2011, pursuant to which she was compensated at a rate of $5,000 per month, for an annual rate of $60,000
ITEM 13.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number
Description
3.1
Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form SB-2, Registration No. 33-74240C).*
3.2
Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form SB-2, Registration No. 33-74240C). *
3.3
Articles of Incorporation for the State of Nevada. (Incorporated by reference to Exhibit 2.2 to Form 10-KSB filed February 2000) *
3.4
Articles of Merger for the Colorado Corporation and the Nevada Corporation (Incorporated by reference to Exhibit 3.4 to Form 10-KSB filed February 2000) *
3.5
Bylaws of the Nevada Corporation (Incorporated by reference to Exhibit 3.5 to Form 10-KSB filed February 2000) *
4.1
Specimen of Common Stock (Incorporated by reference to Exhibit to Registration Statement on Form SB-2, Registration No. 33-74240C). *
31.1
Certification
32.1
Certification
* Incorporated by reference to a previously filed exhibit or report.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
1. AUDIT FEES.
Our audit fees for the years ended March 31, 2009 and 2008 were as follows:
2. TAX FEES.
Our tax return fees for the years ended March 31, 2009 and 2008 were as follows:
3. ALL OTHER FEES.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company in the capacities and on the dates indicated.
Date: July 14, 2009
By:
/s/ Kent Rodriguez
Kent Rodriguez
Chief Executive Officer, President,
Secretary and Principal Financial Officer
Date: July 14, 2009
By:
/s/ Jill Allison
Jill Allison
Vice President, Director
Date: July 14, 2009
By:
/s/ Douglas Barton
Douglas Barton
Director
Date: July 14, 2009
By:
/s/ Stephen Newton
Steven Newton
Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Avalon Oil & Gas, Inc.
We have audited the accompanying consolidated balance sheets of Avalon Oil & Gas, Inc. (“the Company”) and subsidiary as of March 31, 2009 and 2008 and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Bernstein & Pinchuk LLP
New York, New York
July 14,
AVALON OIL & GAS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31,
See notes to consolidated financial statements.
AVALON OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31,
(AUDITED)
See notes to consolidated financial statements.
AVALON OIL & GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
(AUDITED)
See notes to consolidated financial statements.
AVALON OIL & GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
(AUDITED)
(Continued)
See notes to consolidated financial statements.
AVALON OIL & GAS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT
FOR THE TWO YEARS ENDED MARCH 31, 2009
See notes to consolidated financial statements.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Avalon Oil & Gas, Inc. (the "Company") was originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. The Company was the general partner of Snow Runner (USA) Ltd.; a Colorado limited partnership to sell proprietary snow skates under the name "Sled Dogs" which was dissolved in August 1992. In late 1993, the Company relocated its operations to Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc., and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares, par value of $0.001, and engage in the acquisition of producing oil and gas properties.
The Company is currently in the process of raising funds to acquire oil and gas properties and related oilfield technologies, which the Company plans to develop into commercial applications.
On July 17, 2006, the Company purchased all the outstanding shares of Ultrasonic Mitigation Technologies, Inc. (UMTI) from UTEK Corporation for 16,250,000 shares of the Company's Common Stock valued at $695,500. The shares were valued at the average sales price received in private placements for sales of restricted common stock for cash. UMTI became a wholly owned subsidiary of the Company as of the date of acquisition. UMTI holds the technology license of a patented process for paraffin wax mitigation from crude oil using ultrasonic waves developed by the University of Wyoming.
On November 9, 2006, the Company purchased all the outstanding shares of Intelli-Well Technologies, Inc. (IWTI) from UTEK Corporation for 20,000,000 shares of the Company's common stock valued at $594,000. The shares were valued at the average sales price received in private placements for sales of restricted common stock for cash. ITWI became a wholly owned subsidiary of the Company as of the date of acquisition. IWTI holds a non-exclusive license in the United States for a borehole casing technology developed by the Regents of the University of California (the "Regents") through its researchers at Lawrence Livermore National Laboratory.
On March 28, 2007, the Company purchased all the outstanding shares of Leak Location Technologies, Inc. (LLTI) from UTEK Corporation for 36,710,526 shares of the Company's common stock valued at $1,090,303. The shares were valued at the average sales price received in private placements for sales of restricted common stock for cash. LLTI became a wholly owned subsidiary of the Company as of the date of acquisition. LLTI holds a non-exclusive license in the United States for a leak detection and location technology developed by the Rensselaer Polytechnic Institute ("Rensselaer") through its researcher Michael Savic.
On September 22, 2007 the Company entered into an agreement with respect to its purchase of a 75.6% interest in Oiltek, Inc. (Oiltek) for $50,000 and the right of Oiltek to market Avalon's intellectual property. Oiltek is consolidated in these financial statements with a minority interest shown.
In June 2008, the Company entered into an agreement with Bedford Energy to acquire a 2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which had been producing 350 thousand cubic feet of gas per day. In August 2008, the Company entered into an additional agreement with Bedford Energy (the “Expanded Bedford Agreement”) to increase its working interest in the Grace #2 from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 to 11.95%. In addition, the Company acquired a 10% working interest and a 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. The Hunton Lime Reserves from the Grace #1, the Grace #3 and the Grace #6 wells are estimated to be 48,000 barrels of oil and 423 million cubic feet of gas. The Upper Red Fork Sand reserves for the Grace #5A are estimated to be 30 million cubic feet of gas. The Company also acquired the right to operate the Grace Wells, and is attempting to increase its ownership in these wells. See note 2.
In September 2008, the Company sold a 15% of its recently acquired interest in the Bedford Assets, for cash in the amount of $262,500.
The Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field, and total reserves of 90,000 barrels of oil and 559 million cubic feet of gas. In addition, the Company also acquired Prue Sand potential in the Grace #3, Grace #5A and the Grace #6 wells. Estimated Prue Sand reserves for these three wells are 33,000 barrels of oil and 81 million cubic feet of gas.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Ultrasonic Mitigation Technologies, Inc.; Intelli-Well Technologies, Inc. and Leak Location Technologies, Inc. along with 75.6 % owned Oiltek, Inc. All significant inter-company items have been eliminated in consolidation.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
Going Concern
The March 31, 2009, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $24,601,101 from inception through March 31, 2009, and has a working capital deficiency of $1,152,826 and shareholder’s equity of $2,762,090, respectively, at March 31, 2009. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Basis of Accounting
The Company's financial statements are prepared using the accrual method of accounting. Revenues are recognized when earned and expenses when incurred.
Cash Equivalents
Cash and cash equivalents consist primarily of cash on deposit, certificates of deposit, money market accounts, and investment grade commercial paper that are readily convertible into cash and purchased with original maturities of three months or less. The Company maintains its cash balances at several financial institutions. Accounts at the institutions are insured by the Federal Deposit Insurance Corporation up to $250,000.
Investments
The Company classifies its debt and marketable securities into held-to-maturity, trading, or available-for-sale categories. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale. Held-to-maturity securities are recorded as either short-term or long-term on the balance sheet based on contractual maturity date and are stated at amortized cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt and marketable equity securities are classified as available-for-sale and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in shareholder's equity.
The fair value of substantially all securities is determined by quoted market prices. Gains or losses on securities sold are based on the specific identification method. As of March 31, 2009, all investments are considered to be available-for-sale for financial reporting purposes.
Fair Value of Financial Instruments
The Company's financial instruments are cash and cash equivalents, accounts receivable, accounts payable, notes payable, and long-term debt. The recorded values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair values based on their short-term nature. The recorded values of notes payable and long-term debt approximate their fair values, as interest approximates market rates.
Accounts Receivable
Management periodically assesses the collectability of the Company's accounts receivable. Accounts determined to be uncollectible are charged to operations when that determination is made. All of the Company's accounts receivable are concentrated in the oil industry and are believed to be fully collectable.
Oil and Natural Gas Properties
The Company follows the full cost method of accounting for natural gas and oil properties, prescribed by the Securities and Exchange Commission ("SEC".) Under the full cost method, all acquisition, exploration, and development costs are capitalized. The Company capitalizes all internal costs, including: salaries and related fringe benefits of employees directly engaged in the acquisition, exploration and development of natural gas and oil properties, as well as other identifiable general and administrative costs associated with such activities.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
All capitalized costs of natural gas and oil properties, including the estimated future costs to develop reserves, are amortized (depleted) on the units-of-production method using estimates of proved reserves. Investments in unproved reserves and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Abandonment of natural gas and oil properties are accounted for as adjustments of capitalized costs; that is, the cost of abandoned properties is charged to the full cost pool and amortized.
Under the full cost method, the net book value of natural gas and oil properties, less related deferred income taxes, may not exceed a calculated "ceiling". The ceiling is the estimated after-tax future net revenue from proved natural gas and oil properties, discounted at ten percent (10%) per annum, plus the lower of cost or fair market value of unproved properties adjusted for the present value of all future oil and gas hedges. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling on a quarterly basis. The excess, if any, of the net book value above the ceiling is required to be written off as an expense. During the years ended March 31, 2009 and 2008, the Company did not recognize any impairment expense. Acquisition costs are expensed as incurred.
Other Property and Equipment
Other property and equipment is reviewed on an annual basis for impairment and as of March 31, 2009, the Company had not identified any such impairment. Repairs and maintenance are charged to operations when incurred and improvements and renewals are capitalized.
Other property and equipment are stated at cost. Depreciation is calculated using the straight-line method for financial reporting purposes and accelerated methods for tax purposes.
Their estimated useful lives are as follows:
Office Equipment: 5-7 Years
Asset Retirement Obligations
In accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations, the Company records the fair value of its liability for asset retirement obligations in the period in which it is incurred and a corresponding increase in the carrying amount of the related long live assets. Over time, the liability is accreted to its present value at the end of each reporting period, and the capitalized cost is depreciated over the useful life of the related assets. Upon settlement of the liability, the Company will either settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company's asset retirement obligations relate to the plugging and abandonment of its oil properties.
Intangible Assets
The cost of licensed technologies acquired is capitalized and will be amortized over the shorter of the term of the licensing agreement or the remaining life of the underlying patents.
The Company evaluates recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that intangible assets carrying amount may not be recoverable. Such circumstances include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of cost significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the assets against the estimated undiscounted future cash flows associated with it.
Should the sum of the expected cash flows be less than the carrying amount of assets being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying amount of the assets, exceed fair value. For the year ended March 31, 2007, the Company recognized an impairment loss of $371,925 related to Intelli-Well Technologies, there was no such impairment for the years ended March 31, 2009 and 2008.
Estimated amortization of intangible assets over the next five years is as follows:
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 123R (FAS-123R), Share Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123 (FAS-123), Accounting for Stock-Based Compensation.
FAS-123R eliminates accounting for share-based compensation transaction using the intrinsic value method prescribed in Accounting Principles Board Opinion No.25 (APB-25, Accounting for Stock Issued to Employees), and requires instead that such transactions be accounted for using a fair-value-based method. The Company has elected to adopt the provisions of FAS-123R effective January 1, 2006, under the modified prospective transition method, in which compensation cost was recognized beginning with the effective date (a) based on the requirements of FAS-123R for all share-based payments granted after the effective date and (b) based on the requirements of FAS 123-R for all awards granted to employees prior to the effective date of FAS-123R that remain unvested on the effective date.
As permitted under FAS-123, the Company elected to follow Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock-based awards to employees through December 31, 2005. Accordingly, compensation cost for stock options and non-vested stock grants was measured as the excess, if any, of the market price of the Company's common stock at the date of the grant over the exercise price.
With the adoption of FAS-123R, the Company elected to amortize stock-based compensation for awards granted on or after the adoption of FAS-123R on January 1, 2006, on a straight-line basis over the requisite service (vesting) period for the entire award. For awards granted prior to January 1, 2006, compensation costs are amortized in a manner consistent with Financial Accounting Standards Boards Interpretation No. 28 (FIN-28), Accounting for Stock Appreciation Rights and Other Variable Stock Option of Award Plans. This is the same manner applied in the pro-forma disclosures under FAS-123.
Warrants
The value of warrants issued is recorded at their fair values as determined by use of a Black Scholes Model at such time or over such periods as the warrants vest.
Earnings per Common Share
Statement of Financial Accounting Standards ("SFAS") 128, Earnings Per Share, requires presentation of "basic" and "diluted" earnings per share on the face of the statements of operations for all entities with complex capital structures. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an antidilutive effect on diluted earnings per share are excluded from the calculation.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is intended to clarify the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Under FIN 48, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
The adoption of FIN 48 at January 1, 2007 did not have a material effect on the Company's financial position.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
Reclassifications
Certain reclassifications have been made to the prior years' financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Revenue Recognition
In accordance with the requirements of SEC Staff Accounting Bulletin Topic 13A "Revenue Recognition", revenues are recognized at such time as (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable and (4) collectibility is reasonably assured. Specifically, oil and gas sales are recognized as income at such time as the oil and gas are delivered to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned.
Long-Lived Assets
Equipment is stated at acquired cost less accumulated depreciation. Laboratory and office equipment are depreciated on the straight-line basis over the estimated useful lives (three to seven years).
Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time. Measurement of impairment may be based upon appraisal, market value of similar assets or discounted cash flows. During the year ended March 31, 2009, the Company recognized an impairment expense on goodwill in the amount of $33,943, there is no such expense in the comparable period.
Recently Issued Accounting Standards
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities--an amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161.
NOTE 2: RECEIVABLE FROM JOINT INTERESTS
The Company is the operator of certain wells acquired in the Expanded Bedford Agreement (see note 6). Pursuant to a joint interest operating agreement (the “Joint Interest Agreement”), the Company bills the other owners of the Grace Wells for their pro-rata share of operating and workover expenses. These receivables are carried on the Company’s balance sheet as Receivable from Joint Interests At March 31, 2009, the amount of these receivables is $159,208.
NOTE 3: NOTES RECEIVABLE
On December 11, 2006 the Company loaned $65,000 to an individual, which was due on April 1, 2007 with an interest rate of 13%. The Company received a promissory note evidencing the loan. The note is secured by real property. An interest only payment of $3,163 was made on the note and it was extended until October 1, 2007. The principal and interest of this loan was repaid on October 14, 2008.
On September 12, 2007 the Company loaned $25,000 to a company, which was due on November 5, 2007 with an interest rate of 10%. The Company received a promissory note evidencing the loan. The note is unsecured. The loan is now past due. This note receivable and interest receivable was impaired during the year ended March 31, 2009, as the Company no longer believes that collectability is likely.
NOTE 4: PROPERTY AND EQUIPMENT
A summary of property and equipment at March 31, 2009 and 2008, is as follows:
Depreciation expense for the years ended March 31, 2009 and 2008 was $13,915 and $6,529, respectively.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
NOTE 5: INTELLECTUAL PROPERTY RIGHTS
A summary of the intellectual property rights at March 31, 2009 and 2008, are as follows:
Amortization expense for the years ended March 31, 2009 and 2008 was $220,822.
NOTE 6: OIL AND GAS PROPERTY ACTIVITY
In April 2008, the Company increased its working interest in the Janssen #1A well to 7.5% for $37,500.
In June 2008, the Company acquired a 2.5% working interest in the Grace #2 well in the East Chandler Field in Oklahoma for $40,000.
In June 2008, the Company entered into an agreement with Bedford Energy to acquire a 2.5% working interest in Grace Well #2 in East Chandler Field, Oklahoma, which had been producing 350 thousand cubic feet of gas per day. In August 2008, the Company entered into an additional agreement with Bedford Energy (the “Expanded Bedford Agreement”) to increase its working interest in the Grace #2 from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 to 11.95%. In addition, the Company acquired a 10% working interest and a 13.825% net revenue interest in the Grace #1, Grace #3, Grace #5A and Grace #6 wells. The Hunton Lime Reserves from the Grace #1, the Grace #3 and the Grace #6 wells are estimated to be 48,000 barrels of oil and 423 million cubic feet of gas. The Upper Red Fork Sand reserves for the Grace #5A are estimated to be 30 million cubic feet of gas.
In September 2008, the Company sold a 15% of its recently acquired interest in the Bedford Assets, for cash in the amount of $262,500, resulting in a loss of $37,500.
In December 2008, the Company and Bedford Energy, Inc. agreed to amend the Original Bedford Agreement, and on December 8, 2008, the Company entered into an amended agreement with Bedford Energy. Pursuant to the terms of the Amended Bedford Agreement, The Company would pay a total of $900,000 in cash (reduced from $1,000,000 in the Original Bedford Agreement), and provide a note in the amount of $400,000 (reduced from $750,000 in the Original Bedford Agreement and subsequently cancelled when the Company agreed to assume accounts payable in the amount of $222,273 (increased from $0 in the original agreement) and issue a total of 3,500,000 shares of its common stock (increased from 2,500,000 in the original agreement). The Company closed this transaction on December 22, 2008.
The Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field. In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field, and total reserves of 90,000 barrels of oil and 559 million cubic feet of gas. In addition, the Company also acquired Prue Sand potential in the Grace #3, Grace #5A and the Grace #6 wells. Estimated Prue Sand reserves for these three wells are 33,000 barrels of oil and 81 million cubic feet of gas
As part of the Expanded Bedford Agreement, the Company also acquired the right to operate Grace Wells #1, #2, #3, #5A, and #6 (the “Grace Wells”). The Company hired a third party to operate the Grace Wells and to upgrade the operation of the Grace Wells (“Workover”). In February and March 2009, the Company made for mal buyout offers (the “Grace Wells Buyout Offer”) to the approximately 93 additional working interest holders in the Grace Wells (the “Additional Grace Wells Owners”). The Grace Wells Buyout Offer provided three options to the Additional Grace Wells Owners: (1) The Additional Grace Wells Owners would continue to participate in the operation of the Grace Wells, and would remit to the Company fund representing their pro rata portion of the Workover costs; (2) The Additional Grace Wells Owners would sell their interests in the Grace Wells to the Company for cash and stock in the Company; (3) The Additional Grace Wells Owners could do nothing. If this option was chosen, the Additional Grace Well Owner would retain their interest in the Grace Wells, but their pro-rata portion of the costs would be subject to a 500% penalty; in addition, their pro-rata portion of the revenue generated by the Grace Wells would be applied to their portion of the costs, including the 500% penalty, before they would receive any payment. At March 31, 2009, the approximately 93 Grace Wells investors had selected the following options: Approximately 22 selected option 1, continued participation; 29 selected option 2, the Company buyout; 17 were in Option 3, non-consent; and 25 were still pending and had not made a selection.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
The table below shows the Company’s working interests in the Grace Wells as of March 31, 2009:
Producing oil and gas properties consist of the following:
NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
NOTE 8: NOTES PAYABLE
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
On February 11, 2008, the Company entered in to a note payable agreement with an officer of the Company in the amount of $75,000. The note carried an interest rate of 10% per annum and matured on March 31, 2008. On April 18, 2008 the Company repaid $35,000 of the principal and $1,762 of accrued interest. On July 7, 2008, the Company repaid $17,000 of the principal of the note. On August 19, 2008, the Company repaid $23,000 of the principal and $762 of accrued interest. Interest in the amount of $1,007 and $1,518 was accrued on this note during the twelve months ended March 31, 2009 and 2008, respectively.
-
75,000
On August 13, 2008, the Company issued a promissory note to Bedford Energy, Inc. as part of the asset acquisition in the amount of $750,000. This note carries an interest rate of 5% per annum and matures on December 13, 2008. On December 8, 2008, the Company and Bedford Energy, Inc., entered into an amended acquisition agreement (see note 2). As a result the note payable in the amount of $750,000 was cancelled and a new payable was issued in the amount of $400,000 with an interest rate of 5% per annum and was payable as follows, (i) $10,000 per month beginning on February 1, 2009; and (ii) accrued interest shall be payable on the first day of each quarter beginning on January 1, 2009. Interest in the amount of $21,927 was accrued on this note during the twelve months ended March 31, 2009.
390,000
-
On November 11, 2008, the Company issued a convertible promissory note to an investor in the amount of $50,000. The note carries an interest rate of 10% per annum and matures on October 1, 2009. The note holder has the right to convert the note and accrued interest into shares of the Company’s common stock at a rate of $0.10 per share. In addition to the note, the investor received three-year warrants to purchase 500,000 shares of the Company’s common stock at a price of $0.10 per share. The Company valued these warrants using the Black-Sholes valuation model, and charged the fair value of the warrants in the amount of $11,310 as a discount on notes payable. The discount is being amortized to interest expense over the life of the note via the effective interest method. Interest in the amount of $1,918 was accrued on this note during the twelve months ended March 31, 2009. During the year ended March 31, 2009 the Company amortized $459 of the discount on the note payable to interest expense.
50,000
-
On December 22, 2008, the Company issued a promissory note to an investor in the amount of $150,000. This note carries an interest rate of 10% per annum and matures of December 15, 2009. In addition to the note payable, the Company issued 7,500,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. At the time of the issuance of the shares to the note holder, the market price of the shares exceeded the fair value of the note payable; as a result the value of the discount was capped at the face value of the note, $150,000. The discount will be amortized to interest expense over the life of the note, 1 year, via the effective interest method. Interest in the amount of $4,068 was accrued on this note during the twelve months ended March 31, 2009. During the year ended March 31, 2009 the Company amortized $3,225 of the discount on the note payable to interest expense.
150,000
-
On December 31, 2008, the Company received a cash advance from an investor in the amount of $100,000. On January 1, 2009, the Company received an additional $50,000 and the Company entered into a note payable agreement in the amount of $150,000. The note bears interest at a rate of 10% per annum and matures on December 15, 2009. In additional to the note payable, the Company issued 7,500,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. At the time of issuance of the shares to the note holders, the market price of the shares exceeded the fair value of the note payable; as a result the value of the discount was capped at the face value of the note, $150,000. The discount will be amortized over the life of the note via the effective interest method. Interest in the amount of $3,082 was accrued on this note during the twelve months ended March 31, 2009. During the year ended March 31, 2009 the Company amortized $1,971 of the discount on the note payable to interest expense.
150,000
-
On January 2, 2009, the Company issued a promissory note to an investor in the amount of $50,000. The note carries an interest rate of 10% per annum and matures on December 15, 2009. In additional to the note payable, the Company issued 1,000,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. The shares are valued using the closing market price on the date the note payable was signed and have a value of $23,000. The discount will be amortized over the life of the note payable via the effective interest method. Interest in the amount of $1,205 was accrued on this note during the twelve months ended March 31, 2009. During the year ended March 31, 2009 the Company amortized $302 of the discount on the note payable to interest expense.
50,000
-
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
On January 8, 2009, the Company issued a promissory note to an investor in the amount of $50,000. The note carries an interest rate of 10% per annum and matures on December 15, 2009. In addition to the note payable, the Company issued 2,000,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. The shares are valued using the closing market price on the day the note was signed and have a value of $50,000. The discount will be amortized over the life of the note payable via the effective interest method. Interest in the amount of $1,123 was accrued on this note during the twelve months ended March 31, 2009. During the year ended March 31, 2009 the Company amortized $657 of the discount on the note payable to interest expense.
50,000
-
On January 27, 2009, the Company issued a promissory note to an investor in the amount of $50,000. The note carries an interest rate of 10% per annum and matures on December 15, 2009. In addition to the note payable, the Company issued 1,000,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. The shares are value using the closing market price on the date the note was signed and have a value of $25,000. The discount will be amortized over the life of the note via the effective interest method. Interest in the amount of $863 was accrued on this note during the twelve months ended March 31, 2009. During the year ended March 31, 2009 the Company amortized $328 of the discount on the note payable to interest expense.
50,000
-
On February 25, 2009, the Company issued a promissory note to an investor in the amount of $150,000. The note carries an interest rate of 10% per annum and matures on December 15, 2009. In addition to the note payable, the Company issued 3,000,000 shares of common stock to the note holder. The shares are considered a discount to the note payable. The shares are valued using the closing market price on the date the note was signed and have a value of $60,000. The discount will be amortized over the life of the note via the effective interest method. Interest in the amount of $1,397 was accrued on this note during the twelve months ended March 31, 2009. During the year ended March 31, 2009 the Company amortized $788 of the discount on the note payable to interest expense.
150,000
-
On November 28, 2006, Oiltek, of which the Company has a majority interest in, issued a convertible note payable in the amount of $2,500. This note bears interest at a rate of 8% per annum and matures on October 1, 2007. The principal amount of the note and accrued interest are convertible into shares of the Company’s common stock at a price of $0.01 per share. A beneficial conversion feature in the amount of $2,500 was recoded as a discount to the note and was amortized to interest expense during the period ended December 31, 2006. In December 2008, this note extended its maturity date until December 31, 2010. Interest in the amount of $200 and $200 was accrued on this note during the twelve months ended March 31, 2009 and 2008, respectively.
2,500
2,500
On November 28, 2006, Oiltek, of which the Company has a majority interest in, issued a convertible note payable in the amount of $5,000. This note bears interest at a rate of 8% per annum and matures on October 1, 2007. The principal amount of the note and accrued interest are convertible into shares of the Company’s common stock at a price of $0.01 per share. A beneficial conversion feature in the amount of $5,000 was recoded as a discount to the note and was amortized to interest expense during the period ended December 31, 2006. In December 2008, this note extended its maturity date until December 31, 2010. Interest in the amount of $400 and $400 was accrued on this note during the twelve months ended March 31, 2009 and 2008, respectively.
5,000
5,000
On December 10, 2006, Oiltek, of which the Company has a majority interest in, issued a convertible note payable in the amount of $5,000. This note bears interest at a rate of 8% per annum and matures on October 1, 2007. The principal amount of the note and accrued interest are convertible into shares of the Company’s common stock at a price of $0.01 per share. A beneficial conversion feature in the amount of $5,000 was recoded as a discount to the note and was amortized to interest expense during the period ended December 31, 2006. In December 2008, this note extended its maturity date until December 31, 2010. Interest in the amount of $400 and $400 was accrued on this note during the twelve months ended March 31, 2009 and 2008, respectively.
5,000
5,000
Total outstanding
$1,062,500
$124,500
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
NOTE 9: RELATED PARTY TRANSACTIONS
Promissory Notes
On February 11, 2008, the Company borrowed $75,000 from an officer of the corporation. The note carried a 10% interest rate and matured on March 31, 2008. On April 18, 2008 the Company repaid $35,000 of the note plus accrued interest. During the three months ended September 30, 2008, the Company made payments in the amount of $40,000 to repay the remaining balance of the note, and the Company also repaid accrued interest in the amount of $762. The balance of the note at March 31, 2009 and 2008 was $0 and $75,000, respectively.
Preferred Stock
The 100 shares of Series A Preferred Stock, issued to an officer/director as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.
During the years ended March 31, 2009 and 2008, the Company incurred $40,000 in preferred stock dividends, respectively.
The holders of the Series A Preferred Stock have the right to convert each share of preferred stock into a sufficient number of shares of common stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exerciser, conversion or exchange of outstanding options, warrants, or convertible securities.
Employment Agreements
KENT RODRIGUEZ
In 2009, Mr. Rodriguez was under an employment agreement dated April 1, 2008 that expires on March 31, 2013, pursuant to which he was compensated at an annual rate of $120,000. The agreement also provides for the increase of Mr. Rodriguez’s base salary by 5% each year for the five year term of the agreement.
JILL ALLISON
In 2009, Ms. Allison was under an employment agreement dated April 1, 2008 that expires on March 31, 2011, pursuant to which she was compensated at a rate of $5,000 per month, for an annual rate of $60,000.
NOTE 10: 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 New Operating Loss carryforwards for income tax purposes with a valuation allowance against the carryforwards for book purposes.
In assessing the realizability 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 State net operating loss carryforwards of approximately $3,200,000, which will expire beginning in 2028. The ultimate realization of deferred tax assets is dependent upon the generating 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 March 31, 2009, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at March 31, 2009. The amount of the deferred tax asset considered realizable could change in the near term if projected taxable income is realized.
The income tax provision (benefit) for the twelve months ended March 31, 2009 and 2008 consist of the following:
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
A reconciliation between the actual income tax expense and income taxes computed by applying the statutory Federal and state income tax rates to income to continuing operations before income taxes is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of March 31, 2009 and 2008 are as follows:
These amounts have been presented in the consolidated balance sheets as follows:
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
NOTE 10: SHAREHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.10 per share. As of December 31, 2008, the Company has 100 shares of preferred stock issued and outstanding.
The 100 shares of Series A Preferred Stock, issued to an officer/director as payment for $500,000 in promissory notes, are convertible into the number of shares of common stock sufficient to represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.
During the years ended March 31, 2009 and 2008, the Company incurred $40,000 in preferred stock dividends, respectively.
The holders of the Series A Preferred Stock have the right to convert the preferred stock into shares of common stock such that if converted simultaneously, they shall represent 40 percent (40%) of the fully diluted shares outstanding after their issuance. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise, conversion or exchange of outstanding options, warrants, or convertible securities.
Common Stock
The Company has authorized 1,000,000,000 shares of common stock with a par value of $0.001 per share. As of March 31, 2009, the Company has 98,278,193 shares of common stock issued and outstanding.
Common stock issuances during the year ended March 31, 2009:
The Company issued 2,000,000 shares of common stock to directors of the Company for director’s fees. The value of these shares in the amount of $190,000 was charged to operations.
The Company issued 6,800,000 shares of common stock to a consultant for services. The value of these shares in the amount of $240,420 was charged to operations.
The Company issue 8,350,000 shares of common stock for the conversion of a note payable. The value of these shares in the amount of $36,966 was been credited to the note payable.
The Company issued 13,349,317 shares of common stock for cash in the amount of $1,044,190.
The Company issued 3,500,000 shares of common stock to Bedford Energy, Inc., valued at $477,727 for an asset acquisition. During the period ended March 31, 2009, the Company discovered an additional $49,301 which was payable by Bedford Energy, Inc, which the Company assumed in the acquisition. As a result, the value of the payable in the amount of $49,301 was debited to additional paid-in capital.
The Company issued 3,000,000 shares of common stock as a finder’s fee for the Bedford Energy, Inc. acquisition. The value of these shares in the amount of $120,000 was been charged to operations.
The Company cancelled 375,000 shares of common stock which had previously been issued, and credited the par value of $375 to additional paid-in capital.
During the three months ended September 30, 2008, the Company issued 27,163 shares of common stock in error to an investor. The par value of $27 was charged to additional paid-in capital.
The Company issued 22,000,000 shares of common stock pursuant to a note payable agreements entered into during the year ended March 31, 2009. These shares are considered discount to the notes payable. This amount was charged to discount on notes payable and to additional paid-in capital during the period.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
The Company issued 7,859,250 shares of common stock to interest holders in the Grace Wells pursuant to the buyout agreement. The value of these shares in the amount of $188,622 was charged to Oil and Gas properties account.
Warrants
During the year ended March 31, 2009, the Company issued 500,000 warrants to purchase additional shares of common stock. The value of these warrants in the amount of $11,310 was charged to discount on notes payable during the three months ended December 31, 2008. The warrants are convertible into shares of common stock at a price of $0.10 per share, and have a 3 year term.
The following table summarizes the warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company at March 31, 2009:
Transactions involving warrants are summarized as follows:
The estimated value of the warrants granted during the period was determined using the Black-Scholes pricing model and the following assumptions:
NOTE 11: TECHNOLOGY LICENSE AGREEMENTS
On July 12, 2006 UMTI entered into a technology license of a patented process for paraffin wax mitigation from crude oil using ultrasonic waves from the University of Wyoming. This license calls for an earned royalty of five percent on net sales of licensed technologies and services; twenty-five percent of all sublicense fees and revenues with an escalating minimum annual royalty which will be credited toward the total royalties due.
On March 27, 2007 LLTI entered into non-exclusive license in the United States for a leak detection and location technology developed by the Rensselaer Polytechnic Institute ("Rensselaer") through its researcher Michael Savic. The agreement calls for a milestone license fee of $10,000 sixteen months following the effective date of the agreement or the first production introduction which ever is sooner. A royalty fee of four and one-half percent (4.5%) of gross sales of licensed products required with annual minimum royalty payments. As of March 31, 2009, the Company has accrued the $10,000 milestone license fee.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
On February 11, 2008 the Company entered into a technology license of a patented process for enzyme based technology for the improvement and increase of the extraction of hydrocarbons from underground. The original terms of the agreement called for a payment of $75,000, however the agreement was modified for a payment of $10,000 in cash and 200,000 shares of common stock which were valued at $20,000. Terms of the agreement call for an annual renew fee of $100,000 on the anniversary date of the agreement. The license calls for royalties of six percent of the net sale of licensed products or services. All royalties earned during the first 365 days of the agreement shall be forgiven until such amount equals $100,000. As of March 31, 2009, the Company has accrued the annual license renewal fee of $100,000.
Minimum obligations under license agreements for the next five years:
NOTE 12: REVENUE RECOGNITION
During the year ended March 31, 20098, the Company entered into a contractual dispute with a well operator (the “Operator”) which currently operates three of the Company’s producing leaseholds. As a result of this dispute, in beginning in July 2008 the Company stopped payment to the Operator on the lease operating expenses associated with these producing leaseholds. The Operator has withheld payment of revenue from these wells from the Company, and has applied this revenue against the lease operating expenses. As of March 31, 2009, the Company is current on all of the lease operating expenses. We have accrued all of the operating expenses at March 31, 2009, but we believe that the operator of these wells has significantly overcharged us for the operating costs of these three leaseholds. We have initiated an audit of the operator to determine the extent of these excess charges.
NOTE 13: EARNINGS PER SHARE
SFAS 128 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. The following securities were not included in the calculation of diluted earnings per share because their effect was anti-dilutive.
Anti-dilutive shares at March 31, 2009:
The following warrants were not included in fully-diluted earnings per share because the effect would have been anti-dilutive: 125,000 warrants at an exercise price of $0.20 per share; 150,000 shares at an exercise price of $0.60 per shares; and 500,000 shares at an exercise price of $0.10 per shares.
Diluted shares does not include shares issuable to the preferred shareholders pursuant to their right to convert preferred stock into sufficient common shares sufficient to equal 40% of the post conversion outstanding shares as the effect would be anti-dilutive.
Anti-dilutive shares at March 31, 2008:
The following warrants were not included in fully-diluted earnings per share because the exercise prices of the warrants were greater than the average market price of the Company’s common stock: 125,000 warrants at an exercise price of $0.20 per share; and 150,000 shares at an exercise price of $0.60 per shares.
Diluted shares does not include shares issuable to the preferred shareholders pursuant to their right to convert preferred stock into sufficient common shares sufficient to equal 40% of the post conversion outstanding shares as the effect would be anti-dilutive.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
NOTE 14: SFAS 69 SUPPLEMENTAL DISCLOSURES (Unaudited)
Net Capitalized Costs
The Company's aggregate capitalized costs related to natural gas and oil producing activities are summarized as follows:
Costs Incurred
Costs incurred in natural gas and oil property acquisition, exploration and development activities that have been capitalized are summarized as follows:
Results of Operations for Natural Gas and Oil Producing Activities
The Company's results of operations from natural gas and oil producing activities are presented below for the fiscal years ended March 31, 2009 and 2008. The following table includes revenues and expenses associated directly with the Company's natural gas and oil producing activities. It does not include any interest costs and general and administrative costs and, therefore, is not necessarily indicative of the contribution to consolidated net operating results of the Company's natural gas and oil operations.
(1) The imputed income tax provision is hypothetical (at the statutory rate) and determined without regard to the Company's deduction for general and administrative expenses, interest costs and other income tax credits and deductions, nor whether the hypothetical tax provision will be payable.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
Natural Gas and Oil Reserve Quantities
The following schedule contains estimates of proved natural gas and oil reserves attributable to the Company. Proved reserves are estimated quantities of natural gas and oil that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. Reserves are stated in thousand cubic feet (mcf) of natural gas and barrels (bbl) of oil. Geological and engineering estimates of proved natural gas and oil reserves at one point in time are highly interpretive, inherently imprecise and subject to ongoing revisions that may be substantial in amount. Although every reasonable effort is made to ensure that the reserve estimates are accurate, due to their nature reserve estimates are generally less precise than other estimates presented in connection with financial statement disclosures.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
Standardized Measure of Discounted Future Net Cash Flows
The following schedule presents the standardized measure of estimated discounted future net cash flows from the Company's proved reserves for the fiscal years ended March 31, 2009 and 2008. Estimated future cash flows are based on independent reserve data. Because the standardized measure of future net cash flows was prepared using the prevailing economic conditions existing at March 31, 2009 and 2008, it should be emphasized that such conditions continually change. Accordingly, such information should not serve as a basis in making any judgment on the potential value of the Company's recoverable reserves or in estimating future results of operations.
(1) The weighted average oil wellhead price used in computing the Company's reserves were $49.64 per bbl and $101.58 per bbl at March 31, 2009 and 2008, respectively. The weighted average gas wellhead price used in computing the Company's reserves were $3.78 and $9.86/mmbtu at March 31, 2009 and 2008, respectively.
The following schedule contains a comparison of the standardized measure of discounted future net cash flows to the net carrying value of proved natural gas and oil properties at March 31, 2009 and 2008:
NOTE 15: SUBSEQUENT EVENTS
As of June 8, 2009, the Company has issued an additional 1,134,000 shares of common stock to investors for their interest in the Grace Wells.