GRVE 10-Q Quarterly Report Dec. 31, 2009 | Alphaminr
GROOVE BOTANICALS INC.
ALPHAMINR

GRVE 10-Q Quarter ended Dec. 31, 2009

Balance Sheet
Cash Flow
Income Statement
GROOVE BOTANICALS INC.
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PROXIES
DEF 14A
Filed on Sept. 14, 2012
10-Q 1 avalonoil10q123109.htm avalonoil10q123109.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2009
Or
r TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________
Commission File Number: 1-12850

AVALON OIL & GAS, INC.
(Exact Name of Small Business Issuer as specified in its charter)
Nevada
84-1168832
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
7808 Creekridge Circle, Suite 105
Minneapolis, MN 55439
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:
(952) 746-9652
Indicate by check mark whether the Issuer:

(1) Has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports):   Yes x No o
(2) Has been subject to such filing requirements for the past 90 days.   Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o Accelerated Filer o
Non-Accelerated Filer o Smaller Reporting Company x

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

146,409,811 shares of the registrant's Common Stock, $0.001 per share, were outstanding as of February 22, 2009.


Table of Contents

PART I FINANCIAL INFORMATION
Page
Item 1.
3
3
4
5
7
Item 2.
27
Item 3.
34
Item 4T.
34
PART II OTHER INFORMATION
Item 1.
34
Item 2.
34
Item 3.
35
Item 4.
35
Item 5.
35
Item 6.
35
36


ITEM 1. FINANCIAL STATEMENTS
AVALON OIL & GAS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
March 31,
2009
2009
(Unaudited)
Assets
Current assets
Cash and cash equivalents
$
18,167
$
26,406
Accounts receivable
38,925
40,827
Deposits and prepaid expenses
10,417
43,340
Receivable from joint interests
163,105
159,208
Total current assets
230,614
269,781
Property and equipment, net
20,349
28,190
Unproven oil and gas properties
339,417
339,417
Producing oil and gas properties, net
1,816,454
2,652,591
Intellectual property rights, net
276,804
962,583
$
2,683,638
$
4,252,562
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued liabilities
$
888,794
$
744,892
Accounts payable and accrued liabilities- related parties
124,818
34,468
Due to related party – dividends payable
22,200
-
Accrued liabilities to joint interests
37,011
42,265
Notes payable – related party
6,000
-
Notes payable, net of discount
409,500
600,982
Total current liabilities
1,488,323
1,422,607
Accrued ARO liability
72,211
67,865
1,560,534
1,490,472
Commitments and contingencies
-
-
Stockholders' equity
Preferred stock, Series A, $0.10 par value, 1,000,000 shares
authorized; 100 shares issued and outstanding - stated at redemption value
500,000
500,000
Common stock, $0.001 par value; 1,000,000,000 shares authorized;
141,704,193 and 98,278,193 shares issued and outstanding
at December 31, 2009 and March 31, 2009, respectively
141,704
98,278
Additional paid-in capital - Common stock
27,182,320
26,761,738
Common stock subscribed -23,000,000 common stock shares at December 31, 2009
206,667
3,175
Accumulated deficit
(26,907,587
)
(24,601,101
)
Total stockholders' equity
1,123,104
2,762,090
$
2,683,638
$
4,252,562
See notes to consolidated financial statements.
AVALON OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE  AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)

For the Three
For the Three
For the Nine
For the Nine
Months Ended
Months Ended
Months Ended
Months Ended
December 31,
December 31,
December 31,
December 31,
2009
2008
2009
2008
Oil and gas sales
$
68,545
$
56,037
$
193,557
$
303,902
Operating expenses:
Lease operating expense, severance taxes
and ARO accretion
19,896
45,810
101,580
232,838
Selling, general and administrative expenses
92,400
268,168
431,558
661,685
Stock based compensation
(7,867
)
85,000
18,083
271,000
Acquisition costs
-
2,500
-
122,500
Depreciation, depletion, and amortization
106,627
73,664
581,800
273,440
Impairment expense
564,711
-
564,711
-
Total operating expenses
775,767
475,142
1,697,732
1,561,463
Operating loss
(707,222
)
(419,105
)
(1,504,175
)
(1,257,561
)
Other expense:
Loss on sale of minority interest
-
-
-
37,500
Loss on sale of property
-
16,000
-
16,000
Loss on extinguishment of debt
242,570
-
309,696
-
Interest expense, net
236,637
12,865
492,615
17,784
Total other expense
479,207
28,865
802,311
71,284
Loss before income taxes
(1,186,429
)
(447,970
)
(2,306,486
)
(1,328,845
)
Provision for income taxes
-
-
-
-
Net loss
(1,186,429
)
(447,970
)
(2,306,486
)
(1,328,845
)
Preferred stock dividends
(10,000
)
(10,000
)
(30,000
)
(30,000
)
Net loss attributable to common stock after preferred stock dividends
$
(1,196,429
)
$
(457,970
)
$
(2,336,486
)
$
(1,358,845
)
Net loss per share - basic and diluted
$
(0.01
)
$
(0.01
)
$
(0.02
)
$
(0.03
)
Weighted average shares outstanding - basic and diluted
124,263,976
60,844,903
110,669,895
46,798,927

See notes to consolidated financial statements.


AVALON OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
For the Nine
For the Nine
Months Ended
Months Ended
December 31,
December 31,
2009
2008
Cash flows from operating activities:
Net loss
$
(2,306,486
)
$
(1,328,845
)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of minority interest in Bedford Energy assets
-
37,500
Loss on sale of property
-
16,000
Loss on extinguishment of debt
309,696
-
Non-cash compensation
18,083
371,000
Depreciation
7,841
11,309
Depletion
452,904
81,901
Depreciation of ARO liability
2,172
-
Impairment of intangible asset
564,711
-
Amortization of discount on notes payable
461,518
59
Amortization of intangible assets
121,057
165,588
Net change in operating assets and liabilities:
Accounts receivable
1,902
1,716
Interest receivable
-
(3,260
)
Joint Interest receivable
(3,897
)
-
Prepaid expenses
43,340
95,236
Notes receivable
-
65,000
Accounts payable and other accrued expenses
196,373
(86,652
)
Dividend Payable to related party
22,200
-
Due to related party
90,350
(2,404
)
Asset retirement obligation
4,346
3,625
Net cash used in operating activities
(13,889
)
(572,227
)
Cash flows from investing activities:
Purchase of Bedford Energy assets
-
(900,000
)
Sale of a minority interest in Bedford Energy assets
-
262,500
Disposal of oil and gas properties
-
10,000
Purchase of interests in Grace wells
(350
)
-
Purchase of fixed assets
-
(1,000
)
Additions to oil and gas properties
-
(126,650
)
Net cash used in investing activities
(350
)
(755,150
)
Cash flows from financing activities:
Proceeds from sale of common stock, net of costs
-
1,078,891
Proceeds from notes payable
-
200,000
Proceeds from notes payable- related parties
6,000
-
Proceeds from cash advances
-
100,000
Payments on note payable
-
(75,000
)
Net cash provided by financing activities
6,000
1,303,891
Net decrease in cash and cash equivalents
(8,239
)
(23,486
)
Cash and cash equivalents at beginning of period
26,406
108,688
Cash and cash equivalents at end of period
$
18,167
$
85,202
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$
-
$
2,524
Taxes
$
-
$
-
Common stock issued in exchange for consulting services
$
18,083
$
61,000
Common stock issued for directors fees
$
-
$
190,000
Common stock issued for conversion of note payable and accrued interest, and assumption of debt
$
585,000
$
36,967
Fees attributable to equity financing
$
-
$
120,000
Common stock issued in error
$
-
$
27
Warrants issued as a discount to notes payable
$
-
$
11,310
Common stock issued as a discount on notes payable
$
-
$
286,967

See notes to consolidated financial statements.

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
NOTE 1:   DESCRIPTION OF BUSINESS

Avalon Oil & Gas, Inc. (the "Company") was originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. The Company was the general partner of Snow Runner (USA) Ltd.; a Colorado limited partnership to sell proprietary snow skates under the name "Sled Dogs" which was dissolved in August 1992. In late 1993, the Company relocated its operations to Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc., and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares, par value of $0.001, and engage in the acquisition of producing oil and gas properties.

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 Company also acquired the right to operate the Grace Wells, and is attempting to increase its ownership in these wells. See note 2.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
In September 2008, the Company sold 15% of its recently acquired interest in the Bedford Assets, for cash in the amount of $262,500.

In September 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.

During the three months ended June 30, 2009, the Company amended the  agreement with Bedford Energy, whereby the Company transferred a 2.25% carried interest in the Grace Wells #1, #2, #3, #5A and #6 in consideration for the cancellation of the note payable and accrued interest to Bedford in the amounts of $390,000 and $18,627, respectively.

During the three months ended December 31, 2009, the Company reduced the amount recorded for the assumption of accounts payable pursuant to the Bedford Energy transaction in the amount of $26,785.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation of Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended March 31, 2009.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the balance sheets of Avalon Oil and Gas Inc. and subsidiaries as of December 31, 2009 and the results of their operations for the three  and nine months ended December 31, 2009 and 2008, and cash flows for the nine months ended December  31, 2009 and 2008. The results of operations for the three and nine months ended December 31, 2009 and 2008 are not necessarily indicative of the results to be expected for the entire year.
Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Ultrasonic Mitigation Technologies, Inc.; Intelli-Well Technologies, Inc. and Leak Location Technologies, Inc. along with  75.6 % owned Oiltek, Inc. All significant inter-company items have been eliminated in consolidation.
Going Concern
The December 31, 2009, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $26,907,587  from inception through December 31, 2009, and has a working capital deficiency  of $1,257,709 at December 31, 2009.  Shareholder’s equity at December 31, 2009 is $1,123,104. 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.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
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 December 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 and gas 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.
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.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
Under the full cost method, the net book value of natural gas and oil properties, less related deferred income taxes, may not exceed a calculated "ceiling". The ceiling is the estimated after-tax future net revenue from proved natural gas and oil properties, discounted at ten percent (10%) per annum, plus the lower of cost or fair market value of unproved properties adjusted for the present value of all future oil and gas hedges. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling on a quarterly basis. The excess, if any, of the net book value above the ceiling is required to be written off as an expense. During the three and nine months ended December 31, 2009 and 2008, the Company made the evaluation and did not recognize any impairment expense.

Other Property and Equipment

Other property and equipment is reviewed on an annual basis for impairment and as of December 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 Financial Accounting Standards Board “FASB” Accounting Standard Codification “ASC” 410-20-15 (formerly referred to as 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 (intellectual property rights) acquired is capitalized and is being amortized over the shorter of the term of the licensing agreement or the remaining life of the underlying patents.
The Company evaluates recoverability of identifiable intangible assets annually or 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.

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
Should the sum of the expected cash flows be less than the carrying amount of assets being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying amount of the assets, exceed fair value. Estimated amortization of intangible assets over the next five years is as follows:

December 31,
2010
$
42,585
2011
42,585
2012
42,585
2013
42,585
2014
42,585
$
212,925
Stock Based Compensation

In December 2004, the ASC 718-10 (formerly referred to as 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).
ASC 718-10 eliminates accounting for share-based compensation transaction using the intrinsic value method, and requires instead that such transactions be accounted for using a fair-value-based method. The Company has elected to adopt the provisions of ASC 718-10 effective January 1, 2006, under the modified prospective transition method, in which compensation cost was recognized beginning with the effective date (a) based on the requirements of ASC 718-10 for all share-based payments granted after the effective date and (b) based on the requirements of ASC 718-10 for all awards granted to employees prior to the effective date of ASC 718-10 that remain unvested on the effective date.
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

ASC 260-10-45 (formerly referred to as 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 ASC 740-10-25 (formerly referred to as Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48)). ASC 740-10-25 is intended to clarify the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
Under ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

The adoption of ASC 740-10-25 at January 1, 2007 did not have a material effect on the Company's financial position.
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 ASC 605-10-S99 (formerly referred to as 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) collectability is reasonably assured. Specifically, oil and gas sales are recognized as income at such time as the oil and gas are delivered under contract to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned.

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.

During the three months ended December 31 ,2009, the Company determined that the Leak Location Technology  license and the BIO-CAT license technology value was impaired, which resulted in the impairment expense of $564,711.
New Accounting Pronouncements
The following accounting guidance has been issued and will be effective for the Company in or after fiscal year 2009:
Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820” and formerly referred to as FAS-157), establishes a framework for measuring fair value in GAAP, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. ASC 820 is effective for fiscal years beginning after November 15, 2007. ASC 820-10-65, Transition and Open Effective Date Information , deferred the effective date of ASC 820, for non-financial assets and liabilities that are not on a recurring basis recognized or disclosed at fair value in the financial statements, to fiscal years, and interim periods, beginning after November 15, 2008. The Company has adopted the guidance within ASC 820 for non-financial assets and liabilities measured at fair value on a nonrecurring basis at January 1, 2009 and will continue to apply its provisions prospectively from January 1, 2009. The application of ASC 820 for non-financial assets and liabilities did not have a significant impact on earnings nor the financial position for the periods presented.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
FASB ASC 805, Business Combinations (“ASC 805” and formerly referred to as FAS-141(R)) requires the acquisition method to be applied to all transactions and other events in which an entity obtains control over one or more other businesses, requires the acquirer to recognize the fair value of all assets and liabilities acquired, even if less than one hundred percent ownership is acquired, and establishes the acquisition date fair value as measurement date for all assets and liabilities assumed. The guidance within ASC 805 is effective prospectively for any acquisitions made after fiscal years beginning after December 15, 2008.
FASB ASC 810, Consolidation (“ASC 810”), ASC 810-10-65, Transition and Open Effective Date Information (“ASC 810-10-65” and formerly referred to as FAS-160) establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated financial statements. ASC 810-10-65 is effective for fiscal years beginning after December 15, 2008. The application of ASC 810-10-65 did not have a significant impact on earnings nor the financial position.
FASB ASC 815, Derivatives and Hedging (“ASC 815”), ASC 815-10-65, Transition and Open Effective Date Information (“ASC 815-10-65”and formerly referred to as FAS-161) includes a requirement for enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. ASC 815 is effective prospectively for fiscal years beginning after November 15, 2008. The application of ASC 815 expanded the required disclosures in regards to the Company’s derivative and hedging activities.
FASB ASC 350, Intangibles – Goodwill and Other , ASC 350-30-65, Transition and Open Effective Date Information (“ASC 350-30-65” and formerly referred to as FSP FAS 142-3) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible. ASC 350-30-65 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The guidance in this ASC 350-30-65 for determining the useful life of a recognized intangible shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements of ASC 350-30-65, however, shall be applied prospectively to all intangible assets recognized in the Company’s financial statements as of the effective date. The application of ASC 350-30-65 is not expected to have a material impact on earnings nor the financial position.
FASB ASC 715, Compensation – Retirement Benefits , ASC 715-20-65, Transition and Open Effective Date Information (“ASC 715-20-65” and formerly referred to as FSP FAS-132(R)-1) provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plans. ASC 715-20-65 is effective prospectively for fiscal years ending after December 15, 2009. The application of ASC 715-20-65 will expand the Company’s disclosures regarding pension plan assets.
FASB ASC 825 Financial Instruments , ASC 825-10-65, Transition and Open Effective Date Information (“ASC 825-10-65” and formerly referred to as FSP FAS 107-1 and APB 28-1) requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. ASC 825-10-65 is effective prospectively for interim reporting periods ending after June 15, 2009. The application of ASC 825-10-65 expanded the Company’s disclosures regarding the use of fair value in interim periods.
FASB ASC 855, Subsequent Events (“ASC 855” and formerly referred to as FAS-165), modified the subsequent event guidance. The three modifications to the subsequent events guidance are: 1) To name the two types of subsequent events either as recognized or non-recognized subsequent events, 2) To modify the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statement are issued or available to be issued and 3) To require entities to disclose the date through which an entity has evaluated subsequent events and the basis for that date, i.e. whether that date represents the date the financial statements were issued or were available to be issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively.

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
NOTE 3: RECEIVABLE FROM JOINT INTERESTS

The Company is the operator of certain wells acquired in the Expanded Bedford Agreement (see note 8).  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 December 31, 2009, the amount of these receivables is $163,105, and they are considered to be fully collectible.

NOTE 4: BEDFORD ENERGY, INC ACQUISITION

On August 11, 2008, the Company entered into an agreement to purchase certain oil and gas properties of Bedford Energy, Inc.  for a total of $2,000,000 (the “Original Bedford Agreement”).  The payment terms consisted of cash in the amount of $1,000,000, a note payable in the amount of $750,000, and 2,500,000 shares of the Company’s common stock with a fair value of $250,000.
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 (the “Amended Bedford Agreement”).  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). The Company would also 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.

During the six months ended December 31, 2008, the Company sold a 15% minority interest in the Bedford Assets for cash in the amount of $262,500.  The Company recorded a loss in this sale in the amount of  $37,500 during the nine  months ended December 31, 2008.

In April 2009, the Company and Bedford Energy, Inc. agreed to amend the Amended Bedford Agreement, whereby the Company transferred to Bedford Energy a 2.25% carried interest in the Grace Wells #1, #2, #3 #5A, and #6 in consideration for the cancellation of the promissory note in the net amount of $390,000 plus accrued interest in the amount of  $18,627.

During the three and nine months ended December 31, 2009, the Company reduced the amount recorded for the assumption of accounts payable pursuant to the Bedford Energy transaction in the amount of $26,785.

NOTE  5: 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 was 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.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
NOTE 6: PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31, 2009 and March 31, 2009, is as follows:

December 31, 2009
March 31, 2009
Office Equipment
$
41,778
$
41,778
Leasehold improvements
7,989
7,989
49,767
49,767
Less: Accumulated depreciation
(29,418
)
(21,577
)
Total
$
20,349
$
28,190
Depreciation expense for the three months ended December 31, 2009 and 2008 was $2,752 and $2,720, respectively. Depreciation expense for the nine months ended December 31, 2009 and 2008 was $7,841 and $8,161, respectively.
NOTE 7: INTELLECTUAL PROPERTY RIGHTS

A summary of the intellectual property rights at December 31, 2009 and March 31, 2009, are as follows:

December 31, 2009
March 31, 2009
Ultrasonic Mitigation Technology
$
425,850
$
425,850
Intelli-Well Technologies
391,500
391,500
Leak Location Technology
980,305
980,303
BIO-CAT Well and pipeline
30,000
30,000
1,827,655
1,827,653
Less: accumulated amortization
(1,550,851
)
(865,070
)
Total
$
276,804
$
962,583

Amortization expense for the three months ended December 31, 2009 and 2008 was $10,646 and $55,205, respectively.  During the three months ended December 31 ,2009, the Company determined that the Leak Location Technology license and the BIO-CAT Technology license value was impaired, which resulted in the impairment expense of $564,711 for the three and nine months ended December 31, 2009.  Amortization expense for the nine months ended December 31, 2009 and 2008 was $121,057 and $110,383, respectively.  (See note 14)

NOTE 8: 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.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
In September 2008, the Company sold 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.

In September 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.

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 funds 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.

In April 2009, the Company and Bedford Energy, Inc. agreed to amend the Amended Bedford Agreement, whereby the Company transferred to Bedford Energy a 2.25% carried interest in the Grace Wells #1, #2, #3 #5A, and #6 in consideration for the cancellation  of the promissory note in the amount of $400,000plus accrued interest in that amount of $18,627.

During the three months ended June 30, 2009, pursuant to the terms of the Grace Well Buyout Offer, an additional  4 investors selected option 2, the Company buyout, and 1 additional investor selected option 1, continued participation
During the three months ended September 30, 2009, pursuant to the terms of the Grace Well Buyout Offer, an additional  2 investors selected option 2, the Company buyout, and 1 additional investor selected option 1, continued participation

The table below shows the Company’s working interests in the Grace Wells as of December 31, 2009:
March 31, 2009
Additional
December 31, 2009
Well
Working Interest
Acquisition
Working Interest
Grace #1
38
%
8
%
46
%
Grace #2
27
%
0
%
27
%
Grace #3
34
%
7
%
41
%
Grace #5A
34
%
2
%
36
%
Grace #6
30
%
3
%
33
%
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
Producing oil and gas properties consist of the following:

December 31, 2009
March 31, 2009
Lincoln County, Oklahoma
$
1,591,545
$
1,972,606
Other properties, net
997,113
999,285
Less: Depletion
(772,204
)
(319,300
)
Net
$
1,816,454
$
2,652,591

NOTE 9: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

December 31, 2009
March 31, 2009
Accounts payable
$
846,192
$
706,961
Accrued interest
42,602
37,931
Total
$
888,794
$
744,892
NOTE 10: NOTES PAYABLE

December 31, 2009
March 31, 2009
On May 8, 2005, the Company entered into a convertible note payable agreement with, a shareholder in the amount of $100,000.  The note carries an interest rate of 10% per annum and a maturity date  of November 8, 2006.  The note holder has the right to convert the note and accrued interest at a rate of $0.01 per share.  The value of this conversion feature was treated as a loan discount for the full $100,000 of the loan and was amortized to interest expense over the life of the loan.   On May 8, 2007 the note was extended for one year.  The conversion feature of the note was valued at $25,852 and was treated as prepaid loan costs.  The prepaid loan costs have been amortized over the life of the extended note. On October 19, 2007, the note holder converted $30,000 of principal plus accrued interest of $16,152 into 1,350,000 shares of common stock. On November 30, 2007, the note holder converted $10,000 of principal into 950,000 shares of common stock. On January 31, 2008, the note holder converted $10,000 of principal and accrued interest of $600 into 1,250,000 shares of common stock. On February 29, 2008, the note holder converted $8,000 of principal into 1,250,000 shares of common stock. On March 31, 2008, the note holder converted $5,000 of principal into 1,250,000 shares of common stock. On March 31, 2008, the note holder converted $5,000 of principal into 1,250,000 shares of common stock. On June 6, 2008, the note holder converted $7,000 of principal and $1,372 of accrued interest into1,550,000 shares of common stock. On June 23, 2008, the note holder converted $10,000 of principal and $395 of accrued interest into1,500,000 shares of common stock. On October 15, 2008, the note holder converted $5,000 of principal and $10,000 of interest into 3,300,000 shares of common stock. On December 3, 2008, the note holder converted $3,000 of principal and $201 of interest into 2,000,000 shares of common stock. On February 24, 2009, the note holder converted $2,000 of principal and $167 of accrued interest into 4,000,000 shares of common stock. During the three months ended September 30, 2009, the Company issued 33,000,000 shares for the conversion of $2,000 of principal and $367 of accrued interest on this note,  and for other consideration (see note 13).  During the three months ended December 31, 2009,the Company issued 30,000,000 shares of common stock for the conversion of $1,000 principal and $361 of accrued interest on this note and for other considerations (see note 13). Interest in the amount of $176 and $302 was accrued on this note during the three months ended December 31, 2009 and 2008, respectively.  Interest in the amount of $903 and $1,664 was  accrued on this note during the nine months ended December 31, 2009 and 2008, respectively.  As of December 31, 2009 this note is in default. As of December 31, 2009, the 6,000,000 shares for the conversion on February 24, 2009 have not been issued, these shares are shown as common stock subscribed on the Company’s balance sheet as of December 31, 2009. During the nine months ended December 31, 2009, the Company extended the maturity date of this note until April 1, 2010.
$
7,000
$
10,000
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
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 a maturity date of   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 note 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 payable on the first day of each quarter beginning on January 1, 2009.   In April 2009, 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 $400,000 was cancelled and accrued interest in the amount of $18,627 was eliminated and the Company issued Bedford Energy, Inc. a 2.25% carried interest in each of the following Grace Wells: #1, #2, #3, #5A and #6.
-
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 a maturity date of  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 $1,222 and $685 was accrued on this note during the three months ended  December 31, 2009 and 2008, respectively. Interest in the amount of $3,729 and $685 was accrued on this note during the nine months ended  December 31, 2009 and 2008, respectively.  During the three and nine months ended December 31, 2009 the Company amortized $3,982 and $7,269 of the discount on the note payable to interest expense. During the three months ended December 31, 2009, the Company issued 30,000,000 shares in consideration for the assumption by a third party of $10,000 this note and interest of $1,068, and for other consideration (see note 13).
40,000
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 maturity date 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 $3,781 and $370 was accrued on this note during the three months ended December 31, 2009 and 2008, respectively.  Interest in the amount of $11,301 and $370 was accrued on this note during the nine months ended December 31, 2009 and 2008, respectively.  During the three and nine months ended December 31, 2009 the Company amortized $103,711and $46,289 of the discount on the note payable to interest expense.
150,000
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 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 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 over the life of the note via the effective interest method. Interest in the amount of $3,781 was accrued on this note during the three months ended December 31, 2009.  Interest in the amount of $11,301 was accrued on this note during the nine months ended December 31, 2009.  During the three and nine months ended December 31, 2009 the Company amortized $108,493 and $148,029 of the discount on the note payable to interest expense.
150,000
150,000
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
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 addition a 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  $1,356 was accrued on this note during the nine months ended December 31,, 2009.  During the three and nine months ended December 31, 2009 the Company amortized $0 and $22,698 of the discount on the note payable to interest expense.  During the nine months ended December 31, 2009, the Company issued 33,000,000 shares in consideration for the assumption of this note and interest of $2,562 by a third party, and for other consideration (see note 13).
-
50,000
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 $1,356 was accrued on this note during the nine months ended December 31, 2009.  During the three and nine months ended December 31, 2009 the Company amortized $0 and $49,343 of the discount on the note payable to interest expense. During the nine months ended December 31, 2009, the Company issued 33,000,000 shares in consideration for the assumption by a third party of this note and interest of $2,479, and for other consideration (see note 13).
-
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 $1,260 was accrued on this note during the three months ended December 31, 2009.  Interest in the amount of $3,767 was accrued on this note during the nine months ended December 31, 2009.  During the three and nine months ended December 31, 2009 the Company amortized $18,102 and $24,672 of the discount on the note payable to interest expense.
50,000
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 $4,068 was accrued on this note during the nine months ended December 31, 2009.  During the three and nine months ended December 31, 2009 the Company amortized $0 and $59,212 of the discount on the note payable to interest expense. During the nine months ended December 31, 2009, the Company issued 33,000,000 shares for the assumption by a third party of this note and interest of $5,466, and for other consideration (see note 13).
-
150,000
On July 15, 2009, the Company issued a promissory note to a related party in the amount of $6,000.  The note carries an interest rate of 10% per annum and matures on December 15, 2009.  Interest in the amount of $151 and $278 was recorded for the three and nine months ended December 31, 2009.
6,000
-
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 a maturity date of 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, the maturity date of  this note was extended until December 31, 2010. Interest in the amount of $50 was accrued on this note during the three months ended December 31, 2009 and 2008. Interest in the amount of $150 was accrued on this note during the nine months ended December 31, 2009 and 2008.
2,500
2,500
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
On November 28, 2006, Oiltek, in which the Company has a majority interest, issued a convertible note payable in the amount of $5,000.  This note bears interest at a rate of 8% per annum and a maturity date of 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, the maturity date of this note was extended  until December 31, 2010. Interest in the amount of $101 was accrued on this note during the three months ended December 31 2009 and 2008.  Interest in the amount of $302 was accrued on this note during the nine months ended December 31, 2009 and 2008.
5,000
5,000
On December 10, 2006, Oiltek, in which the Company has a majority interest, issued a convertible note payable in the amount of $5,000.  This note bears interest at a rate of 8% per annum and a maturity date of 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, the maturity date of this note was extended until December 31, 2010. Interest in the amount of $101 was accrued on this note during the three months ended December 31, 2009 and 2008. Interest in the amount of $302 was accrued on this note during the nine months ended December 31, 2009 and 2008.
5,000
5,000
Total outstanding
$
415,500
$
1,062,500
Note
Unamortized
Net of
December 31, 2009:
Amount
Discounts
Discount
Notes payable - current portion
$
403,000
$
-
$
403,000
Notes payable – current portion (Oiltek)
12,500
-
12,500
Total
$
415,500
$
-
$
415,500

Note
Unamortized
Net of
March 31, 2009:
Amount
Discounts
Discount
Notes payable - current portion
$
1,050,000
$
(461,518
)
$
588,482
Notes payable – current portion (Oiltek)
12,500
-
12,500
Total
$
1,062,500
$
(461,518
)
$
600,982

Three months ended December 31,
2009
2008
Discount on Notes Payable amortized to interest expense
$
234,286
$
59
Nine months ended December 31,
2009
2008
Discount on Notes Payable amortized to interest expense
$
461,518
$
59
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
NOTE 11: RELATED PARTY TRANSACTIONS

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 nine months ended December 31, 2009 and 2008, the Company incurred $30,000 in preferred stock dividends.  At December 31, 2009, the Company has not paid accrued dividends in the amount of $22,200 and this amount appears as dividends payable in the Company’s balance sheet.
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.

Notes Payable

On July 15, 2009, the Company issued a promissory note to the Company’s Chief Executive Officer, a related party, in the amount of $6,000.  The note carries an interest rate of 10% per annum and matures on December 15, 2009.  Interest in the amount of $151 and $278 was recorded for the three and nine months ended December 31, 2009, respectively.  This note has been extended until April 1, 2010.

Employment Agreements

KENT RODRIGUEZ

In 2009, Mr. Rodriguez, our President, 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.  During the three months ended December 31, 2009, the Company charged to operations the amount of $30,000 in quarterly salary for Mr. Rodriguez, of which $5,850 was paid to him during the quarter and the balance of $24,150 was accrued. During the nine months ended December 31, 2009, the Company charged to operations the amount of $90,000 in quarterly salary for Mr. Rodriguez, of which $19,650 was paid to him and the balance of $70,350 was accrued.
JILL ALLISON

In 2009, Ms. Allison, our Secretary, 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. During the nine months ended December 31, 2009, the Company increased the compensation rate for Ms. Allison, from $5,000 per month to $6,000 per month, for an annual rate of $72,000. During the three months ended December 31, 2009, the Company charged to operations the amount of  $18,000 in quarterly salary for Ms. Allison, of which $19,000 was paid to her during the quarter and the overpayment of $1,000 reduced the previously accrued salary. During the nine months ended December 31, 2009, the Company charged to operations the amount of  $51,000 in quarterly salary for Ms. Allison, of which $35,500 was paid to her during the quarter and the balance of $15,500 was accrued.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
NOTE 12: INCOME TAXES

In July 2006, the ASC 740-10-25 (formerly referred to as Financial Accounting Standards Board (FASB) issued interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48)). ASC 740-10-25 is intended to clarify the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under ASC 740-10-25, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

The adoption of ASC 740-10-25 at January 1, 2007 did not have a material effect on the Company's financial position.

The Company is delinquent filing tax returns with the Internal Revenue Service and state taxing authorities. The Company is currently in the process of filing these delinquent returns. We expect to file these delinquent returns on or before March 31, 2010. The filing of these returns should result in a net operating loss (NOL) carry forward which would create in a deferred tax asset that would be fully reserved due to uncertainties about realization of the benefits of the carry forward.
NOTE 13: 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, 2009, 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 three and nine months ended December 31, 2009 and 2008, the Company incurred $10,000 and $30,000, respectively, in preferred stock dividends, respectively.  As of  December 31, 2009, dividends in the amount of $22,200 have not been paid, and are carried on the Company’s balance sheet as Dividends Payable to Related Party.

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.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
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 December 31, 2009, the Company has 141,704,193  shares of common stock issued and outstanding.
During the nine months ended December 31, 2009:

The Company issued 1,176,000 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 $28,224 was charged to Oil and Gas properties account.

The Company issued 1,500,000 shares of common stock to consultants for services provided, pursuant to consulting agreements.  The value of these shares in the amount of $25,950 was charged to operations during the nine months ended December 31, 2009. During the three months ended December 31, 2009, the Company cancelled 500,000 shares that had been previously issued to a consultant for services to be provided, the value of these shares in the amount of $9,950 has been credited to operations during the three months ended December 31, 2009.

The Company agreed to issue 33,000,000 shares of common stock valued at $0.01 per share or an aggregate of $330,000   to a group of investors (the “Note Conversion 1 Investors”) for the following consideration: (a) the Note Conversion 1 Investors converted a portion of the Company’s convertible note payable in the principal amount of $2,000 plus accrued interest in the amount of $367; (b) the Note Conversion 1 Investors assumed other notes payable of the Company in the principal amount of $250,000 plus accrued interest in the amount of $10,507, calculated as follows:

Conversion of notes payable and accrued interest
$
2,367
Assumption of notes payable and accrued interest by investors
260,507
Total consideration
262,874
Value of 33,000,000 shares at $0.01 per share
(330,000
)
Loss on extinguishment of debt
$
(67,126
)

As of December 31, 2009, 27,000,000 of these shares have been issued, and 6,000,000 shares remaining to be issued and are presented in the Company’s balance sheet as common stock subscribed.
The Company issued 1,250,000 shares of common stock to consultants for services to be provided over the next three months.  The value of these shares in the amount of $12,500 was charged to prepaid expenses during the three months ended December 31, 2009. As of December 31, 2009, the Company has expense the value of the $2,083 to operations.

During the three months ended December 31, 2009, the Company agreed to issue 30,000,000 shares of common stock valued at $0.0085 per share or an aggregate of $255,000 to a group of investors (the “Note Conversion 2 Investors”) for the following consideration; (a) the Note Conversion 2 Investors converted a portion of the Company’s convertible note payable in the principal amount of $1,000 plus accrued interest in the amount of $361; (b) the Note Conversion 2 Investors assumed a portion of a note payable of the Company in the principal amount of $10,000 (the original value of the note was $50,000) plus accrued interest of $1,068, calculated as follows:

Conversion of notes payable and accrued interest
$
1,361
Assumption of notes payable and accrued interest by investors
11,068
Total consideration
12,429
Value of 30,000,000 shares at $0.0085 per share
(255,000
)
Loss on extinguishment of debt
$
(242,571
)

As of December 31, 2009, 13,000,000 of these shares have been issued, and 17,000,000 shares remaining to be issued and are presented in the Company’s balance sheet as common stock subscribed.

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
Options

There are no stock options outstanding.
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 December 31, 2009:

Warrants Outstanding
Warrants Exercisable
Weighted Average
Weighted Average
Exercise
Number
Remaining Contractual
Weighted Average
Number
Remaining Contractual
Prices
Outstanding
Life (years)
Exercise Price
Exercisable
Life (years)
$
0.10
500,000
1.86
$
0.10
500,000
1.86
0.20
125,000
2.94
0.20
125,000
2.94
0.60
150,000
3.21
0.60
150,000
3.21
775,000
2.30
775,000
2.30
Transactions involving warrants are summarized as follows:
Number of Shares
Weighted Average
Price Per Share
Outstanding at March 31, 2009
775,000
$
0.21
Granted
-
-
Exercised
-
-
Cancelled or expired
-
-
Outstanding at December 31, 2009
775,000
$
0.21

NOTE 14: 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 is also required with the annual minimum royalty payments. As of December 31, 2009, the Company has accrued the $10,000 milestone license fee.  During the three months ended December 31, 2009, the Company determined that the Leak Location Technology license value was impaired, which resulted in the impairment expense of $534,711.  As of December 31, 2009, the Company has valued this technology at $0.   (See note 7.)
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
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 renewal fee of $100,000 on the anniversary date of the agreement. The license calls for royalties of six percent of the net sales 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 December 31, 2009, the Company has accrued the annual license renewal fee of $100,000. During the three months ended December 31, 2009, the Company determined that the BIO-CAT Technology license value was impaired, which resulted in the impairment expense of $30,000.  As of December 31, 2009, the Company has valued this technology at $0.   (See note 7.)

During the three months ended September 30, 2009, the Company entered into negotiations with UMTI and LLTI to amend the licensing fees.
Minimum obligations under license agreements for the next five years:

3/31/2010
$
100,000
3/31/2011
100,000
3/31/2012
100,000
3/31/2013
100,000
3/31/2014
100,000
$
500,000

NOTE 15: REVENUE RECOGNITION
During the year ended March 31, 2009, 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, 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 September 30, 2009, the Company is current on all of the lease operating expenses. We have accrued all of the operating expenses as of September 30, 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.

During the three months ended December 31, 2009, a settlement agreement was entered into between the Company and the Operator.  As a result of this agreement, the Company has received the revenues which were due from these wells, which was applied to the adjust lease operating expenses.
NOTE 16: EARNINGS PER SHARE

ASC 260-10-45 (formerly referred to as 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 December 31, 2009:

The following warrants were not included in basic or 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 warrants at an exercise price of $0.60 per shares; and 500,000 warrants at an exercise price of $0.10 per shares.
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
Diluted shares does not include shares issuable to the preferred shareholder pursuant to his 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 December 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; 150,000 warrants at an exercise price of $0.60 per shares; and 500,000 warrants 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.
NOTE 17:  SUBSEQUENT EVENTS
The Company has evaluated subsequent events through February 22, 2010, the filing date of this Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2009, and has disclosed such items in Note 17 “Subsequent Events” herein. During January 2010, the Company issued an additional 5,000,000 shares for the conversion of the convertible note payables and assumption of debt in the aggregate amount of $260,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and the notes related thereto. The discussion of results, causes and trends should not be construed to infer conclusions that such results, causes or trends necessarily will continue in the future.

Business Development

We were originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. We were the general partner of Snow Runner (USA) Ltd., a Colorado limited partnership to sell proprietary snow skates under the name "Sled Dogs" which was dissolved in August 1992. In late 1993, we relocated our operations to Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. In August 2000, following our bankruptcy, we made a decision to re-focus to a traditional wholesale to retail distributor, and obtained the exclusive North American rights to distribute high-end European outdoor apparel and equipment. We first intended to exploit these rights over the Internet under the name XDOGS.COM, Inc. However, due to the general economic conditions and the ensuing general downturn in e-commerce and internet-based businesses, we decided that to best preserve our core assets we would need to adopt a more traditional strategy. Thus, we abandoned this approach and to better reflect our new focus, we changed our name to XDOGS, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc. ("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 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. We transferred our interest in the J.C Kelly wellbore back to Krog Partners, LLC.

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 seven and one-half percent (7.5%) working interest in the Janssen #1A prospect in Karnes County, Texas. The Janssen Prospect will be re-completed in the existing vertical wellbore by a sidetrack drilling procedure at a depth of approximately 10,500 feet, and test the Wilcox sand. Total potential reserves are estimated to be 75,000 to 100,000 barrels of condensate and 3 to 4 BCF (billion cubic feet) of gas.

On October 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 0.7% 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. This well was completed in January 2008 and has been producing 800,000 mcf per day. 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%.

In September 2008, the Company sold 15% of its recently acquired interest in the Bedford Assets, for cash in the amount of $262,500.

In September 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.

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 funds 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 third 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.  As of 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.

During the three months ended June 30, 2009, the Company amended the  agreement with Bedford Energy, whereby the Company transferred a 2.25% carried interest in the Grace Wells #1, #2, #3, #5A and #6 in consideration  for the cancellation of  the note payable and accrued interest to Bedford in the amounts of $390,000 and $18,627, respectively.

During the three months ended December 31, 2009, the Company reduced the amount recorded for the assumption of accounts payable pursuant to the Bedford Energy transaction in the amount of $26,785.  Also during the three months ended December 31, 2009, the Company determined that the Leak Location Technology license and the BIO-CAT Technology license value was impaired, which resulted in a write-down of $564,711.

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.
Going Concern
The December 31, 2009, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $26,907,587 from inception through December 31, 2009, and has a working capital deficiency  of $1,257,709 as of December 31, 2009.  Shareholder’s equity as of  December 31, 2009 is $1,123,104. 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.
Financing Activities

We have been funding our obligations through the issuance of our Common Stock for services rendered for notes payable owed or for cash in private placements. The Company may seek additional funds in the private or public equity or debt markets in order to execute its plan of operation and business strategy. There can be no assurance that we will be able to attract capital or obtain such financing when needed or on acceptable terms in which case the Company's ability to execute its business strategy will be impaired.

Results of Operations

Three months ended December 31, 2009 compared to the three months ended December 31, 2008:

Revenues

Revenues for the three months ended December 31, 2009 were $68,545 an increase of approximately 22% compared to revenues of  $56,037 for the three months ended December 31, 2008.  Revenues from the sale of oil and gas increased as a result of  the increase in the market price of oil and gas

Lease Operating Expenses

During the three month period ending December 31, 2009, our lease operating expenses were  $19,896, a decrease of $25,914 or approximately 57% compared to  $45,810 for the three month period ended December 31, 2008. This decrease was the result of the completion of workover (s) to bring the wells into production during the three months ended December 31, 2009.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses for the three months ended December 31, 2009 were $92,400, a decrease of $175,768 compared to selling, general and administrative expenses of $268,168 during the three months ended December 31, 2008.   This decrease was the mainly result of a reduction in the use of outside consultants and decreased travel expenses.  Selling, general and administrative expenses for 2009 consisted primarily of  payroll and related costs of $49,501; legal and accounting fees in the amount of $18,906; investor relations costs of $14,266; facilities costs in the amount of $13,987; and travel and entertainment expenses of $9,172.

Impairment expense

During the three months ended December 31, 2009, the Company determined that the value of the Leak Location Technology license and the BIO-CAT Technology license were no longer of value, as a result the Company expensed the remaining value of $564,711 to operations during the period.  There is no comparable expense during the period ended December 31, 2008.

Stock Based Compensation

Stock based compensation costs were ($7,867) for the three months ended December 31, 2009 compared to $85,000 for the three months ended December 31, 2008.  The Company used more outside consultants in prior periods as we were building our business model, and those services have been largely discontinued.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization were $106,627 for the three months ended December 31, 2009, an increase of $32,963 or approximately 45% compared to $73,664 for the three months ended December 31, 2008.  The reason for this increase was the increase in oil and gas reserves and associated depletion.
Interest Expense, net of Interest Income

Interest expense, net of interest income was $236,637 for the three months period ended December 31, 2009, an increase of $223,772 compared to interest income, net of interest expense of $12,865 for the three month period ending December 31, 2008. This increase is due to an increase in notes payable and the amortization of the discount on the notes payable.

Gain and loss on extinguishment of debt
During the three months ended December 31, 2009, the Company agreed to issue 30,000,000 shares of common stock for the conversion of debt in the amount of $1,361 and the assumption of notes payable and accrued interest in the amount of $11,068.  This resulted in a loss on extinguishment of debt in the amount of $242,570.

Net Loss
For the reasons stated above, our net loss for the three months ended December 31, 2009, amounted to $1,186,429,  an increase of $738,459 or approximately 165% compared to a net loss of $447,970 during the prior period.
Nine months ended December 31, 2009 compared to the nine months ended December 31, 2008:
Revenues

Revenues for the nine months ended December 31, 2009 were $193,557 a decrease of approximately 36% compared to revenues of  $303,902  for the nine months ended December 31, 2008.  Revenues from the sale of oil and gas decreased as a result of a weakness in the market price of oil and gas.
Lease Operating Expenses

During the nine months period ending December 31, 2009, our lease operating expenses were $101,580, a decrease of $131,258 or approximately 56% compared to  $232,838 for the nine month period ended December 31, 2008.  This decrease was the result of the completion of the workover (s) on the Company’s oil and gas wells during the nine months ended December 31, 2008.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses for the nine months ended December 31, 2009 were $431,558, a decrease of $230,127 compared to selling, general and administrative expenses of $661,685 during the nine months ended December 31, 2008.  This decrease was the mainly result of a decreased travel expenses.   Selling, general and administrative expenses for 2009 consisted primarily of  payroll and related costs of $167,904; legal and accounting fees in the amount of $144,638; facilities costs in the amount of $42,720; travel and entertainment expenses of $24,081; office expenses of $14,149; and investor relations costs of $18,932.
Impairment expense

During the nine months ended December 31, 2009, the Company determined that the value of the Leak Location Technology license and the BIO-CAT Technology license were no longer of value, as a result the Company expensed the remaining value of $564,711 to operations during the period.  There is no comparable expense during the period ended December 31, 2008.

Stock Based Compensation

Stock based compensation costs were $18,083 for the nine months ended December 31, 2009 compared to $271,000 for the nine months ended December 31, 2008.  The Company used more outside consultants in prior periods as we were building our business model, and those services have been largely discontinued.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization were $581,800 for the nine months ended December 31, 2009, an increase of $308,360 or approximately 113% compared to $273,440 for the nine months ended December 31, 2008.  The reason for this increase was the increase in the Company’s oil and gas reserves and associated depletion.
Interest Expense, net of Interest Income

Interest expense, net of interest income was $492,615 for the nine months period ended December 31, 2009, an increase of $474,831 compared to interest expense, net of interest income, of $17,784 for the nine months period ending December 31, 2008. This increase is due to an increase in notes payable and the amortization of the discount on the notes payable.

Gain and loss on extinguishment of debt
During the nine months ended December 31 2009, the Company agreed to issue 63,000,000 shares of common stock for the conversion of debt in the amount of $3,728 and the assumption of notes payable and accrued interest in the amount of $271,575.  This and a smaller similar transaction resulted in a loss on extinguishment of debt in the amount of $309,696.

Net Loss
For the reasons stated above, our net loss for the nine months ended December 31, 2009 amounted to $2,306,486,  an increase of $977,641 or approximately 74% compared to a net loss of $1,328,845 during the prior period.
LIQUIDITY AND CAPITAL RESOURCES
The December 31, 2009, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $26,907,587 from inception through December 31, 2009, and has a working capital deficiency  of $1,257,709   and shareholder’s equity of $1,123,104, respectively, as of December 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 $18,167 on December 31, 2009, compared to $26,406 on March 31, 2009. 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 nine months ended December 31, 2009 was $13,889 compared to $572,227 used in the nine months ended December 31, 2008, because many 2009 expenses such as amortization, depreciation did not affect cash.
The Company had a net loss of $2,316,436 for the nine months ended December 31, 2009 compared to a net loss of $1,328,845 for the nine months ended December 31, 2008. Net accounts receivable as of December 31, 2009 were $38,925 compared to $40,827 for March 31, 2009.
Investing activities

For the nine months ended December 31, 2009 we used $350 for investing activities compared to the use of $755,150 in the nine months ended December 31, 2008 because in 2008 funds were used to purchase working interest in the Grace Field.

Financing activities

Our financing activities for the nine months ended December 31, 2009 provided cash of $6,000 as compared to $1,303,891 for the period ended December 31, 2008 principally from the sale of stock. We plan to raise additional capital during the coming fiscal year.

Critical Accounting Policies

The consolidated  financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on information available. These estimates and assumptions affect the reporting amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of the significant accounting policies is described in Note 1 to the financial statements.
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Material Commitments

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information has been omitted, as the Company qualifies as a smaller reporting company.
ITEM 4T.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our principal executive and financial officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the "Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.
There has been no change in our internal control over financial reporting identified during the period covered by this report which have materially affected or is likely to materially affect our internal control over financial reporting.
PART II

ITEM 1. LEGAL PROCEEDINGS

None.

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

The Company issued 1,250,000 shares of common stock to consultants pursuant to consulting agreements.  These shares were valued at $12,500.  During the three months ended December 31, 2009, the Company cancelled 500,000 of these shares that were issued during the three months ended September 30, 2009.

The Company issued 30,000,000 shares of common stock to note holders for the conversion and assumption of notes payable in the aggregate of $11,000.  These shares were valued at $255,000.  As of December 31, 2009, 13,000,000 were issued and 17,000,000 were shown as common stock subscribed.

The Company issued 12,000,000 shares of common stock that were previously accrued during the prior quarter for the conversion and assumptions of notes.
(b) None.

(c) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

ITEM 5. OTHER INFORMATION

None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Form 8-K

None.

(b) Exhibits
Exhibit Number
Description
3.1
Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registration Statement on Form SB-2, Registration No. 33-74240C).*
3.2
Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Registration Statement on Form SB-2, Registration No. 33-74240C).*
3.3
Articles of Incorporation for the State of Nevada. (Incorporated by reference to Exhibit 2.2 to Form 10-KSB filed February 2000)*
3.4
Articles of Merger for the Colorado Corporation and the Nevada Corporation (Incorporated by reference to Exhibit 3.4 to Form 10-KSB filed February 2000)*
3.5
Bylaws of the Nevada Corporation (Incorporated by reference to Exhibit 3.5 to Form 10-KSB filed February 2000)*
4.1
Specimen of Common Stock (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form SB-2, Registration No. 33-74240C).*
4.2
Certificate of Designation of Series and Determination of Rights and Preferences of Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 4.2 to Form 10-KSB filed July 12, 2002.)*
10.1
Incentive Compensation and Employment Agreement for Kent A. Rodriguez (Incorporated by Reference to Exhibit 10.12 of our Form 10-KSB filed July 20, 2001)*
31
32
____________

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

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Avalon Oil & Gas, Inc.
Date: February 22, 2010
By:
/s/ Kent Rodriguez
Kent Rodriguez
Chief Executive Officer
Chief Financial and Accounting Officer
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