GRVE 10-Q Quarterly Report Dec. 31, 2012 | Alphaminr
GROOVE BOTANICALS INC.
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GRVE 10-Q Quarter ended Dec. 31, 2012

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Filed on Sept. 14, 2012
10-Q 1 f10q1212_avalonoilgasinc.htm QUARTERLY REPORT f10q1212_avalonoilgasinc.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
____________
þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2012
Or
o 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.)
310 Fourth Avenue South, Suite 7000
Minneapolis, MN 55415
(Address of principal executive offices) (Zip Code)

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

(1) Has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports):   Yes þ No o
(2) Has been subject to such filing requirements for the past 90 days.   Yes þ 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
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ

3,258,062 shares of the registrant's Common Stock, $0.001 per share, were outstanding as of December 31, 2012.
Table of Contents

PART I FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
3
Consolidated Balance Sheets as of  December 31, 2012 (Unaudited)  and March 31, 2012
3
Consolidated Statements of Operations for the Three Months and Nine Months  Ended  December 31, 2012 and 2011 (Unaudited)
5
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2012 and 2011 (Unaudited)
7
Notes to Consolidated Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition or Plan of Operation
21
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
27
Item 4.
Controls and Procedures
27
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
28
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28
Item 3.
Defaults upon Senior Securities
28
Item 4.
Submission of Matters to a Vote of Security Holders
28
Item 5.
Other Information
28
Item 6.
Exhibits and Reports on Form 8-K
29
Signatures
30
Avalon Oil & Gas, Inc.
Consolidated Balance Sheets
December 31,
March 31,
2012
2012
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents
$ 118,773 $ 114,533
Accounts receivable, net of allowance for doubtful accounts of $0 and $0
37,452 33,958
Notes receivable
12,142 9,286
Deposits and prepaid expenses
160,000 160,000
Receivables from joint interests, net of allowance for doubtful accounts of $126,791 and $135,708
20,000 20,000
Total current assets
348,367 337,777
Notes receivable
13,572 20,000
Property and equipment, net
76 1,033
Unproven oil & gas properties
1,867,183 1,867,183
Producing oil & gas properties, net
178,423 208,281
Intellectual property rights, net
149,048 180,986
Total Assets
$ 2,556,669 $ 2,615,260
The accompanying notes are an integral part of these financial statements.
3
Avalon Oil & Gas, Inc.
Consolidated Balance Sheets (Continued)
December 31,
March 31,
2012
2012
(Unaudited)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities
662,979 581,380
Accrued payroll - related parties
200,217 196,365
Dividends payable to related party
39,350 35,450
Accrued liabilities to joint interest
12,350 12,547
Notes payable - related party
20,000 15,000
Notes payable, net of discount
503,000 620,931
Total current liabilities
1,437,896 1,461,673
Notes payable, net of discount
725,000 474,500
Accrued asset retirement obligation (ARO) liability
100,328 91,094
Total Liabilities
2,263,224 2,027,267
Commitments and contingencies
Stockholders' Equity
Preferred stock, Series A, $.10 par value, 1,000,000 shares authorized; 100 shares issued and outstanding stated at redemption value
500,000 500,000
Common stock, $.001 par value: 1,000,000,000 shares authorized 3,265,992 and 2,558,584shares issued and outstanding at December 31, 2012 and March 31, 2012 respectively
3,266 2,559
Additional paid in capital
29,439,653 29,308,950
Accumulated deficit
(29,649,474 ) (29,223,516 )
Total Stockholders' Equity
293,445 587,993
Total Liabilities and Stockholders' Equity
$ 2,556,669 $ 2,615,260
The accompanying notes are an integral part of these financial statements.
4
Avalon Oil & Gas, Inc.
Consolidated Statements of Operations
For the three
For the three
Months ended
Months ended
December 31, 2012
December 31, 2011
(Unaudited)
(Unaudited)
Oil & Gas Sales
$ 63,880 $ 49,446
Operating expenses:
Lease operating expense, severance taxes and ARO accretion
22,087 48,405
Selling, general and administrative expenses
91,886 72,253
Stock based compensation
- 10,000
Depreciation, depletion, and amortization
23,129 14,846
Total operating expenses
137,102 145,504
Operating loss
(73,222 ) (96,058 )
Other income (expense):
(Loss) on conversion of notes payable
- -
Gain on extinguishment of debt
7,000
Interest expense, net
(39,113 ) (140,832 )
Total other income (expense)
(39,113 ) (133,832 )
Loss before income tax
(112,335 ) (229,890 )
Provision for income taxes
- -
Net Loss
(112,335 ) (229,890 )
Preferred stock dividends
(10,000 ) (10,000 )
Net loss attributable to common shareholders
$ (122,335 ) $ (239,890 )
Net loss per share - basic and diluted
(0.038 ) (0.122 )
Weighted average shares outstanding - basic and diluted
3,228,491 1,963,872
The accompanying notes are an integral part of these financial statements.
5
Avalon Oil & Gas, Inc.
Consolidated Statements of Operations
For the nine
For the nine
Months ended
Months ended
December 31, 2012
December 31, 2011
(Unaudited)
(Unaudited)
Oil & Gas Sales
$ 112,649 $ 168,981
Operating expenses:
Lease operating expense, severance taxes and ARO accretion
36,888 103,638
Selling, general and administrative expenses
240,211 265,782
Stock based compensation
87,500 35,946
Depreciation, depletion, and amortization
60,545 69,425
Total operating expenses
425,144 474,791
Operating loss
(312,495 ) (305,810 )
Other income (expense):
(Loss) on conversion of notes payable
(9,172 )
Gain on extinguishment of debt
- 35,531
Interest expense, net
(113,423 ) (245,586 )
Total other income (expense)
(113,423 ) (219,227 )
Loss before income tax
(425,918 ) (525,037 )
Provision for income taxes
- -
Net Loss
(425,918 ) (525,037 )
Preferred stock dividends
(30,000 ) (30,000 )
Net loss attributable to common shareholders
$ (455,918 ) $ (555,037 )
Net loss per share - basic and diluted
(0.143 ) (0.285 )
Weighted average shares outstanding - basic and diluted
3,190,032 1,947,488
The accompanying notes are an integral part of these financial statements.
6
Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows
For the nine
For the nine
Months ended
Months ended
December 31, 2012
December 31, 2011
(Unaudited)
(Unaudited)
Cash flows from operating activities:
Net (loss)
$ (425,918 ) $ (525,037 )
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock issued for services
87,500 35,946
Accrued interest
5,000 -
Stock issued for reduction of interest on notes payable
2,409 -
(Gain) Loss on extinguishment of debt
- (35,531 )
Gain on settlement of debt
- 7,842
Bad debt expense
44,200
Depreciation
957 5,426
Depletion
27,686 32,058
Depreciation and ARO liability
2,172 2,174
Amortization of discount on notes payable
29,068 188,645
Amortization of intangible assets
31,938 31,941
Net change in operating assets and liabilities:
Accounts receivable
(3,494 ) (14,369 )
Joint interest receivable
- (13,930 )
Accounts payable and other accrued expenses
85,217 18,640
Dividends payable to related party
3,900 (3,250 )
Due to related party
5,000 12,200
Asset retirement obligation
9,233 4,347
Net cash (used) in operating activities
(139,332 ) (208,698 )
Cash flows from investing activities:
Deposit on the purchase of additional assets
- (160,000 )
Principle payments received on notes receivable
3,572 5,713
Net cash (used in) investing activities
3,572 (154,287 )
Cash flows from financing activities:
Proceeds from advances from related party
- 40,000
Reduction of accounts payable in exchange for common stock
- 47,712
Proceeds from notes payable
140,000 80,000
Net cash (used in) financing activities
140,000 167,712
The accompanying notes are an integral part of these financial statements.
7
Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows (Continued)
For the nine
For the nine
Months ended
Months ended
December 31, 2012
December 31, 2011
(Unaudited)
(Unaudited)
Net (decrease) in cash and cash equivalents
4,240 (195,273 )
Cash and cash equivalents at beginning of period
114,533 311,802
Cash and cash equivalents at end of period
$ 118,773 $ 116,529
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$ - $ -
Taxes
$ - $ -
Common stock issued in exchange for consulting
services
$ 87,500 $ 35,946
Common stock issued for conversion of note payable,
accrued interest, and assumption of debt
$ 43,909 $ 224,219
Gain from settlement of debt
$ - $ (9,172 )
Gain (Loss) on extinguishment of debt
$ - $ 35,531
The accompanying notes are an integral part of these financial statements.
8
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Avalon Oil & Gas, Inc. (the "Company") was originally incorporated in Colorado in April 1991 under the name Snow Runner (USA), Inc. The Company was the general partner of Snow Runner (USA) Ltd.; a Colorado limited partnership to sell proprietary snow skates under the name "Sled Dogs" which was dissolved in August 1992. In late 1993, the Company relocated its operations to Minnesota and in January 1994 changed our name to Snow Runner, Inc. In November 1994 we changed our name to the Sled Dogs Company. On November 5, 1997, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In September 1998, we emerged from protection of Chapter 11 of the U.S. Bankruptcy Code. In May, 1999, we changed our state of domicile to Nevada and our name to XDOGS.COM, Inc. On July 22, 2005, the Board of Directors and a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to change the Company's name to Avalon Oil & Gas, Inc., and to increase the authorized number of shares of our common stock from 200,000,000 shares to 1,000,000,000 shares par value of $0.001, and engage in the acquisition of producing oil and gas properties. On November 16, 2011, a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock from 1,000,000,000 shares to 3,000,000,000 shares par value of $0.001.  This amendment was not filed with the Nevada Secretary of State.
On June 4, 2012 the Board of Directors approved an amendment to our Articles of Incorporation to a reverse split of the issued and outstanding shares of Common Stock of the Corporation (“Shares”) such that each holder of Shares as of the record date of June 4, 2012 shall receive one (1) post-split Share on the effective date of June 4, 2012 for each three hundred (300) Shares owned.  The reverse split was effective on July 23, 2012.   On September 28, 2012, we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock.  We expect to file an amendment with the Nevada Secretary of State on or before March 31, 2013, to increase our authorized shares to 200,000,000.

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 May17, 2006, The Company signed a strategic alliance agreement with Innovaro Corporation, a technology transfer company to build a portfolio of new technologies for the oil and gas industry.
On November 9, 2006, The Company acquired Intelli-Well Technologies, Inc., ("IWT"). IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory.
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, 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 non-controlling interest shown.
9

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
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.  They do not include all of the information and footnotes required by Accounting Principles generally accepted accounting principles in United States America (“US GAAP”) for complete financial statements and related notes. The accompanying unaudited 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, 2012.
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, 2012 and the results of their operations for the three month and nine months ended December 31, 2012 and 2011, and cash flows for the nine months ended December 31, 2012 and 2011 are not necessarily indicative of the results to be expected for the entire year.

Principles of consolidation

The consolidated financial statements include the accounts of the Company  and The Company’s subsidiary Oiltek, Inc. All significant inter-company items have been eliminated in consolidation.
Going Concern

The December 31, 2012, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $29,649,474 from inception through December 31, 2012, and has a working capital deficiency of $1,089,528 and stockholders’ equity of $293,445 as of December 31, 2012. 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 Company will continue so seek equity and debt financing to meet our operating losses.  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 US GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.

Basis of Accounting

The Company's financial statements are prepared using the accrual method of accounting. Revenues are recognized when earned and expenses when incurred.
10
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
Cash and 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.

Fair Value of Financial Instruments

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

Accounts Receivable

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. The Company had an allowance of $ 126,791 and $ 135,708 for accounts receivable from the joint working interests, respectively for the nine month periods ending December 31, 2012 and ended March 31, 2012.

Oil and Natural Gas Properties

The Company follows the full cost method of accounting for natural gas and oil properties.  Under the full cost concept, all costs incurred in acquiring, exploring, and developing properties cost center are capitalized when incurred and are amortized as mineral reserves in the cost center are produced, subject to a limitation that the capitalized costs not exceed the value of those reserves.  The unamortized costs relating to a property that is surrendered, abandoned, or otherwise disposed of are accounted for as an adjustment of accumulated amortization, rather than as a gain or loss that enters into the determination of net income, until all of the properties constituting the amortization base are disposed of, at which point gain or loss is recognized. all acquisition, exploration, and development costs are capitalized. The Company capitalizes all internal costs, including: salaries and related fringe benefits of employees directly engaged in the acquisition, exploration and development of natural gas and oil properties, as well as other identifiable general and administrative costs associated with such activities.  During the nine month periods ending December 31, 2012 and 2011, no acquisition costs were capitalized. Oil and natural gas properties are reviewed for recoverability at least annually or when events or changes in circumstances indicate that its carrying value may exceed future undiscounted cash inflows. As of December 31, 2012 and 2011, the Company had not identified any such impairment.
11
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
Other Property and Equipment

Other property and equipment is reviewed for recoverability when events or changes in circumstances indicate that its carrying value may exceed future undiscounted cash inflows. As of December 31, 2012 and 2011, 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, “Accounting for Asset Retirement Obligations”, the Company records the fair value of its liability for asset retirement obligations in the period in which it is incurred and a corresponding increase in the carrying amount of the related long live assets. Over time, the liability is accreted to its present value at the end of each reporting period, and the capitalized cost is depreciated over the useful life of the related assets. Upon settlement of the liability, the Company will either settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company's asset retirement obligations relate to the plugging and abandonment of its oil properties.

Intangible Assets

The cost of licensed technologies acquired is capitalized and will be amortized over the shorter of the term of the licensing agreement or the remaining life of the underlying patents.

The Company evaluates recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that intangible assets carrying amount may not be recoverable. Such circumstances include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of cost significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the assets against the estimated undiscounted future cash flows associated with it.

There was not any impairment loss for the three and nine month periods ending December 31, 2012 and December 31, 2011.

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,
2013
$
21,293
2014
42,585
2015
42,585
2016
42,585
$
155,103
12

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
Stock Based Compensation

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

Loss per Common Share

ASC 260-10-45, “Earnings Per Share”, requires presentation of "basic" and "diluted" earnings per share on the face of the statements of operations for all entities with complex capital structures. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation. When the company is in loss position, no dilutive effect is considered.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial   statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

ASC 740-10-25, “Accounting for Uncertainty in Income Taxes”, is intended to clarify the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

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

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
13

AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)

Revenue Recognition

In accordance with the requirements ASC topic 605 "Revenue Recognition", revenues are recognized at such time as (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable and (4) collectability is reasonably assured. Specifically, oil and gas sales are recognized as income at such time as the oil and gas are delivered to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned.
Long-Lived Assets
Equipment is stated at acquired cost less accumulated depreciation.  Office equipment is depreciated on the straight-line basis over the estimated useful lives (five 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 . There was no impairment for the three and nine month periods ended December 31, 2011 and December 31, 2012.

Recently enacted accounting standards

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment."  This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Except for the ASUs above, in the period ended March 2013, The FASB has issued ASU No. 2012-01 through ASU 2013-05, which is not expected to have a material impact on the consolidated financial statements upon adoption.
14
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
( Unaudited)

NOTE 2:   RECEIVABLE FROM JOINT INTERESTS

The Company is the operator of certain wells acquired in the Expanded Bedford Agreement (see note 4).  Pursuant to a joint interest operating agreement (the “Joint Interest Agreement”), the Company charges the other owners of the Grace Wells for their pro-rata share of operating and work over expenses.  These receivables are carried on the Company’s balance sheet as Receivable from Joint Interests. At December 31, 2012 and March 31, 2012, the amount of these receivables is $146,791 and 155,708.   At March 31, 2012 and December 31, 2012, the Company deemed the collectability of the receivable from joint interests in the amount of $135,708 and 126,791 as unlikely.
NOTE 3: INTELLECTUAL PROPERTY RIGHTS

A summary of the intellectual property rights at December 31, 2012 and March 31, 2012, are as follows:

December 31,
2012
March 31,
2012
(Unaudited)
Ultrasonic Mitigation Technology
$
425,850
$
425,850
Less: accumulated amortization
(276,802
)
(244,864
)
Total
$
149,048
$
180,986

Amortization expense for the three month and nine month period ended December 31, 2012 and 2011 was $10,646 and $31,938 respectively.
NOTE 4: OIL AND GAS PROPERTY ACTIVITY

The table below shows the Company’s working interests in the Grace Wells as of December 31, 2012.  There were not any additional acquisitions during the nine month period ended December 31, 2012.

Well
Working
Interest
Grace #1
65.25
%
Grace #2
55.75
%
Grace #3
64.00
%
Grace #5A
52.00
%
Grace #6
58.00
%
15
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)

NOTE 4: OIL AND GAS PROPERTY ACTIVITY (Continued)

Producing oil and gas properties consist of the following at December 31, 2012and March 31, 2012:

December 31,
2012
March 31,
2012
Lincoln County, Oklahoma
$
67,565
$
67,565
Other properties, net
1,049,513
1,049,514
Asset retirement obligation
47,812
46,364
Property impairments
(481,072
)
(481,072
)
Less: Depletion
( 505,395
)
(474,089
)
Net
$
178,423
$
208,281

NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

December 31,
2012
March 31,
2012
(Unaudited)
Accounts payable
$
413,530
$
409,094
Accrued interest
249,449
172,286
Total
$
662,979
$
581,380
NOTE 6: NOTES PAYABLE

Notes Payable are summarized as follows:
Note
Unamortized
Net of
March 31, 2012:
Amount
Discounts
Discount
Notes payable – long-term portion
$
474,500
$
-
$
474,500
Notes payable – current portion
650,000
(29,069
)
620,931
Total
$
1,124,500
$
(29,069
)
$
1,095,431
16
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
Note
Unamortized
Net of
December 31, 2012(Unaudited):
Amount
Discounts
Discount
Notes payable – long-term portion
$
725,000
$
-
$
725,000
Notes payable – current portion
503,000
-
503,000
Total
$
1,228,000
$
-
$
1,228,000
Nine months ended December 31,
2012
2011
(Unaudited)
Discount on Notes Payable amortized to interest expense
$
29,068
$
188,645
Three months ended December 31,
2012
2011
(Unaudited)
Discount on Notes Payable amortized to interest expense
$
9,985
$
122,922

NOTE 7: RELATED PARTY TRANSACTIONS
Promissory Notes

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 forty percent (40%) of the fully diluted shares outstanding after their issuance. The Series A Preferred Stock pays an eight percent (8%) dividend. The dividends are cumulative and payable quarterly. The Series A Preferred Stock carries liquidating preference, over all other classes of stock, equal to the amount paid for the stock plus any unpaid dividends. The Series A Preferred Stock provides for voting rights on an "as converted to common stock" basis.

During the three months and nine months ended December 31, 2012 and 2011, the Company incurred $10,000 and $30,000 respectively in preferred stock dividends.

The holders of the Series A Preferred Stock have the right to convert all of the shares of preferred stock into a sufficient number of shares of common stock to equal 40% of the then fully-diluted shares outstanding. Fully diluted shares outstanding is computed as the sum of the number of shares of common stock outstanding plus the number of shares of common stock issuable upon exercise, conversion or exchange of outstanding options, warrants, or convertible securities.
17
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
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. On April 1, 2011 Mr. Rodriguez voluntarily reduced his compensation to an annual rate of $48,000, subject to an increase by the Company’s Board of Directors.  The Company charged to operations the amount of $12,000 and $36,000 for the three month and nine month periods ended December 31, 2012 and $12,000 and $36,000 for the three and nine month periods ended December 31, 2011, in annual salary for Mr. Rodriguez, of which $32,600 was paid to him during the nine month period ending December 31 2011, and $ 32,148 during the nine month period ending December 31, 2012.  As of December 31, 2012, and March 31, 2012, the balances of accrued and unpaid salaries were $200,217 and $196,365.
NOTE 8: INCOME TAXES

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

In assessing the value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carry forwards of approximately $7,500,000, which will expire beginning in 2028.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon our cumulative losses through December 31, 2012, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at December 31, 2012.  The amount of the deferred tax asset considered realizable could change in the near term if projected future taxable income is realized.  Due to significant changes in the Company's ownership, the Company's future use of its existing net operating losses may be limited.

NOTE 9: STOCKHOLDERS' 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, 2012 and March 31, 2012, 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.
18
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
During the nine months ended December 31, 2012and December 31, 2011, the Company incurred $30,000 in preferred stock dividends, and paid $33,250 and $500 respectively.  As of December 31, 2012 and March 31, 2012, dividends in the amount of $39,350 and  $35,450 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.
Common Stock

The Company has authorized 3,333,333 shares of common stock with a par value of $0.001 per share.  As of December 31, 2012 and March 31, 2012, the Company had 3,265,992 and 2,558,584 shares of common stock issued and outstanding, respectively.

Common stock issuances during the nine month period ended December 31, 2012:

The Company issued 150,000 shares of common stock to the Company’s outside directors for services provided.  The value of these shares in the amount of $45,000 was charged to operations.

The Company issued 291,667 shares of common stock to consultants for services provided, pursuant to consulting agreements.  The value of these shares in the amount of $42,500  was charged to operations

The Company issued 340,771 shares of common stock for the conversion of notes payable and for the assumption of debt.  The value of these shares in the amount of $42,909 was been credited to the note (s) payable.    No gain or loss was recognized on these conversions.

The Company cancelled 83,335 shares of common stock that were issued to consultants for services provided, pursuant to consulting agreements.

There are no stock options outstanding.
19
AVALON OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Month Periods Ended December 31, 2012 and 2011
(Unaudited)
Warrants
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, 2012:
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)
$30.00
1,666
0.62
$
30.00
1,666
0.62
60.00
417
1.69
60.00
417
1.69
180.00
500
1.96
180.00
500
1.96
2,583
1.05
2,583
1.05
Transactions involving warrants are summarized as follows:
Number of
Shares
Weighted
Average
Price Per
Share
Outstanding at March 31, 2012
2,583
$
63.00
Granted
-
-
Exercised
-
-
Cancelled or expired
-
-
Outstanding at December 31, 2012
2,583
$
63.00
NOTE 10: EARNINGS PER SHARE

ASC 260-10-45 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. As the Company is in a loss position during the three and nine months ended December 31, 2012 and December 31, 2011 there is no dilutive effect included.
NOTE 11: COMMITMENTS AND CONTINGENCIES

Commitments and contingencies through the date of these financial statements were issued have been considered by the Company and none were noted which were required to be disclosed.
NOTE 12:  SUBSEQUENT EVENTS
The Company has evaluated events subsequent to December 31, 2012 to assess the need for potential recognition or disclosure in the report.  Such events were evaluated through the date of that these financial statements were issued and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.
20

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

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. On November 16, 2011, a majority of the Company's shareholders approved an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock from 1,000,000,000 shares to 3,000,000,000 shares par value of $0.001.  This amendment was not filed with the Nevada Secretary of State.
On June 4, 2012 the Board of Directors approved an amendment to our Articles of Incorporation to a reverse split of the issued and outstanding shares of Common Stock of the Corporation (“Shares”) such that each holder of Shares as of the record date of June 4, 2012 shall receive one (1) post-split Share on the effective date of June 4, 2012 for each three hundred (300) Shares owned.  The reverse split was effective on July 23, 2012.   On September 28, 2012, we held a special meeting of Avalon’s shareholders and approved an amendment to the Company’s Articles of Incorporation such that the Company would be authorized to issue up to 200,000,000 shares of common stock.  We expect to file an amendment with the Nevada Secretary of State on or before December 31, 2012, to increase our authorized shares to 200,000,000.

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 Innovaro Corporation, (ASE: INV) 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 three years:
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 well from 2.5% to 7.5%; and to increase its net revenue interest in the Grace #2 well 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%.
21

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

The Company also acquired an undivided fifty (50%) percent interest in a salt water disposal well and offset and development acreage in the two quarter sections of the East Chandler Field.  In addition, the Company acquired a fifty (50%) percent interest in 540 acres adjoining the 320 acre East Chandler Field.
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 June 30, 2010, 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.
The Company has reached an agreement to purchase a 13.50% working interest in the Grace # 1, a 22.50% working interest in the Grace # 2, a 14.50% working interest in the Grace # 3, an 11.50% working interest in the Grace # 5A, and a 21.50% working interest in the Grace #6, for $43,837.50, from 17 working interest owners.  We closed this purchase in January, 2011.

During the three months ended June 30, 2010, the Company sold working interests in the wells located in Blackmon- Hall Unit, New Diana Field, Upshur County, Texas (the “New Diana Wells”), of which it had previously acquired a ten percent (10%) working interest in April, 2008, for a note receivable in the amount of $42,857.
We also purchased a 5.75% working interest in the Grace #1, a 6.25% working interest in the Grace #2, an 8.5% working interest in the Grace #3, a 4.50% working interest in the Grace #5A and a 3.50% working interest in the Grace #6, during the year ended March 31, 2011 by issuing 294,000 shares of common stock to two (2) working interest owners.
During the three months ending June 30, 2010 , we advanced $160,000 for the purchase of oil and gas producing properties in Western Oklahoma, pending the completion of due diligence by the Company.  These funds will be returned to us if we do not complete the acquisition of these producing properties.
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.
22
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 Innovaro Corporation, a technology transfer company to build a portfolio of new technologies for the oil and gas industry.
On November 9, 2006, The Company acquired Intelli-Well Technologies, Inc., ("IWT"). IWT holds a license for borehole casing technology developed by researchers at Lawrence Livermore National Laboratory.
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 promote Avalon's intellectual property.
GOING CONCERN

The December 31, 2012, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $29,649,474 from inception through December 31, 2012, and has a working capital deficiency of $1,089,529 as of December 31, 2012.  Stockholders’ equity as of December 31, 2012, is $293,445. 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.
23
Financing Activities

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

Results of Operations

Three and nine months ended Decmeber31, 2012 compared to the three and nine months ended December 31, 2011:

Revenues

Revenues for the three months ended December 31, 2012 were $63,880, an increase of $14,434 or approximately 29% compared to revenue of $49,446 for the three months ended December 31, 2011.  Revenues from the sale of oil and gas increased as a result of the higher market price for natural gas.

Revenues for the nine months ended December 31, 2012 were $112,649, a decrease of $56,332 or approximately33% compared to revenue of $168,981 for the nine months ended December 31, 2011.  Revenues from the sale of oil and gas decreased as a result of the lack of revenues from Company’s properties in Miller County, Arkansas.
Lease Operating Expenses

During the three months ended December 31, 2012, our lease operating expenses were $22,087, a decrease of $26,318 or approximately 54% compared to $48,405 for the three months ended December 31, 2011.

During the nine months ending December 31, 2012, our lease operating expenses were $36,888, a decrease of $66,750 or approximately 64% compared to $103,638for the nine months ended December 31, 2011.
Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2012 were $91,886,  an increase of $19,633 or approximately 27% compared to selling, general and administrative expenses of $72,253 during the three months ended December 31, 2011.   Selling, general and administrative expenses for the three months ended December 31, 2012 consisted primarily of payroll and related costs of $12,000; legal and accounting fees in the amount of $24,784; travel and entertainment expenses of $7,550; dividend expense of $10,000; office expenses of $3,369; facilities costs in the amount of $26,388; and investor relations costs of $4,455.
Selling, general and administrative expenses for the nine months ended December 31, 2012 were $240,211, a decrease of $25,571 or approximately10% compared to selling, general and administrative expenses of $265,782, during the nine months ended December 31, 2011.   Selling, general and administrative expenses for the nine months ended December 2012 consisted primarily of payroll and related costs of $36,000; legal and accounting fees in the amount of $42,344; travel and entertainment expenses of $22,051; dividend expense of $30,000; office expenses of $8,377; facilities costs in the amount of $35,201 and consulting expense of $7,496.
24

Stock Based Compensation
There was no non-cash compensation for the three months ended December 31, 2012, compared to  non-cash compensation of $10,000 for the three months ended December 31, 2011.

Non-cash compensation for the nine months ended December 31, 2012 was $87,500, an increase of $51,554 compared to non-cash compensation of $35,946 for the nine months ended December 31, 2011.  This increase was the result of common stock issuances to a consultant group as payment for services rendered during the period ending December 31, 2012.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization was $23,129 for the three months ended December 31, 2012, an increase of $8,283 or approximately56% compared to $14,846 for the three months ended December 31, 2011.

Depreciation, Depletion, and Amortization was $60,545 for the nine months ended December 31, 2012, a decrease of $8,800 or approximately 13% compared to $69,425 for the nine months ended December 31, 2011
Interest Expense, net of Interest Income

Interest expense, net of interest income was $39,113 for the three months ended December 31, 2012, a decrease of $101,719 compared to interest expense of $140,832 for the three months ending December 31, 2011.

Interest expense, net of interest income was $113,423 for the nine months ended December 31, 2012, an increase of $132,163 compared to interest expense of $245,586 for the nine months ending December 31, 2011.
Net Loss

Our net loss for the three months ended December 31, 2012, was $112,335, a decrease of $117,555 or approximately 51% compared to a net loss of $229,890, during the three months ending December 31, 2011.
Our net loss for the nine months ended December 31, 2012, was $425,918, a decrease of $99,119 or approximately 19% compared to a net loss of $525,037during the nine months ending December 31, 2011.
25

LIQUIDITY AND CAPITAL RESOURCES
The December 31, 2012, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $29,649,474 from inception through December 31, 2012, and has a working capital deficiency of $1,089,529 and Stockholders’ equity of $293,445 as of December 31, 2012. 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 Company will continue so seek equity and debt financing to meet our operating losses.  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 $118,773 on December 31, 2012, compared to $116,529 on December 31, 2011. We met our liquidity needs through the issuance of our common stock and convertible notes payable for cash and the revenue derived from our 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 as a going concern 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

The Company had a net loss of $112,335 for the three months ended December 31, 2012 compared to a net loss of $229,890 for the three months ended December 31, 2011. Our net loss for the nine months ended December 31, 2011, was $425,918, compared to a net loss of $525,037during the nine months ending December 31, 2011, due to a reduction in expense in for the issuance of stock for consulting services.

Net accounts receivable for the nine months ended December 31, 2012 were $37,452 compared to $29,627 for the nine months ended December 31, 2011.
Investing activities
The Company had $154,827 net cash used  in investing activities for the nine month period ended December 31, 2011 and $3,572 net cash provided for the  nine month period ended December 31, 2012
Financing activities
During the nine month period ended December 31, 2011, the Company had $167,712 net cash provided by financing activities, a $40,000 advance from a related party and $80,000 in proceeds from two promissory notes from a shareholder of the Company.  For the nine month period ended December 31, 2012, the Company had $140,000 in financing activities,
Critical Accounting Policies

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

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment."  This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Except for the ASUs above, in the period ended March 2013, The FASB has issued ASU No. 2012-01 through ASU 2013-05, which is not expected to have a material impact on the consolidated financial statements upon adoption.
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 4. 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

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PART II

ITEM 1. LEGAL PROCEEDINGS

None.

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

The Company issued 150,000 shares of common stock to the Company’s outside directors for services provided  The value of these shares in the amount of $45,000, was charged to operations.

The Company issued 291,667 shares of common stock to consultants for services provided, pursuant to consulting agreements.  The value of these shares in the amount of $87,500 was charged to operations

The Company issued 340,771 shares of common stock for the conversion of notes payable and for the assumption of debt.  The value of these shares in the amount of $42,909 has been credited to the note (s) payable.    No gain or loss was recognized on these conversions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
ITEM 4. MINE SAFETY DISCLOSURES
None.

ITEM 5. OTHER INFORMATION

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

(a) Form 8-K

1.
Filed on July 16, 2012, the Company announced that the outstanding common stock was reverse split on a 300-for-1 basis.
2.
Filed on October 3, 2012, the Company announced that the authorized shares have been increased from 3,333,333 to 200,000,000.
(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
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
____________
* Incorporated by reference to a previously filed exhibit or report.

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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Avalon Oil & Gas, Inc.
Date: March 21, 2013
By:
/s/ Kent Rodriguez
Kent Rodriguez
Chief Executive Officer
Chief Financial and Accounting Officer
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