GROOVE BOTANICALS INC. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - GROOVE BOTANICALS INC.	ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - GROOVE BOTANICALS INC.	ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

FORM 10-Q

____________

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

For the quarterly period ended December 31, 2015

☐ 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 ☒ No ☐

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☐

Non-Accelerated Filer	☐	Smaller Reporting Company	☒

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

18,198,062 shares of our common stock were issued and outstanding as of February 16, 2016.

Table of Contents

PART I FINANCIAL INFORMATION		Page

Item 1.	Financial Statements
	Consolidated Balance Sheets as of December 31, 2015 (Unaudited) and March 31, 2015	3
	Consolidated Balance Sheets as of December 31, 2015 (Unaudited) and March 31, 2015 (continued)	4
	Consolidated Statements of Operations for the Three and Nine Months ended December 31, 2015 and 2014 (Unaudited)	5
	Consolidated Statement of Cash Flows for the Nine Months ended December 31, 2015 and 2014 (Unaudited)	6
	Consolidated Statement of Cash Flows for the Nine Months ended December 31, 2015 and 2014 (Unaudited) (continued)	7
	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operation	22
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

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	29
Item 5.	Other Information	29
Item 6.	Exhibits and Reports on Form 8-K	29
Signatures		30

Avalon Oil & Gas, Inc.
Consolidated Balance Sheets


		(Unaudited)
		December 31,		March 31,
		2015		2015

Assets

Current Assets:
Cash and cash equivalents	$	135,474	$	135,713
Accounts receivable, net of allowance for doubtful accounts of $0 and $0		29,817		33,344
Notes receivable		10,000		11,429
Deposits and prepaid expenses		392,269		368,946
Receivables from joint interests, net of allowance for doubtful accounts of $133,209 and $131,236		20,000		20,000

Total current assets		587,560		569,432

Property and equipment, net		14,726		18,125
Unproven oil & gas properties		1,867,183		1,867,183
Producing oil & gas properties, net		221,944		239,283
Intellectual property rights, net		21,296		53,234

Total Assets	$	2,712,709	$	2,747,257


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

Avalon Oil & Gas, Inc.
Consolidated Balance Sheets (Continued)


		December 31,			March 31,
		2015			2015
		(Unaudited)
Liabilities and Stockholders' Equity

Current Liabilities:
Accounts payable and accrued liabilities		159,781			433,751
Accrued payroll - related parties		200,562			211,317
Dividends payable		160,388			32,950
Accrued liabilities to joint interest		9,965			10,567
Notes payable - related party		20,000			20,000
Notes payable		149,200			224,300

Total current liabilities		699,896			932,885

Accrued asset retirement obligation (ARO) liability		133,537			124,220

Total Liabilities		833,433			1,057,105

Stockholders' Equity

Preferred stock, 1,000,000 authorized
Preferred stock, Series A, $.10 par value, 100 shares authorized; 100 shares issued and outstanding as of December 31, 2015 and March 31, 2015, respectively liquidation preference of $537,950 and $532,950 as of December 31, 2015 and March 31, 2015, respectively		10			10
Preferred stock, Series B, $.10 par value, 2,000 shares authorized; 1,960 and 1,625 shares issued and outstanding liquidation preference of $2,080,938 and $1,625,000 as of December 31, 2015 and March 31, 2015, .respectively		199			164

AFS Holdings, Inc. (Subsidiary):
Preferred stock, Series A, $.001 par value, 1,000 shares authorized; 50 shares and 0 shares issued and outstanding as of December 31, 2015 and March 31, 2015 respectively liquidation preference of $51,500 and $-0- as of December 31, 2015 and March 31, 2015, .respectively		—			—
Common stock, $.001 par value: 200,000,000 shares authorized 18,198,062 and 16,548,062 shares issued and outstanding at December 31, 2015 and March 31, 2015, respectively		18,199			16,549
Additional paid in capital		33,021,617			32,572,302
Accumulated deficit		(31,161,869	)		(30,898,873	)
Total Avalon Oil & Gas Inc. Stockholders' Equity		1,878,156			1,690,152

Non-controlling interest		1,120			—

Total Liabilities and Equity	$	2,712,709		$	2,747,257


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

Avalon Oil & Gas, Inc.
Consolidated Statements of Operations

		For the Three			For the Three			For the Nine			For the Nine
		Months ended			Months ended			Months ended			Months ended
		December 31, 2015			December 31, 2014			December 31, 2015			December 31, 2014
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Oil & Gas Sales	$	24,743		$	46,991		$	48,647		$	109,925

Operating expenses:
Lease operating expense, severance taxes and ARO accretion		35,075			39,467			61,981			78,260
Selling, general and administrative expenses		102,598			67,469			266,353			245,149
Stock based compensation		10,011			2,121			38,677			16,121
Depreciation, depletion, and amortization		18,848			24,403			50,504			64,635

Total operating expenses		166,532			133,460			417,515			404,165

Operating loss		(141,789	)		(86,469	)		(368,868	)		(294,240	)

Other income (expense):

Other miscellaneous income		—			—			—			10,100
Gain on extinquishment of notes payable		12,930			207,500			257,902			207,500
Interest income (expense), net		(526	)		(11,054	)		409			(32,375	)

Total other income (expense)		12,404			196,446			258,311			185,225

Income (loss) before income tax		(129,385	)		109,977			(110,557	)		(109,015	)

Provision for income taxes		—			—			—			—

Net income (loss)	$	(129,385	)	$	109,977		$	(110,557	)	$	(109,015	)

Preferred stock dividends	$	(53,688	)	$	(46,938	)	$	(152,438	)	$	(127,911	)

Net loss attributable to common shareholders	$	(183,073	)	$	63,039		$	(262,995	)	$	(236,926	)

Net loss per share - basic		(0.010	)		0.005			(0.015	)		(0.020	)
Net loss per share - diluted		(0.010	)		0.005			(0.015	)		(0.020	)

Weighted average shares outstanding - basic		17,893,714			12,343,932			17,424,971			12,003,153
Weighted average shares outstanding - diluted		17,893,714			22,015,973			17,424,971			12,003,153


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

Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows

		(Unaudited)			(Unaudited)
		For the Nine			For the Nine
		Months ended			Months ended
		December 31, 2015			December 31, 2014

Cash flows from operating activities:
Net loss	$	(110,557	)	$	(109,015	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock issued for services		12,720			16,121
Common stock issued for licenses					15,000
Non-cash consulting services		26,677			—
(Gain) on forgiveness of debt		(257,902	)		(207,500	)
(Gain) on forgiveness of interest payable		(14,246	)		—
Stock issued for reduction of interest on note payable		—			90,000
Depreciation		3,399			3,399
Depletion		15,167			29,299
Depreciation and ARO liability		2,172			2,172
Amortization of intangible assets		31,938			31,937
Net change in operating assets and liabilities:
Accounts receivable		3,527			(9,187	)
Accounts payable and other accrued expenses		5,724			(43,503	)
Asset retirement obligation		9,317			8,470

Net cash (used) in operating activities		(272,064	)		(172,807	)

Cash flows from investing activities:
Deposit on the purchase of additional assets		—			22,657
Acquisition of oil producing assets		—			(120,000	)
Acquisition of property and equipment		—			(22,657	)
Principal payments received on notes receivable		1,428			7,142

Net cash provided by (used in ) investing activities		1,428			(112,858	)

Cash flows from financing activities:
Notes payable		(15,000	)		60,000
Non-Controlling Interest stock sale		400			—
Series B Preferred Stock issued for cash		310,000			175,000
Dividends paid		(25,000	)		(55,000	)

Net cash provided by financing activities		270,400			180,000


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

Avalon Oil & Gas, Inc.
Consolidated Statement of Cash Flows (Continued)

		(Unaudited)			(Unaudited)
		For the Nine			For the Nine
		Months ended			Months ended
		December 31, 2015			December 31, 2014

Net (decrease) in cash and cash equivalents		(236	)		(105,665	)

Cash and cash equivalents at beginning of period		135,713			223,914

Cash and cash equivalents at end of period	$	135,477		$	118,249

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	—		$	—
Taxes	$	—		$	—
Common stock issued in exchange for consulting services	$	12,720		$	99,000
Preferred stock issued in exchange for consulting services	$	—		$	15,000
Common stock issued in exchange for licenses	$	12,000		$	15,000
Common stock issued for extinguishment of note payable,	$	28,000		$	—
accrued interest, and assumption of debt	$	26,000		$	32,500
Note payable issued for payment of accounts payable	$	5,000		$	—
Preferred stock issued for extinguishment of note payable, accrued interest, and assumption of debt	$	25,000		$	50,000


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

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(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.

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

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 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.

On March 19, 2014, the Company formed Weyer Partners, LLC, (“Weyer”) a one hundred percent (100%) wholly owned Minnesota Corporation. Weyer Partners, LLC, was formed to operate oil and gas properties in Oklahoma and Texas. Weyer is consolidated in these financial statements.

On May 9, 2014, the Company formed AFS Holdings, Inc., (“AFS”) a Nevada Corporation. As of December 31, 2015 the Company owns 91.5% of the outstanding common shares of AFS Holding, Inc. AFS was formed to leverage the Company’s relationship with IP TechEx, and market technology licensed from IP TechEx. AFS is consolidated in these financial statements.

On June 1, 2015, AFS entered into a technology license agreement with Avalon Oil & Gas, Inc., a related party majority shareholder of AFS. Under the terms of the agreement, AFS shall pay to Avalon Oil & Gas, Inc. $300,000 no later than December 31, 2015 together with 5% of the gross receipts received by AFS for the use of the licensed technology. The Company consolidates AFS’s assets, liabilities, income and expenses and inter-company transactions were eliminated for purposes of these financial statements. On June 10, 2015, AFS sold 3,000,000 shares of Common Stock to the Company for $10,000 and 100,000 shares to the Directors of the Company for $400.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

On October 5, 2015, the Articles of Incorporation of AFS were amended. Pursuant to the amended articles of incorporation, AFS is authorized to issue 250,000,000 shares of common stock, each having a par value of $0.001, with each share of common stock entitled to one vote for all matters on which a shareholder vote is required or requested. AFS was also authorized to issue 5,000,000 shares of Preferred Stock, par value $0.001, of which 1,000 shares were designated as Series A Preferred Stock.

On October 23, 2015, AFS filed a registration statement on Form S-1 with the Securities and Exchange Commission, in order to register shares to be sold by AFS. On December 7, 2015, we received the first set of comments on the Form S-1 that we filed on October 23, 2015. We responded to these comments on December 16, 2015. We received a second set of comments on December 29, 2015. We responded to these comments on January 13, 2016. We received a third set of comments on January 27, 2016 and responded to these comments on January 29, 2016. We have not received any other comments and the registration statement is not yet effective.

Principles of consolidation

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

Basis of Preparation of Financial Statements

The accompanying unaudited 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, 2015.

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, 2015 and the results of their operations and cash flows for the three and nine months ended December 31, 2015 and 2014, and are not necessarily indicative of the results to be expected for the entire year.

Going Concern

The December 31, 2015, consolidated financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $31,161,869 from inception through December 31, 2015, and has a working capital deficiency of $112,336 and stockholders’ equity of $1,878,156 as of December 31, 2015. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. 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 to 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 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

December 31, 2015

(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 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 and Receivables from the Joint Interest

Management periodically assesses the collectability of the Company's accounts receivable and receivables from the Joint Interest. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company had an allowance for receivables from the Joint Interest of $133,209 and $131,236 as of December 31, 2015 and March 31, 2015.

Oil and Natural Gas Properties

The Company follows the full cost method of accounting for natural gas and oil properties. Under the full cost concept, all costs incurred in acquiring, exploring, and developing properties cost center are capitalized when incurred and are amortized as mineral reserves in the cost center are produced, subject to a limitation that the capitalized costs not exceed the value of those reserves. The unamortized costs relating to a property that is surrendered, abandoned, or otherwise disposed of are accounted for as an adjustment of accumulated amortization, rather than as a gain or loss that enters into the determination of net income, until all of the properties constituting the amortization base are disposed of, at which point gain or loss is recognized. All acquisition, exploration, and development costs are capitalized. The Company capitalizes all internal costs, including: salaries and related fringe benefits of employees directly engaged in the acquisition, exploration and development of natural gas and oil properties, as well as other identifiable general and administrative costs associated with such activities. During the three month and nine month periods ended December 31, 2015, 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, 2015 and March 31, 2015, the Company had not identified any such impairment.

Property and Equipment, net

Property and equipment is reviewed for recoverability when events or changes in circumstances indicate that its carrying value may exceed future undiscounted cash inflows. As of December 31, 2015 and March 31, 2015, the Company had not identified any such impairment. Repairs and maintenance are charged to operations when incurred and improvements and renewals are capitalized.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method for financial reporting purposes and accelerated methods for tax purposes.

Their estimated useful lives are as follows:

	Office Equipment:	5-7 Years
	Vehicles	5 Years

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.

Intellectual Property Rights, net

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 months ended December 31, 2015 and 2014.

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:

March 31,

	2016	$	10,646
	2017		10,650

		$	21,296

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

Stock Based Compensation

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

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

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.

Non-controlling interest

The Company accounts for non-controlling interest in accordance with ASC Topic 810-10-45, which requires the Company to present non-controlling interests as a separate component of total shareholders’ equity on the consolidated balance sheet and the consolidated net income attributable to the parent and the non-controlling interest be clearly identified and presented on the face of the consolidated income and comprehensive income statement. ASC Topic 810-10-45 also requires that losses attributable to the parent and the non-controlling interest in a subsidiary be attributed to those interests even if it results in a deficit non-controlling interest balance.

Earnings (loss) per Common Share

ASC 260-10-45, “Earnings Per Share”, requires presentation of "basic" and "diluted" earnings per share on the face of the statements of operations for all entities with complex capital structures. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted during the period. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation. 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.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(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.

Revenue Recognition

In accordance with the requirements ASC topic 605 "Revenue Recognition", revenues are recognized at such time as (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable and (4) collectability is reasonably assured. Specifically, oil and gas sales are recognized as income at such time as the oil and gas are delivered to a viable third party purchaser at an agreed price. Interest income is recognized as it is earned.

Recently Issued Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements.

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 an operating agreement (the “Operating Agreement”), the Company charges 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, 2015 and March 31, 2015, the amounts of these receivables are $153,209 and $151,236, respectively. As of December 31, 2015 and March 31, 2015, the Company deemed the collectability of the receivable from joint interests in the amount of $133,209 and $131,236, respectively as unlikely and reserved for $133,209 and $131,236, respectively.

NOTE 3: DEPOSITS AND PREPAID EXPENSES

The Company previously advanced $279,400 toward the purchase of properties.

In 2014 the Company had prepaid consulting fees in the amount of $100,000 which is being amortized over 36 months. And in November 2015 the Company had prepaid consulting fees in the amount of $50,000 which is being amortized over 48 months. Amortization through December 31, 2015 and March 31, 2015 was $37,131 and $10,454, respectively.

	December 31, 2015			March 31, 2015
Deposits on wells	$	279,400		$	279,400
Prepaid consulting fees		150,000			100,000
		429,400			379,400
Less: Accumulated amortization on prepaid fees		(37,131	)		(10,454	)
Total	$	392,269		$	368,946

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

NOTE 4: PROPERTY AND EQUIPMENT, NET

A summary of property and equipment at December 31, 2015 and March 31, 2015 is as follows:

	December 31, 2015			March 31, 2015
Office Equipment	$	41,778		$	41,778
Vehicles		22,657			22,657
		64,435			64,435
Less: Accumulated depreciation		(49,709	)		(46,310	)
Total	$	14,726		$	18,125

Depreciation expense for the three months periods ended December 31, 2015 and 2014 was $1,133 and $1,133, respectively.

Depreciation expense for the nine months periods ended December 31, 2015 and 2014 was $3,399 and $3,399, respectively.

NOTE 5: INTELLECTUAL PROPERTY RIGHTS, NET

A summary of the intellectual property rights at December 31, 2015 and March 31, 2015, are as follows:

	December 31, 2015			March 31, 2015
	(Unaudited)
Ultrasonic Mitigation Technology	$	425,850		$	425,850
Less: accumulated amortization		(404,554	)		(372,616	)
Total	$	21,296		$	53,234

Amortization expense for the three months periods ended December 31, 2015 and 2014 was $10,646 and $10,646, respectively.

Amortization expense for the nine months periods ended December 31, 2015 and 2014 was $31,938 and $31,938, respectively.

NOTE 6: OIL AND GAS PROPERTY ACTIVITY

The table below shows the Company’s working interests in the Grace Wells as of December 31, 2015. There were not any additional acquisitions during the three and nine month periods ended December 31, 2015.

Well	Working Interest
Grace #1		65.25	%
Grace #2		55.75	%
Grace #3		64.00	%
Grace #5A		52.00	%
Grace #6		58.00	%

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

NOTE 6: OIL AND GAS PROPERTY ACTIVITY (Continued)

Producing oil and gas properties consist of the following at December 31, 2015 and March 31, 2015:

	December 31, 2015			March 31, 2015
	(Unaudited)

Lincoln County, Oklahoma	$	111,402		$	111,402
Lipscomb County, Texas		250,082			250,082
Miller County, Arkansas		132,909			132,909
Ward Petroleum Assets		290,500			290,500
Kensington Energy Assets		120,000			120,000
Other Properties		332,185			332,185
Total Properties		1,237,078			1,237,078

Asset retirement cost, net		35,504			37,676
Property impairments		(481,072	)		(481,072	)
Less: Depletion		(569,566	)		(554,399	)
Net	$	221,944		$	239,283

For the three and nine months periods ended December 31, 2015, depletion per Bbl was $6.85 and $6.85, respectively.

For the three and nine months periods ended December 31, 2014, depletion per Bbl was $5.12 and $5.12, respectively.

NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

	December 31, 2015		March 31, 2015
	(Unaudited)
Accounts payable	$	98,769	$	371,722
Accrued interest		61,012		62,030
Total	$	159,781	$	433,752

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited

NOTE 8: NOTES PAYABLE

Notes Payable are summarized as follows:

	Note
	Amount
March 31, 2015:
Notes payable – long-term portion	$	-0-
Notes payable – current portion		224,300
Total	$	224,300

	Note
	Amount
December 31, 2015 (Unaudited):
Notes payable – long-term portion	$	-0-
Notes payable – current portion		149,200
Total	$	149,200

NOTE 9: RELATED PARTY TRANSACTIONS

Notes Payable

On April 21, 2011, Mr. Rodriguez advanced the Company $35,000. As of December 31, 2015 and March 31, 2015, amount outstanding is $20,000. This note does not accrue interest and is due on demand.

Series A Convertible Preferred Stock

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

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

During the three months ended December 31, 2015 and 2014, the Company incurred $10,000 and $10,000 in Series A Convertible Preferred Stock dividends, paid $3,500 and $13,500 for the three months ended December 31, 2015 and 2014. During the nine months ended December 31, 2015 and 2014, the Company incurred $30,000 and $30,000 in Series A Convertible Preferred Stock dividends, and paid $ 25,000 and $39,000 for the nine months ended December 31, 2015 and 2014. As of December 31, 2015 and March 31, 2015, the accrued balance due Mr. Rodriguez was $37,950 and $32,950 respectively. The liquidation preference of Series A Convertible Preferred Stock as of December 31, 2015 and March 31, 2015 was $537,950 and $532,950 or $5,380 and $5,330 per share.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

Employment Agreements

In 2009, Mr. Rodriguez, our President, was under an employment agreement dated April 1, 2008 that expires on March 31, 2016, pursuant to which he was compensated at an annual rate of $120,000. On April 1, 2011 Mr. Rodriguez voluntarily reduced his compensation to an annual rate of $48,000, subject to an increase by the Company’s Board of Directors. The Company charged to operations the amount of $12,000 and $36,000 for the three and nine month periods ended December, 2015 and 2014, of which $10,403 and $14,000 was paid to him during the three month periods ending December 31, 2014 and 2015, and $47,957 and $36,450 during the three and nine month periods ending December 31 2014 and 2015, respectively. As of December 31, 2015, and March 31, 2015, the balances of accrued and unpaid salaries were $195,962 and $206,717.

NOTE 10: INCOME TAXES

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

In assessing the value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in deferred tax assets are Federal and State net operating loss carry forwards of $31,132,781, 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, 2015, we have provided a valuation allowance reducing the net realizable benefits of these deductible differences to $0 at December 31, 2015. 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 11: STOCKHOLDERS' EQUITY

Preferred Stock

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

Series A Convertible Preferred Stock

The holders of the Series A Convertible Preferred Stock have the right to convert the preferred stock into shares of common stock such that if converted simultaneously, they shall represent forty 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

December 31, 2015

(Unaudited)

As of December 31, 2015, the Company has 100 shares of Series A Convertible preferred stock issued and outstanding.

Series B Preferred Stock

In March, 2013, our Board of Directors authorized the issuance of 2,000 shares of Series B Preferred Stock, (the "Series B Preferred Stock"). The face amount of share of the Series B Preferred Stock is $1,000. As of December 31, 2015 and March 31, 2015, the Company has 1,960 and 1,625 shares of Series B preferred stock respectively issued and outstanding.

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

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

During the nine month period ended December 31, 2015, the Company issued 335 shares of Series B Preferred Stock, 25 shares in exchange for a $25,000 promissory note and 260 shares for an investment of $260,000 and. 50 shares for $50,000 of services to be amortized over 48 months During the three month periods ended December 31, 2015 and 2014, the Company incurred $42,188 and $36,938 in dividends on Series B preferred stock. The Company did not pay any dividends for the three or nine months period ended December 31, 2015 and paid $16,000 for the nine months period ended December 31, 2014. During the nine month periods ended December 31, 2015 and 2014, the Company incurred $120,938 and $97,911 in dividends on Series B preferred stock. The liquidation preference of Series B Preferred Stock as of December 31, 2015 and March 31, 2015 was $2,080,938 and $1,625,000 or $1,062 and $1,000 per share, respectively. Dividends payable for Series B Preferred Stock at December 31, 2015 and March 31, 2015 were $120,938 and $0 respectively.

Total dividends payable from both Series A and Series B preferred shares at December 31, 2015 and March 31, 2015 were $158,888 and $32,950 respectively.

AFS Holdings, Inc. Series A Preferred Stock

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

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

On September 30, 2015, AFS issued 50 shares of its Series A Preferred Stock for $50,000 to an unaffiliated third party.

During the three month periods ended December 31, 2015 and 2014, the Company incurred $1,500 and $-0- in dividends on Series A preferred stock. The Company did not pay any dividends for the three or nine months period ended December 31, 2015. During the nine month periods ended December 31, 2015 and 2014, the Company incurred $1,500 and $-0- in dividends on Series A preferred stock. The liquidation preference of Series APreferred Stock as of December 31, 2015 and March 31, 2015 was $51,500 and $-0- or $1,030 and $-0- per share, respectively. Dividends payable for Series A Preferred Stock at December 31, 2015 and March 31, 2015 were $1,500 and $0 respectively.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

Common Stock

On June 10, 2015, the Company’s subsidiary AFS Holdings, Inc. issued us 3,000,000 shares of its Common Stock for $10,000 in cash. The shares were valued at $0.0033. The issuance was an isolated transaction not involving a public offering pursuant to Section 4(2) of the Securities Act of 1933.

On June 10, 2015, the Company’s subsidiary AFS Holdings, Inc., issued 100,000 shares of its Common Stock to their directors for their services. The shares were valued at $0.004. The issuance was an isolated transaction not involving a public offering pursuant to Section 4(2) of the Securities Act of 1933.

On October 19, 2015, the Company’s subsidiary AFS Holdings, Inc., issued to 30,000 shares of $0.001 par value common stock for services rendered valued at $120 or $.004 per share.

On November 5, 2015, the Company’s subsidiary AFS Holdings, Inc., issued to its Directors 100,000 shares of $0.001 par value common stock for services rendered valued at $.004.

On December 18, 2015, the Company’s subsidiary AFS Holdings, Inc., issued 50,000 shares of $0.001 par value common stock for professional services rendered valued at $200 or $.004 per share.

During the nine months period ended December 31, 2015 the Company issued the following shares:

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

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

On November 9, 2015, the Company issued 700,000 shares of common stock for the conversion of a note payable and assumption of debt. The fair market value of these shares was $28,000 or $0.04 per share which was based on the current market value on the date of issuance. $100 has been credited to the note payable, $830 to interest payable, and a loss of $27,070 was recognized on this conversion, and was charged to operations.

Warrants

There are no warrants outstanding as of December 31, 2015 and March 31, 2015.

NOTE 12: TECHNOLOGY LICENSE AGREEMENTS

On December 1, 2014, the Company entered into an exclusive license agreement for anti-corrosion technology from Ronald Knight in exchange for three hundred thousand (300,000) shares of our common stock. This license calls for an earned royalty of three percent (3.00%) on sales of licensed products and services as they may relate to corrosion prevention and maintenance of sump pumps at gasoline and diesel dispensing locations, including, but not limited to gas stations, convenience stores, trucking companies, bus companies, and any other locations where gasoline and/or diesel is dispensed. We did not have any revenue for the period from December 1, 2014 through December 31, 2015.

On June 1, 2015, the Company entered into a technology license agreement with AFS Holdings, Inc related to the anti-corrosion technology mentioned in the paragraph above. Under the terms of the agreement, the AFS shall pay to the Company $300,000 no later than December 31, 2015 together with 5% of the gross receipts received by the AFS for the use of the licensed technology. As of December 31, 2015, the license fee of $300,000 has not been paid and we are negotiating an extension of the license agreement with AFS Holdings, Inc, until December 31, 2016.

NOTE 13: EARNINGS (LOSS) PER SHARE

ASC 260-10-45 requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. We have included the basic and diluted earnings per share (EPS) computation for the three and nine months periods ended December 31, 2015.

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

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

		For the nine months ended December 31,			For the nine months ended December 31,
		2015			2014
		(Unaudited)			(Unaudited)
Net loss attributable to Avalon Oil & Gas, Inc.	$	(110,560)		$	(109,015	)
Preferred stock dividends		(152,438	)		(127,911	)
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for basic earnings per share)		(262,998	)		(236,926	)
Dividend for Series A convertible preferred stock		—			—
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for diluted earnings per share)		(262,998	)		(236,926	)

Weighted average number of common shares outstanding - Basic		17,424,971			12,003,153
Effect of diluted securities:
Convertible amount of Common Shares		—			—
Weighted average number of common shares outstanding - Diluted		17,424,971			12,003,153

Loss per share- Basic and Diluted	$	(0.015	)	$	(0.020	)

	For the three months ended December 31,			For the three months ended December 31,
	2015			2014
	(Unaudited)			(Unaudited)
Net loss attributable to Avalon Oil & Gas, Inc.	$	(129,387	)	$	109,977
Preferred stock dividends		(53,688	)		(46,938	)
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for basic earnings per share)		(183,075	)		63,039
Dividend for Series A convertible preferred stock		—			—
Net loss attributable to common shareholders of Avalon Oil & Gas, Inc. (numerator for diluted earnings per share)		(183,075	)		63,039

Weighted average number of common shares outstanding - Basic		17,893,714			12,343,932
Effect of diluted securities:
Convertible amount of Common Shares		—			—
Weighted average number of common shares outstanding - Diluted		17,893,714			22,015,973

Loss per share- Basic and Diluted	$	(0.010	)	$	0.005

AVALON OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(Unaudited)

For the three months end December 31, 2015, the diluted earnings per share calculation did not include the effect of the shares resulted from assumed conversion of the Series A convertible preferred stock and the shares convertible from convertible notes payable with the principal amount of $81,800 and the related accrued interest, because the effect is anti-dilutive, as the Company incurred a loss during the periods.

For the nine months end December 31, 2015, the diluted earnings per share calculation did not include the effect of the shares resulted from assumed conversion of the Series A convertible preferred stock and the shares convertible from convertible notes payable with the principal amount of $81,800 and the related accrued interest, because the effect is anti-dilutive, as the Company incurred a loss during the periods.

For the nine months end December 31, 2014, the diluted earnings per share calculation did not include the effect of the shares resulted from assumed conversion of the Series A convertible preferred stock and the shares convertible from convertible note payable with the principal amount of $489,750 and the related accrued interest, because the effect is anti-dilutive, as the Company incurred a loss during the periods.

NOTE 14: 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 15: SUBSEQUENT EVENTS

On October 23, 2015, AFS Holdings, Inc., a subsidiary of the Company, filed a registration statement on Form S-1 with the Securities and Exchange Commission, in order to register shares to be sold by AFS Holdings, Inc. On December 7, 2015, we received the first set of comments on the Form S-1 that we filed on October 23, 2015. We responded to these comments on December 16, 2015. We received a second set of comments on December 29, 2015. We responded to these comments on January 13, 2016. We received a third set of comments on January 27, 2016 and responded to these comments on January 29, 2016. We have not received any other comments and the registration statement is not yet effective.

The Company has evaluated subsequent events through the issuance of the consolidated financial statements and other than as listed above, no subsequent event is identified.

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

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 May 9, 2014, the Company formed AFS Holdings, Inc., (“AFS”) a Nevada Corporation. As of December 31, 2015, the Company currently owns 91.5% of the outstanding common shares of AFS Holding, Inc. AFS was formed to leverage the Company’s relationship with IP TechEx, and market technology licensed from IP TechEx. AFS is consolidated in these financial statements.

On October 5, 2015, the Articles of Incorporation of AFS were amended. Pursuant to the amended articles of incorporation, AFS is authorized to issue 250,000,000 shares of common stock, each having a par value of $0.001, with each share of common stock entitled to one vote for all matters on which a shareholder vote is required or requested. AFS was also authorized to issue 5,000,000 shares of Preferred Stock, of which 1,000 shares are designated as Series A Preferred Stock.

On October 23, 2015, AFS filed a registration statement on Form S-1 with the Securities and Exchange Commission, in order to register shares to be sold by AFS. On December 7, 2015, we received the first set of comments on the Form S-1 that we filed on October 23, 2015. We responded to these comments on December 16, 2015. We received a second set of comments on December 29, 2015 and responded to these comments on January 13, 2016. We received a third set of comments on January 27, 2016 and responded to these comments on January 29, 2016. We have not received any other comments and the registration statement is not yet effective.

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.

In furtherance of the foregoing strategy, we have engaged in the following transactions during the last three years:

During the year ended March 31, 2013, 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, if the Seller is not able to deliver clear title to these properties these funds will be returned to us.

On July 1, 2013, the Company acquired a fifty percent (50%) working interest in the Moody and West Lease, Duval County, Texas.

On October 10, 2013, the Company entered into a Technology Scouting Agreement with IP Technology Exchange, Inc. ("IP TechEx"), to identify potential technology acquisition and licensing opportunities. Our alliance with IP TechEx will enable us to develop a portfolio of new technologies within the oil and gas industry.

On March 19, 2014, the Company formed Weyer Partners, LLC, a one hundred percent (100%) wholly owned Minnesota Corporation. Weyer Partners, LLC, was formed to operate oil and gas properties in Oklahoma and Texas.

On May 9, 2014, the Company formed AFS Holdings, Inc., (“AFS”) a Nevada Corporation. As of December 31, 2015, the Company owns 91.5% of the outstanding common shares of AFS Holding, Inc. AFS was formed to leverage the Company’s relationship with IP TechEx, and market technology licensed from IP TechEx.

On September 29, 2014 the Company acquired the assets of Kensington Energy Limited Partnership – 1985, Kensington Energy Limited Partnership – 1986, Kensington Energy Limited Partnership – 1987, Kensington Energy Company, Kensington Group Venture Kensington Group Venture I, Kensington Group Venture II, and Kensington Group Venture III for a combination of cash and debt.

On December 1, 2014, the Company acquired a license for proprietary products and solutions to prevent corrosion on new sump equipment and sump equipment currently in use. These proprietary products can be used on new or used sump equipment and will substantially minimize corrosion.

On December 15, 2014, the Company renewed its Technology Scouting Agreement with IP TechEx for an additional three (3) years.

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

We plan to raise additional capital during the coming fiscal year, but currently have not identified additional funding sources. Our ability to continue operations is highly dependent upon our ability to obtain additional financing, or generate revenues from 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 Innovaro Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry.

On March 29, 2007, The Company 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 Innovaro Corporation, a technology transfer company to develop a portfolio of new technologies for the oil and gas industry.

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. We are working with IP Technology Exchange, Inc. to market this intellectual property.

On December 15, 2014, the Company renewed its Technology Scouting Agreement with IP TechEx for an additional three (3) years.

GOING CONCERN

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 month periods ended December 31, 2015 compared to the three and nine month periods ended December 31, 2014:

Revenues

Revenues for the three months ended December 31, 2015 were $24,743, a decrease of $22,248 or approximately 47% compared to revenue of $46,991 for the three months ended December 31, 2014. Revenues decreased as a result of a lower market price of oil and natural gas.

Revenues for the nine months ended December 31, 2015 were $48,647, an decrease of $61,278 or approximately 56% compared to revenue of $109,925 for the nine months ended December 31, 2014. Revenues decreased as a result of a lower market price of oil and natural gas.

Lease Operating Expenses

During the three months ended December 31, 2015, our lease operating expenses were $35,075, a decrease of $4,392 or approximately 11% compared to $39,467 for the three months ended December 31, 2014. The decrease was due to less operating expenses incurred on the Company's properties in Miller County, Arkansas.

During the nine months ended December 31, 2015, our lease operating expenses were $61,981, a decrease of $16,279 or approximately 21% compared to $78,260 for the nine months ended December 31, 2014. The decrease was due to less operating expenses incurred on the Company's properties in Miller County, Arkansas.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2015 were $102,598, an increase of $35,129 or approximately 52% compared to selling, general and administrative expenses of $67,469 during the three months ended December 31, 2014. Selling, general and administrative expenses for the three months ended December 31, 2015 consisted primarily of payroll and related costs of $12,000; legal and accounting fees in the amount of $10,612; consulting fees in the amount of $25,930 travel and entertainment expenses of $21,564; office expenses of $28,058; facilities costs in the amount of $3,000; and investor relations costs of $1,434.

Selling, general and administrative expenses for the nine months ended December 31, 2015 were $266,353, an increase of $21,204 or approximately 9% compared to selling, general and administrative expenses of $245,149 during the nine months ended December 31, 2014. Selling, general and administrative expenses for the nine months ended December 31, 2015 consisted primarily of payroll and related costs of $36,000; legal and accounting fees in the amount of $67,012; consulting fees in the amount of $38,008; travel and entertainment expenses of $59,624; office expenses of $52,534; facilities costs in the amount of $9,000; and investor relations costs of $4,175.

Stock Based Compensation

There was $10,011 non-cash compensation for the three months ended December 31, 2015 compared to $2,121 for the three month period ended December 31, 2014 or an increase of $7,890 or 372%.

Non-cash compensation for the nine months ended December 31, 2015 was $38,677, compared to non-cash compensation of $16,121 for the nine months ended December 31, 2014, or an increase of $22,556 or 140%. This increase was due to common stock issuances for consulting and director services rendered during the nine month period ended December 31, 2015.

Depreciation, Depletion, and Amortization

Depreciation, Depletion, and Amortization was $18,848 for the three months ended December 31, 2015, an decrease of $5,555 or approximately 23% compared to $24,403 for the three months ended December 31, 2014. Depletion decreased as a result of lower production of oil and natural gas.

Depreciation, Depletion, and Amortization was $50,504 for the nine months ended December 31, 2015, a decrease of $14,131 or approximately 22% compared to $64,635 for the nine months ended December 31, 2014. Depletion decreased as a result of lower production of oil and natural gas.

Interest Expense, net of Interest Income

Interest expense, net of interest expense was $528 for the three months ended December 31, 2015, a increase of $10,526, or approximately 95% compared to $11,054 for the three months ended December 31, 2014. The increase was due to a reduction in notes payable.

Interest income, net of interest expense was $406 for the nine months ended December 31, 2015, an increase of $32,781 or approximately 101% compared to interest expense of $32,375 for the nine months ended December 31, 2014. The increase was due to the forgiveness of interest on a promissory note payable.

Net Income (Loss)

Our net loss for the three months ended December 31, 2015, was $129,387 an decrease of $239,364 or approximately 218% compared to a net income of $109,977, during the three months ended December, 2014.

Our net loss for the nine months ended December 31, 2015, was $110,560 a increase of $1,545 or approximately 1% compared to a net loss of $109,015, during the nine months ended December 31, 2014. The increase was due to a gain from the settlement of accounts payable and forgiveness of interest promissory note payable.

LIQUIDITY AND CAPITAL RESOURCES

The December 31, 2015, financial statements have been prepared assuming the Company will continue as a going concern. However, the Company has incurred a loss of $31,161,869 from inception through December 30, 2015, negative working capital of $112,336 and stockholders’ equity of $1,878,156, as of December 31, 2015. 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 to 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 $135,474 on December 31, 2015, compared to $135,713 on March 31, 2015. We met our liquidity needs through the issuance of our common and preferred stock for cash and the revenue derived from our oil and gas operations.

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 obtained, 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.

Investing activities

During the nine months ended December 31, 2015, we received $1,428 in principal payments on a note receivable compared to a net investment of $112,858 during the nine months ended December 31, 2014

Financing Activities

During nine months ended December 31, 2015, the Company received $260,000 from the sale of preferred stock and our subsidiary AFS, Inc. received $50,000 from the sale of preferred stock totaling $310,000, paid $15,000 of principal on a note payable and paid dividends on preferred stock of $25,000. During nine months ended December 31, 2014, we received $175,000 from the sale of preferred stock, received $60,000 from a note payable and paid dividends on preferred stock of $55,000.

Operating 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.

Recently Issued Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective, accounting standards or pronouncements, if currently adopted, would have a material effect on the Company’s condensed consolidated 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 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.

PART II

ITEM 1. LEGAL PROCEEDINGS

None.

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

During the nine months period ended December 31, 2015, the Company issued 385 shares of Preferred Stock as follows:

310 shares of Avalon Series B Preferred Stock, to an accredited investor for $310,000 in cash.

25 shares of Avalon Series B Preferred Stock to an accredited investor in exchange of a $25,000 promissory note.

50 Shares of The Company’s subsidiary AFS Holdings, Inc. Series A Preferred Stock, to an accredited investor for $50,000 for cash.

During the nine months period ended December 31, 2015, the Company issued 1,650,000 shares of Common Stock, as follows:

We issued 650,000 shares of our common stock, paid $5,000 in cash and issued a $5,000 promissory note to settle an account payable of $280,972.06. The common stock was valued at $.04 per share, and was based on the closing bid price.

We issued 300,000 shares of our common stock to our Director’s for services rendered. The 300,000 shares were valued at $0.04 shares or $12,000. The price was based on the closing bid price of the Company’s Common Stock on the date that shares were granted to the Directors.

On November 9, 2015, we issued 700,000 shares of common stock for the conversion of a note payable and assumption of debt. The fair market value of these shares was $28,000 or $0.04 per share which was based on the current market value on the date of issuance. $100 has been credited to the note payable, $830 to interest payable, and a loss of $27,070 was recognized on this conversion, and was charged to operations.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

N/A

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 to Registration Statement on Form SB-2, Registration No. 33-74240C). *
10.1		Employment Agreement between the Company and Kent Rodriguez dated April 1, 2011 *
10.2		Promissory Note between the Company and Peter Messerli dated January 6, 2011, in the amount of $200.000 *
10.3		Promissory Note between the Company and Maerki Baumann & Company AG dated January 11, 2011, in the amount of $250,000 *
10.4		Promissory Note between the Company and Maerki Baumann & Company AG dated January 27, 2012, in the amount of $200,000 *
10.5		Certificate of Designation Series B Preferred Stock*
31.1		Certification
32.1		Certification

____________

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

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: February 22, 2016	By:	/s/ Kent Rodriguez
		Kent Rodriguez
		Chief Executive Officer
		Chief Financial and Accounting Officer

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