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VANGUARD ENERGY CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION

May 15, 2014

During 2012 the Company sold secured convertible notes in the principal amount of $8,254,500. The notes bear interest at 15% per year and are due and payable on June 30, 2015.

During the three months ended December 31, 2013, the Company's operations used cash of $(137,721). During the six month period ended March 31, 2014, the Company's operations used cash of $(236,559). In this six month period ended March 31, 2014, the Company's capital expenditures on oil & gas properties were $958,146.

On March 31, 2014, the Company failed to make its interest payments on its 2012 Convertible Promissory Notes. As a result, the note holders are entitled to declare the notes in default, in which case the principal amount of the notes, plus all accrued and unpaid interest, would be immediately due and payable.

The Company's inability to make the interest payment to the note holders was the result of the expenditure of considerable capital to work over some of the Company's well. The costs of the work far exceeded the Company's expectations and yet the work was required in order to get the wells back into production. This activity depleted the Company's cash position far below its expectations. Further, although the initial work on those wells was successful in boosting production momentarily, further complications resulted in lower production than anticipated, which has not been adequate to replenish the cash expended and enable the Company to make required interest payments.

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With a view to paying its note holders, the Company has entered into an agreement to sell all of its oil and gas properties to Vast Petroleum Corporation for $5,500,000. The sale of the Company's oil and gas properties would represent the sale of substantially all of the Company's assets.

If the transaction with Vast is completed, the Company plans to use the proceeds from the sale to:

? purchase the net profits interest held by Vanguard Net Profits, LLC for

$230,619; and

? pay the balance to the holders of the secured notes.

The amount which will be paid to the note holders from the sale of the Company's oil and gas properties will be less than the amount owed to the note holders. In consideration for accepting less than the full amount due on their notes, and releasing their lien on the Company's oil and gas properties, the note holders, as a group, are expected to receive shares in the Company's stock which shares, when issued, will represent 90% of the Company's issued and outstanding shares.

The sale of the Company's oil and gas properties to Vast is contingent upon a number of conditions, including the following:

? the approval of the sale by the holders of a majority of the Company's outstanding shares of common stock; ? the approval of note holders owning notes in the principal amount of approximately $5,505,700; and ? the approval of holders owning a majority of the membership interests in Vanguard Net Profits, LLC to sell the net profit interests to the Company for $230,619.



The transaction is expected to close by the end of May 2014 and be effective as of April 1, 2014. The sale of the Company's oil and gas properties would represent the sale of substantially all of the Company's assets. An impairment charge of $880,213 was recognized during the quarter ended March 31, 2014 for the amount by which the carrying value of the Company's oil and gas properties exceeded the estimated net proceeds from the planned sale.

In the event that the sale of virtually all of the Company's assets closes as planned, the Company will be a shell with no operations planned beyond the current quarter. The Company is in discussions with potential third parties who have shown an interest in investing new capital into the Company at a price yet to be determined and also contribute equity positions in operating properties in the oil and gas industry. No agreements have been made and there is no certainty that such agreements might be concluded.

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Results of Operations

The following discussion analyzes and summarizes the results of our operations and our financial condition for the three and six month periods ended March 31, 2014 and 2013. This discussion and analysis should be read in conjunction with our financial statements included with this report.

We were incorporated in Colorado on June 21, 2010 and commenced operations on July 19, 2010.

In November and December 2010 we entered into two agreements to acquire oil and gas leases covering 220 acres in the Batson Dome Field in Hardin County, Texas.

In December 2010, we acquired two producing and three shut-in oil wells in the Batson Dome Field. As of March 31, 2014, the two wells were producing approximately 1 barrel of oil per day, net to our 63% net revenue interest. As of March 31, 2014, the two shut-in wells had been plugged and abandoned.

As of March 31, 2014, we had drilled and completed 14 wells in the Batson Dome Field. Our share of the costs of drilling and completing these wells was approximately $12 million. During the six month period ending March 31, 2014, we reworked 3 of the 9 wells at a cost of approximately $960,000. Initially production increased significantly in these 3 wells but the increased production was not maintained. During the six months ended March 31, 2014, we produced 21,102 gross bbls of oil.

Material changes in our Statement of Operations for the three and six months ended March 31, 2014 as compared to the same periods in the prior year are discussed below: Increase (I) Item or Decrease (D) Reason Material Oil and Gas Sales D reduction in production of oil. Material increase in Cost and Expenses I operating expenses and impairment of oil and gas properties



Operating expenses requiring cash for the six months ended March 31, 2014 consisted primarily of:

? lease operating expenses; ? general and administrative expenses; and ? workover of existing wells 12



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Interest expense increased as the result of the sale of our convertible notes in June, July and September 2012.

Other than that discussed above we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on our revenues or expenses.

Liquidity and Capital Resources

In November and December 2010, we sold 34 units in a private offering at a price of $100,000 per unit. Each unit consisted of one promissory note in the principal amount of $100,000 and 50,000 Series A warrants. Each Series A warrant entitles the holder to purchase one share of our common stock at a price of $4.00 per share at any time on or before October 31, 2014. The notes bear interest at 8% per year. In June, July and September 2012 notes in the principal amount of $3,075,000 were surrendered in payment of the notes sold in 2012. The remaining notes, which had an outstanding principal balance of $325,000, were repaid in October 2012.

In February and March 2011, we sold 1,500,000 units at a price of $1.00 per unit. Each unit consisted of one share of our common stock and one warrant. Each warrant allows the holder to purchase one share of our common stock at a price of $1.50 per share at any time prior to February 28, 2016. In March 2011, we issued 453,322 shares of our common stock to a placement agent upon the exercise of warrants which had an exercise price of $0.10 per share.

In December 2011 we sold 4,800,000 units in an initial public offering at a price of $1.00 per unit. Net proceeds to us from this offering, after payment of the underwriting discounts and offering expenses, were approximately $3,498,900. Each unit consisted of one share of common stock and one Class A warrant. Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price of $1.50. The Class A warrants are exercisable at any time on or before November 29, 2016.

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In June, July and September 2012 we sold convertible secured promissory notes to a group of private investors. The notes bear interest at 15% per year, are payable quarterly, mature on June 30, 2015, and are convertible into shares of our common stock at a conversion price of $1.25 per share, subject to adjustment.

Notes in the principal amount of $5,179,500 were sold for cash and notes in the principal amount of $3,075,000 were exchanged for notes that we sold in 2010. Net proceeds from this financing:

? were used to pay the remaining balance ($325,000) of our 2010 notes, and ? have been used to fund a drilling program in our fields in Southeast Texas. Our sources and (uses) of funds for the six months ended March 31, 2014 and 2013 are shown below: Six Months Ended Six Months Ended March 31, 2014March 31, 2013



Cash provided by (used in) operations $ (236,559 ) $ 530,386 Purchase of furniture and equipment

-- (2,452 ) Drilling and completion costs (958,146 ) (2,037,209 ) Repayment of notes -- (325,000 )



As of March 31, 2014, our salaries and other corporate overhead were approximately $57,000 per month. This significantly reduced operating cost as compared with the same period in the previous year, which is a result of material reductions in compensation to management, elimination of investor relations outreach, and other cost cutting efforts.

By agreement dated March 15, 2011, we entered into a farmout agreement with an unrelated third party pertaining to a 100-acre lease in the Batson Dome Field. As of March 31, 2014, we had drilled 5 wells on the lease. Pursuant to the farmout agreement we have the option of drilling additional wells on the lease. As of March 31, 2014, the Company has not drilled any wells on the property in the last 12 months effectively terminating the lease.

By agreement dated May 25, 2011, we entered into a farmout agreement with Exxon/Mobil Corporation pertaining to another 100-acre lease adjacent to our existing leases in the Batson Dome Field. Pursuant to the agreement, as previously extended, we had the obligation to commence drilling a well on the lease by June 14, 2013. We requested that this agreement be extended for another year for payment of $10,000, which was approved in November 2013. Subject to the commencement of drilling the first well by June 14, 2014, and completing the well if warranted, we have the option of drilling additional wells on the lease; provided however, that unless we commence drilling each well within 180 days of the date we complete or abandon the latest well drilled, our right to drill any additional wells on the lease will terminate. We estimate the cost of drilling and completing any well on this lease will be approximately $1,000,000. The Company will not be drilling any wells on this lease.

By agreement dated January 6, 2012, we entered into a three-year farmout agreement with an unrelated third party pertaining to another 70-acre lease in the Batson Dome Field. We estimate the cost of drilling and completing any well on this lease will be approximately $1,000,000.

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By agreement dated May 1, 2012, we entered into a farmout agreement with an unrelated third party pertaining to a 45-acre lease in the Hull-Daisetta Field. Pursuant to the agreement, we have the obligation to commence drilling a well on the lease by January 31, 2014. During January 2014, we chose to allow this agreement to expire.

Capital expenditures during the first six months of fiscal year 2014 totaled $958,146. We do not expect to expend any further funds for drilling and completing wells in the Batson Dome Field or for other projects.

Our material future contractual obligations as of March 31, 2014 were as follows: Total 2014 2015 2016 Thereafter Convertible notes $ 8,254,500$ 8,254,500 -- -- --



The contractual maturity of the convertible notes is June 3, 2015. However, on March 31, 2014 we failed to make the scheduled interest payments. As a result, the note holders are entitled to declare the notes in default, in which case the principal amount of the notes, plus all accrued and unpaid interest would be immediately due and payable.

Other than as disclosed above, we do not know of any:

? Trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, any material increase or decrease in our liquidity; or ? Significant changes in our expected sources and uses of cash.


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Source: Edgar Glimpses


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