UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





R Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934





For the quarterly period endedMarch 31, 2014





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: None





VANGUARD ENERGY CORPORATION


(Exact name of registrant as specified in its charter)





COLORADO

27-2888719(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)





1330 Post Oak Blvd., Suite 1600


Houston, Texas 77056


(Address of principal executive offices, including Zip Code)


(713) 627-2500


(Issuer’s telephone number, including area code)





____________________________________________


(Former name or former address if changed since last report)





Check whether the issuer (1) 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), and (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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-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 Exchange Act). Yes o No þ





State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12,711,440 shares of common stock as of March 31, 2014.














CONTENTS




Page

NumberConsolidated Balance Sheets

1Consolidated Statements of Cash Flows

2Consolidated Statements of Operations

3Notes to the Consolidated Financial Statements

4









VANGUARD ENERGY CORPORATIONCONSOLIDATED BALANCE SHEET  March 31,


September 30,ASSETS

2014


2013(Unaudited)Current assetsCash and cash equivalents

$
139,580


$
1,334,285Accounts receivable


309,492



371,765Other assets


26,182



16,055Total current assets


475,254



1,722,105Property and equipmentOil and gas, on the basis of full cost accountingProved properties


14,031,399



12,994,766Unproved properties and properties underdevelopment, not being amortized


-



61,470Furniture and equipment


-



26,946Less: accumulated depreciation, depletion and amortization


(8,452,368
)


(6,594,081
)Total property and equipment


5,579,031



6,489,101Debt issuance costs


384,786



538,700Other assets


6,488



10,808Total assets

$
6,445,559


$
8,760,714LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilitiesAccounts payable

$
151,156


$
113,314Other liabilities


325,239



322,194Current notes payable, net of discount of $329,380 and $0


7,925,120



-Total current liabilities


8,401,515



435,508Notes payable, net of discount of $0 and $542,961


-



7,813,368Participation liability


402,391



465,551Asset retirement obligations


187,601



177,685Total liabilities


8,991,507



8,892,112Commitments and contingencies


-



-Stockholders' deficitPreferred stock, $0.00001 par value; 5,000,000 sharesauthorized, none issued or outstanding


-



-Common stock, $0.00001 par value; 50,000,000 shares authorized,12,741,512 shares issued and outstanding


127



127Additional paid-in capital


5,522,204



5,522,204Accumulated deficit


(8,068,279
)


(5,653,729
)Total stockholders' deficit


(2,545,948
)


(131,398
)Total liabilities and stockholders' deficit

$
6,445,559


$
8,760,714


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




1




VANGUARD ENERGY CORPORATIONCONSOLIDATED STATEMENT OF OPERATIONS  Three Months Ended March 31


Six Months Ended March 312014


2013


2014


2013(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)RevenuesOil and gas sales

$
790,671


$
1,249,353


$
1,521,937


$
2,565,014Costs and expensesLease operating expense


292,239



193,074



497,637



370,517Production taxes


36,436



57,601



70,155



118,260Depreciation, depletion and amortization


539,472



282,095



984,200



651,431Impairment of O&G properties


880,213



-



880,213



-Asset retirement obligation accretion


13,371



4,799



29,088



9,273General and administrative


312,723



415,354



552,906



823,004Total costs and expenses


2,074,454



952,923



3,014,199



1,972,485Income (loss) from operations


(1,283,783
)


296,430



(1,492,262
)


592,529Other income (expense)Other income


360



-



792



-Interest income


30



332



234



858Interest expense


(453,995
)


(461,206
)


(902,494
)


(990,000
)Furniture and equipment write-down


-



-



(20,819
)


-Change in fair value of warrant andconversion feature liabilities


-



155,256



-



598,193Total other income (expense)


(453,605
)


(305,618
)


(922,287
)


(390,949
)Income (loss) before income taxes


(1,737,388
)


(9,188
)


(2,414,549
)


201,580Provision for income taxes


-



-



-



-Net Income (loss)

$
(1,737,388
)

$
(9,188
)

$
(2,414,549
)

$
201,580Earnings (Loss) per share:Basic

$
(0.14
)

$
(0.00
)

$
(0.19
)

$
0.02Diluted

$
(0.14
)

$
(0.00
)

$
(0.19
)

$
0.02Weighted average shares outstanding;Basic


12,741,512



12,741,512



12,741,512



12,741,512Diluted


12,741,512



12,741,512



12,741,512



12,741,512


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





2





VANGUARD ENERGY CORPORATIONCONSOLIDATED STATEMENT OF CASH FLOWS  Six Month ended March 31,2014


2013(Unaudited)


(Unaudited)Cash flows from operating activitiesNet Income (loss)

$
(2,414,549
)

$
201,580Adjustments to reconcile net income/(loss)to net cash from operating activities:Depreciation, depletion and amortization


984,200



651,431Impairment of O&G properties


880,213



-Amortization of debt issuance costs


153,914



164,798Asset retirement obligation accretion


29,088



9,273Amortization of debt discount


111,752



170,371Accretion of participation liability


(63,160
)


75,178Furniture and equipment write-down


20,819



-Change in fair value of warrant and conversionfeature liabilities


-



(598,193
)Change in operating assets and liabilities:Accounts receivable


62,273



89,378Other assets


(5,807
)


(28,988
)Accounts payable


1,653



(67,594
)Other liabilities


3,045



(136,848
)Net cash from operating activities


(236,559
)


530,386Cash flows from investing activitiesPurchase of furniture and equipment


-



(2,452
)Capital expenditures on oil and gas properties


(958,146
)


(2,037,209
)Net cash from investing activities


(958,146
)


(2,039,661
)Cash flows from financing activitiesRepayment of note payable


-



(325,000
)Net cash from financing activities


-



(325,000
)Net change in cash and cash equivalents


(1,194,705
)


(1,834,275
)Cash and cash equivalentsBeginning of period


1,334,285



3,090,422End of period

$
139,580


$
1,256,147


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





3





VANGUARD ENERGY CORPORATION


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE 1 – BASIS OF PRESENTATION





These consolidated financial statements of Vanguard Energy Corporation (Vanguard or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations. These financial statements should be read along with Vanguard’s audited financial statements as of September 30, 2013.





Default on 2012 Convertible Promissory Notes and Pending Sale of Oil & Gas Properties – On March 31, 2014 the Company failed to make the scheduled 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.  For this reason, the 2012 Convertible Promissory Notes are classified as current obligations within the consolidated balance sheet at March 31, 2014.





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 wells.  The costs of that work far exceeded the Company’s expectations and yet the work was required in order to get the wells back into production.  This 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.





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 (Vast) for $5,500,000.  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.





4


VANGUARD ENERGY CORPORATION
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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.





Going Concern – The above actions and events raise substantial doubt as to the ability of the Company to continue as a going concern.  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.





NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





As of March 31, 2014, Vanguard’s significant accounting policies were consistent with those discussed in the audited financial statements as of September 30, 2013.





Earnings Per Share –Basic earnings per share have been calculated based upon the weighted-average number of common shares outstanding.  Diluted earnings per share have been calculated based upon the weighted-average number of common and potential common shares. The calculation of diluted weighted-average shares outstanding for the three-month periods ended March 31, 2014 and 2013 excludes 19,261,860 and 17,610,960 shares, respectively, issuable pursuant to outstanding warrants, stock options and debt conversion features because their effect is anti-dilutive.





Recently Issued Accounting Pronouncements –Various accounting standards updates have been recently issued, most of which represented technical corrections to the accounting literature or were applicable to specific industries.  No new accounting pronouncements have been issued that are likely to have a material impact to the Company's consolidated financial statements.








NOTE 3 – OIL AND GAS ACQUISITIONS





By agreement dated March 15, 2011, the Company 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, the Company had drilled five wells on the lease. Pursuant to the farmout agreement, as amended in January 2013, the Company has the option of drilling additional wells on the lease; provided however, that if it does not drill at least three wells in any twelve month period the right to drill any additional wells on the lease will terminate. As of March 31, 2014, the Company has not drilled any wells on the property in the last 12 months effectively terminating the lease.




5





VANGUARD ENERGY CORPORATION


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





By agreement dated May 25, 2011, the Company entered into a farmout agreement with an unrelated third party pertaining to a 100-acre lease in the Batson Dome Field. Pursuant to the agreement, the Company had the obligation to commence drilling a well on the lease by June 14, 2012.  In June 2012, the Company paid $10,000 to extend the agreement, whereby it had an obligation to commence drilling by June 14, 2013. The Company requested that this agreement be extended for another year for payment of $10,000, which was approved in November 2013.   The Company is subject to commence drilling of the first well by June 14, 2014, and completing the well if warranted. The Company has the option of drilling additional wells on the lease; provided however, that unless the Company commences drilling each well within 180 days of the date the latest well is completed or abandoned, the right to drill any additional wells on the lease will terminate. The estimated cost of drilling and completing any well on this lease is approximately $1,000,000. As of March 31, 2014 the Company has not drilled any wells on this lease and will not drill any wells prior to the expiration date of June 14, 2014.





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





By agreement dated May 1, 2012, the Company entered into a farmout agreement with an unrelated third party pertaining to another 45-acre lease in the Hull-Daisetta Field. Pursuant to the agreement, the Company had the obligation to commence drilling a well on the lease by January 31, 2013.  In January 2013, the agreement was amended, whereby the Company now has an obligation to commence drilling by January 31, 2014.     The lease has expired as of January 31, 2014, as the Company did not drill any wells on this lease.





Through certain acquisitions in 2010, the Company owns a ninety percent (90%) working interest in mineral leases for 230 acres in the Batson Dome Field. C.F.O., Inc. owns the remaining ten percent (10%) working interest and is the operator for the mineral leases pursuant to a joint operating agreement between the Company and C.F.O., Inc.  C.F.O., Inc. is controlled by Delton Drum, an officer of the Company since 2010.  The Company has recorded a receivable from C.F.O., Inc. for its 10% share of capital expenditures.  At March 31, 2014, this amount totaled $1,757 which was paid in full in April 2014.





NOTE 4 – LONG-TERM DEBT





2010 Convertible Promissory Notes –In December 2010, the Company completed the sale of $3,400,000 in Convertible Promissory Notes, due and payable on October 31, 2012 and convertible, at the holder’s option, into common stock of the Company at $1.00 per share at any time after April 30, 2011.  The 2010 Convertible Promissory Notes bore interest at 8% per year, payable quarterly.  In addition, the note holders were issued 1,700,000 Series A warrants to purchase the Company’s common stock at $4.00 per share any time on or before October 31, 2014 and were additionally granted a twenty percent (20%) net profits interest payable quarterly from any net profits generated from wells drilled and completed with the proceeds of the notes.





6





VANGUARD ENERGY CORPORATION


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





During 2012, $3,075,000 of the 2010 Convertible Promissory Notes outstanding was surrendered in exchange for new 2012 Convertible Promissory Notes as discussed below. The remaining notes, which had an outstanding principal balance of $325,000, were repaid in October 2012.





2012 Convertible Promissory Notes –During 2012, the Company sold $8,254,500 of Convertible Promissory Notes, due and payable on June 30, 2015 and convertible at the holder’s option, into common stock of the Company at $1.25 per share.  The Convertible Promissory Notes bear interest at 15% per year, payable quarterly. Of the total amount raised, $5,179,500 represented new cash investors and $3,075,000 represented investors from the 2010 convertible note offering who chose to roll their investment in that earlier offering into the Company's new offering. Net proceeds from this financing:





●
were used to pay the 2010 Convertible Promissory Notes remaining outstanding on October 31, 2012 ($325,000), and




●
have been used to fund an accelerated developmental drilling program in the Company's oil fields located in Southeast Texas





Except in certain circumstances, the conversion price of the 2012 Convertible Promissory Notes will be lowered if the Company sells any additional shares of common stock or any securities convertible into common stock, at a price below the then applicable conversion price.  The conversion price will also be proportionately adjusted in the event of any stock split, or capital reorganization.  The Company may prepay the Notes upon twenty days written notice to the Note holders.





Direct costs of $813,780 were incurred in connection with the issuance of the 2012 Convertible Promissory Notes.  The Company recognized a loss on debt extinguishment of $410,639 related to the investors who chose to roll their investment in the 2010 Convertible Promissory Notes into the new offering. The placement agents for this offering received a cash commission of $619,905 as well as 537,360 Series E warrants. Each Series E warrant entitles the holder to purchase one share of the Company’s common stock. The Series E warrants may be exercised at any time on or before June 30, 2017 at a price of $1.55 per share.





The Company’s gross outstanding balance of the 2012 Convertible Promissory Notes was $8,254,500 as of March 31, 2014.  As of March 31, 2014, the unamortized discount on the 2012 Convertible Promissory Notes totaled $329,380.  Interest expense for the amortization of debt issuance cost and discount on the notes for the six-month period ended March 31, 2014 was $265,666.  The effective interest rate of the 2012 Convertible Promissory Notes was 17.71% as of March 31, 2014.  Accrued interest included in Other Liabilities at March 31, 2014 and 2013 was $309,544.




7





VANGUARD ENERGY CORPORATION


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Net Profits Interest Participation Liability–The 20% net profits interest granted with the issuance of the 2010 Convertible Promissory Notes is owned by Vanguard Net Profits, LLC, a Texas limited liability company (the “Fund”). The Company has a 1% interest in the Fund and is the Fund’s manager on behalf of the notes holders who own the remaining interest.





The Company has recognized a participation liability related to the net profits interest granted.  This participation liability is reflected in the liability section of the balance sheet at its estimated fair value of $402,391 as of March 31, 2014. The Company estimated the fair value of the participation liability utilizing a present value factor of 10 applied to proved developed reserves associated with the wells drilled and completed with the proceeds of the notes.  At any time, the Company may purchase the net profits interests held by the Fund for $3,400,000.





The Company incurred expense associated with the net profits interest granted during the six-month period ended March 31, 2014 of $63,160. This amount is reported as interest expense in the statement of operations. The Company also made payments of $84,577 under this arrangement during the six-month period ended March 31, 2014.





NOTE 5 – INCOME TAXES





The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the three-month period ended March 31, 2014 because the Company estimates it will record no income tax expense for the year ended September 30, 2014.  The Company recorded no income tax expense for the three-month period ended March 31, 2013. The Company has a valuation allowance that fully offsets net deferred tax assets.





NOTE 6 – COMMITMENTS AND CONTINGENCIES





The Company’s material future contractual obligations as of March 31, 2014 were as follows:




Total


2014


2015


2016


ThereafterConvertible notes

$
8,254,500


$
8,254,500



--



--



--





The contractual maturity of the convertible notes is June 30, 2015.  However, on March 31, 2014 the Company 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.





Except as shown above, the Company had no contractual capital commitments outstanding at March 31, 2014.  The Company is presently attempting to sell its Batson Dome field.  Although no sale occurred, the Company spent approximately $960,000 during the six month period ending March 31, 2014 but will not spend any more for the remainder of the fiscal year 2014 for work over of wells in the Batson Dome Field or for various other projects.





8





VANGUARD ENERGY CORPORATION


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS





The following table summarizes the financial liabilities measured at fair value on a recurring basis as of March 31, 2014 and September 30, 2013:





March 31, 2014


September 30, 2013LevelParticipation liability


3


$
402,391


$
465,551Total liabilities





$
402,391


$
465,551


The following table presents a reconciliation of those liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):





Participation Liability


TotalBalance at September 30, 2013

$
465,551


$
465,551Purchases, issuances and settlements


(63,160
)


(63,160
)Balance at March 31, 2014

$
402,391


$
402,391





NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION





Six Month ended March 31,2014


2013(Unaudited)


(Unaudited)Interest paid

$
681,669


$
603,088Interest capitalized (non-cash)


3,677



45,935Noncash investing and financing activities:Capital expenditures included in accounts payable


(36,189
)


(15,278
)Asset retirement obligations incurred


-



9,792




*  *  *  *  *




9





FORWARD LOOKING STATEMENTS





The information contained in this Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, including among other things, statements regarding our capital needs, business strategy and expectations. Any statement which does not contain a historical fact may be deemed to be a forward-looking statement. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. In evaluating forward looking statements, you should consider various factors outlined in our latest Form 10-K, filed with the U.S. Securities Exchange Commission (“SEC”) on March 31, 2014, and, from time to time, in other reports we file with the SEC. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements.





ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION





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.





10





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.





11




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, thetwo 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:




Item

Increase (I)

or Decrease (D)

ReasonOil and Gas Sales

D

Material reduction in production of oil.Cost and Expenses

I

Material increase in 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





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.





13





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 EndedMarch 31, 2014


March 31, 2013Cash provided by (used in) operations

$
(236,559
)

$
530,386Purchase 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.





14





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


ThereafterConvertible 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.





ITEM 4.                   CONTROLS AND PROCEDURES.





(a) We maintain a system of controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“1934 Act”), is recorded, processed, summarized and reported within time periods specified in the SEC's rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is accumulated and communicated to our management, including our Principal Executive and Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of March 31, 2014, our Principal Executive and Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Principal Executive and Financial Officer concluded that our disclosure controls and procedures were effective.





(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting during the six month period ended March 31, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





15





PART II








ITEM 6. EXHIBITS





Exhibits





31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.




31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act.





16





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




VANGUARD ENERGY CORPORATIONDate: May 15, 2014
By:
/s/ Warren DillardWarren Dillard,Chief Executive, Financial andAccounting Officer