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EX-31.1 - EXHIBIT 31.1 - VHGI HOLDINGS, INC.vhgi10qex311063010.htm
EX-32.1 - EXHIBIT 32.1 - VHGI HOLDINGS, INC.vhgi10qex321063010.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended:  June 30, 2010

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission File Number 000-17520

VHGI HOLDINGS, INC.
     (Exact name of registrant as specified in its charter)
 
Delaware
75-2276137
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)

325 West Main Street, Suite 240
Lexington, Kentucky 40507
 (Address of principal executive offices)
(Zip Code)
 
(859) 266-9772
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
Shares issued and outstanding of the registrant’s $.001par value common stock as of June 30, 2010:   76,724,659 shares.
 
 
 
 
1

 
 
 
PART I – FINANCIAL INFORMATION  
   
Item 1:  Financial Statements
 
   
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited)
 
and December 31, 2009 (audited)
3
   
Unaudited Condensed Consolidated Statements of Operations
 
for the three and six months ended June 30, 2010 and 2009
4
   
Unaudited Condensed Consolidated Statements of Cash Flows
 
for the six months ended June 30, 2010 and 2009
5
   
Notes to Unaudited Condensed Consolidated Financial Statements
6
   
Item 2:  Management’s Discussion and Analysis of Financial Condition
 
and Results of Operations
11
   
Item 3: Quantitative and Qualitative Disclosures about Market Risk
14
   
Item 4:  Controls and Procedures
14
   
PART II – OTHER INFORMATION
 
   
Item 1:   Legal Proceedings
15
   
Item 1A: Risk Factors – not required
15
   
Item 2:    Unregistered Sales of Equity Securities and Use of Proceeds
15
   
Item 3:    Defaults upon Senior Securities
15
   
Item 4:    Removed and reserved
15
   
Item 5:   Other Information
15
   
Item 6:  Exhibits
16
   
Signatures
16
 
 
 
2

 
 
VHGI HOLDINGS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30, 2010 (Unaudited) and December 31, 2009 (Audited)
 
             
             
   
June 30, 2010
   
December 31, 2009
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 4,578     $ 26,343  
Accounts Receivable, Net
    102,668       92,741  
Interest Receivable
    179,223       172,197  
      Total Current Assets
    286,469       291,281  
                 
PROPERTY, PLANT, AND EQUPMENT (NET)
    -       910  
                 
OTHER ASSETS:
               
                 
Mining Lease Rights - Arizona
    735,000       62,500  
Notes Receivable - Related Parties
    475,000       75,000  
Note Receivable
    -       1,500,000  
Deposits
    570,000       -  
Goodwill
    1,228,856       1,228,856  
Deferred Loan Costs
    -       30,333  
TOTAL ASSETS
  $ 3,295,325     $ 3,188,880  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Accounts Payable - Trade
  $ 573,158     $ 451,053  
Accrued Payroll and Payroll Taxes
    6,246       37,749  
Other Accrued Liabilities
    2,490       4,135  
Dividends Payable
    33,750       33,750  
Deposits Received
    100,000       -  
Notes Payable, net of discount
    389,220       95,000  
Notes Payable - Related Parties
    116,775       1,395,896  
Accrued Interest
    318,895       531,695  
Total Current Liabilities
    1,540,534       2,549,278  
                 
LONG-TERM DEBT:
               
Debentures
    -       275,362  
                 
TOTAL LIABILITIES
    1,540,534       2,824,640  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, Class B - $0.001 par value, 300,000
shares designated, 70,000 issued and outstanding
as of  June 30, 2010 and December 31, 2009
    70       70  
Common stock  - $0.001 par value, 100,000,000
shares authorized, 76,724,659 and 57,352,644
 issued and outstanding as of June 30, 2010
and December 31, 2009
    76,725       57,353  
Additional paid-in capital
    7,477,331       4,961,822  
Stock Subscription Receivable
    (89,904 )     (89,904 )
Retained Deficit
    (5,709,431 )     (4,565,101 )
TOTAL STOCKHOLDERS'  EQUITY
    1,754,791       364,240  
                 
TOTAL LIABILITIES AND STOCKHOLDERS'
  $ 3,295,325     $ 3,188,880  
   EQUITY
               
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
3

 
 
 
VHGI HOLDINGS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 
                         
   
THREE
MONTHS ENDED
   
THREE
MONTHS ENDED
   
SIX MONTHS
 ENDED
   
SIX MONTHS
ENDED
 
REVENUES:
 
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
                         
Total Revenue
  $ 193,609     $ 228,853     $ 339,178     $ 423,192  
                                 
Cost of Sales
    (56,878 )     (53,254 )     (85,995 )     (102,525 )
                                 
Gross Profit
    136,731       175,599       253,183       320,667  
                                 
OPERATING EXPENSES:
                               
   Selling, General and Administrative
    (645,040 )     (299,478 )     (1,077,663 )     (595,572 )
                                 
LOSS FROM CONTINUING OPERATIONS
    (508,309 )     (123,879 )     (824,480 )     (274,905 )
                                 
OTHER INCOME (EXPENSES):
                               
   Interest Income
    9,190       38,247       28,403       75,105  
   Loss on  Settlement
    (101,053 )     -       (289,247 )     -  
   Interest (Expense)
    (36,098 )     (80,718 )     (59,006 )     (159,315 )
Other Income (Expenses)
    (127,961 )     (42,471 )     (319,850 )     (84,210 )
                                 
NET LOSS
    (636,270 )     (166,350 )     (1,144,330 )     (359,115 )
   Current Tax Expense
    -       -       -       -  
   Deferred Tax Expense
    -       -       -       -  
NET LOSS
  $ (636,270 )   $ (166,350 )   $ (1,144,330 )   $ (359,115 )
                                 
                                 
Basic gain (loss) per common share
  $ (0.01 )   $ (0.00 )   $ (0.02 )   $ (0.01 )
                                 
Weighted average number of common shares
    66,035,437       46,551,533       63,331,215       46,551,301  
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
4

 
 
 
VHGI HOLDINGS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 
   
    Six Months Ended    
Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (1,144,330 )   $ (359,115 )
Adjustments to reconcile net loss to net cash used
               
in operating activities:
               
Depreciation and amortization
    910       1,090  
Imputed interest expense
    -       45,000  
Loss on debt settlement
    208,877       -  
Loss on convertible debentures
    98,945       -  
Gain on diposal of subsidiary
    (23,576 )     -  
Stock issued for services
    481,000       20,000  
Contributed rental expense
    13,000       13,000  
Amortization of discount
    4,720       -  
Amortization of offering cost
    30,333       -  
Changes in assets and liabilities:
               
(Increase) decrease in accounts receivable
    (9,927 )     (16,052 )
(Increase) decrease in other assets
    (20,000 )     6,958  
(Increase) decrease in interest receivable
    (7,026 )     (71,645 )
Increase (decrease) in accounts payable
    123,745       13,335  
Increase (decrease) in accrued payroll
    (31,503 )     3,761  
Increase (decrease) in accrued expenses
    (1,645 )     (121 )
Increase (decrease) in accrued interest
    1,333       107,356  
Net cash used in operating activities
    (275,144 )     (236,433 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Deposits Received
    100,000       -  
Purchase of note receivbale-related party
    -       (12,351 )
Purchase of lease rights
    (312,500 )     -  
Proceeds from note receivable
    100,000       -  
Net cash used by investing activities
    (112,500 )     (12,351 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from notes payable
    389,000       -  
Payments on notes payable
    (55,000 )     -  
Proceeds from notes payable - Related Party
    597,955       156,220  
Payments on notes payable -  Related Party
    (587,825 )     (124,649 )
Proceeds from debentures
    21,749       165,300  
Net cash provided by financing activities
    365,879       196,871  
                 
NET INCREASE (DECREASE) IN CASH
    (21,765 )     (51,913 )
                 
CASH, beginning of period
    26,343       87,005  
                 
CASH, end of period
  $ 4,578     $ 35,092  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         
Cash paid during period for interest
  $ -     $ -  
Cash paid during period for income tax
  $ -     $ -  
                 
Non-Cash Investing and Financing Activities:
               
Sale of note receivable for assumption of debt
  $ 1,400,000     $ -  
Common Stock issued in payment of debt
  $ 1,130,881     $ -  
Common Stock issued in consulting fees
  $ 262,183     $ 20,000  
Common Stock issued in investment of lease
  $ 910,000     $ -  
Imputed Interest expensed as a capital contribution
  $ -     $ 45,000  
Contributed rent as a capital contribution
  $ 13,000     $ 13,000  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 

 
5

 

VHGI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The terms “VHGI,” “we,” the “Company,” and “us” as used in this report refer to VHGI Holdings, Inc.  The accompanying unaudited condensed consolidated balance sheet as of June 30, 2010 and unaudited condensed consolidated statements of operations for the six months ended June 30, 2010 and 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management of VHGI, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the six month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any other period.  These financial statements and notes should be read in conjunction with the financial statements for the years ended December 31, 2009 and 2008, included in the Company’s Annual Report on Form 10-K, and the  audited condensed consolidated balance sheet as of December 31, 2009 has been included for comparison purposes in the accompanying balance sheet.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of VHGI and its wholly-owned subsidiaries:  VPS Holding, LLC (d/b/a Veriscrip) (“VPS”), Secure eHealth LLC, (“eHealth”), Medical Office Software, Inc. (“MOS”), VHGI Gold, LLC (“VHGI Gold”) and VHGI Energy, LLC. eHealth and VPS are only included for the period January 1, 2010 thru January 31, 2010 due to the sale of eHealth and the assets of VPS on February 1, 2010 (see Note 5 – “Asset Dispositions”).  The remaining liabilities of VPS were transferred to VHGI because the entity became inactive as of this same date.   VHGI Energy, LLC, a Delaware limited liability corporation, was formed in February 2010.  All intercompany accounts and transactions have been eliminated.

NOTE 2 – GOING CONCERN

The Company has current liabilities in excess of current assets and has incurred losses since inception. The Company has had limited operations and has not been able to develop an ongoing, reliable source of revenue to fund its existence.  The Company’s day-to-day expenses have been covered by proceeds obtained, and services paid by, the issuance of stock and notes payable.  The adverse effect on the Company’s results of operations due to its lack of capital resources can be expected to continue until such time as the Company is able to generate additional capital from other sources.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

These unaudited interim condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.  The continuation of the Company as a going concern is dependent upon the success of the Company in obtaining additional funding and the success of its future operations. The Company’s ability to achieve these objectives cannot be determined at this time.

NOTE 3 – MINING LEASE RIGHTS

In November 2009, the Company entered into an agreement to assume the lease purchase option of the Treasure Gulch Gold Mine (“Gulch Mine”) lease rights situated in the Hassayampa Mining District of Arizona, approximately 10 miles south of Prescott.  The assumption of the Gulch Mine lease rights has been recorded at a total of $435,000, which consists of $50,000 for the initial lease assumption, $25,000 to extend the lease through February 15, 2013 and $360,000 for the issuance of 2,000,000 shares of the Company’s common stock to the assignor of the mining lease rights in first quarter 2010.
 
 
 
6

 

On June 8, 2010, the Company entered into an Asset Purchase Agreement for the purchase of a group of mining lease rights located in Northern Arizona (including Gulch Mine), from Western Sierra Mining Corporation (the “Seller”), a Utah corporation, for a purchase price consisting of (i) 5,000,000 shares of the Company’s common stock, (ii) $60,000 in cash, and (iii) a promissory note in the principal amount of $240,000 (the “Western Sierra Note”).  Furthermore, (90) days following the payment of the Western Sierra Note (see Note 7 for terms of the note payable), VHGI will issue to Seller an additional 2,500,000 shares of the Company’s common stock; however, at least ten (10) days prior, either the Company may elect to pay, or Seller may elect to receive, $250,000 in lieu of VHGI’s issuing Seller 1,250,000 of such shares of common stock.  In addition, The Company will pay the Seller a royalty of 2% of gross sales of processed gold from the mining claims during any calendar quarter.  The mining lease rights included in the asset purchase are Bueno #1, Treasure Gulch 1, Treasure Gulch 2, Sun Gold 2, Sun Gold 3, and Sun Gold 4, which are recorded with the United States Department of the Interior Bureau of Land Management – Arizona State Office.  On June 16, 2010, 5,000,000 shares of the Company’s common stock were issued at a closing price of $.11 per share and these shares, in addition to title of ownership for the mining claims, will be held in escrow until payment has been received by the Seller for the Western Sierra Note.  The value of the issued shares has been recorded as a deposit at June 30, 2010 in the amount of $550,000.

NOTE 4 –ASSET ACQUISITIONS

At March 31, 2010 the Company entered into an agreement to acquire certain pipeline assets from a chapter 7 bankruptcy proceeding for $4,500,000, which required a deposit payment of $250,000 during the auction and bidding process.  In April 2010, the bankruptcy court notified the Company that a higher bid was needed and the decision was made to discontinue the bidding process.   The deposit of $250,000 was returned to the Company.

On June 15, 2010, the Company entered into a letter of intent to purchase certain oil and gas leases located in shallow waters in the Gulf of Mexico off of Jefferson County, Texas and the Company made a deposit payment of $10,000 to the seller while the terms of the purchase are finalized.   The seller of the leases is currently performing consulting services for the Company for $10,000 per month.

On June 25, 2010, the Company entered into a letter of intent with an unrelated party to purchase the mining lease assignments that make up the Gold Creek Placer Mine, which includes the Wisner Placer, Christian Placer Pineau Placer and the Hughes Placer located in Granite County, Montana.  The Company paid $10,000, which has been recorded as a deposit, to allow an exclusive forty-five (45) day period for due diligence to be completed, with a right to extend for an additional forty-five (45) days.  Due diligence by the Company has not yet been completed and the Company has elected the additional forty-five (45) day extension.

NOTE 5 – ASSET DISPOSITIONS

On February 1, 2010, the Company entered into a purchase agreement (the “Purchase Agreement”) with Wound Management Technologies, Inc. (“WMT”), a Texas corporation, pursuant to which  WMT purchased from VHGI—for a total purchase price of $500,000, consisting of $100,000 in cash and a promissory note in the principal amount of $400,000 (the “WMT Note”) -- the following:
 
a)  
VHGI’s membership interest in eHealth.
b)  
VHGI interest in a $1,500,000 Senior Secured Convertible Promissory Note issued by Private Access, Inc. (the “Private Access Note”), certain agreements related thereto, and a note payable obligation of $1,000,000 (including accrued interest)  incurred by VHGI in conjunction with the Private Access Note transaction.
c)  
VPS intellectual property assets of the real-time prescription drug monitoring business, including its “Veriscrip” technology.

In addition, a royalty agreement was executed which provides for a three-year 10% royalty to be paid to VHGI on all revenues received by eHealth or any affiliate of eHealth from the sale of the VPS technology.  The sale resulted in a gain of $23,576.
 
 
 
7

 

Scott A. Haire, the Company's Chief Executive Officer and Chairman, also serves as the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and a director of WMT. Based on shares outstanding as of the Annual Report on Form 10-K filed by WMT for the year ended December 31, 2009, Mr. Haire beneficially owns, through H.E.B., LLC (“HEB”), a Nevada limited liability company of which Mr. Haire is the managing member, 25% of the outstanding common stock of WMT.

NOTE 6 - NOTES RECEIVABLE – RELATED PARTIES

The following is a summary of amounts due from related parties, including accrued interest separately recorded, as of June 30, 2010:


Related party
 
Nature of relationship
 
Terms of the agreement
 
Principal amount
             
             
Commercial Holding AG, LLC
 
Commercial Holding AG, LLC  has provided previous lines of credit to affiliates of HEB
 
Unsecured note with interest accrued at rate of 10% per annum and is due on demand. Accrued interest at June 30, 2010 is $12,354.
 
      75,000
Wound Management Technologies, Inc.
 
 
Scott Haire is a majority shareholder of WMT and VHGI
 
Unsecured note at 9% interest per annum with February 1, 2011 maturity date.  Accrued interest at June 30, 2010 is $15,000.
 
     400,000
TOTAL
         
$   475,000

NOTE 7- NOTES PAYABLE AND LONG-TERM DEBT

Notes Payable - Related Parties


Funds are advanced to the Company from various related parties including from Scott A. Haire, the Company's CEO and CFO, and entities controlled by him.  Other shareholders may fund the Company as necessary to meet working capital requirements and expenses.  The following is a summary of amounts due to related parties, including terms of the debt and the interest accrued.

   
June 30,
 
   
2010
 
 HEB, Scott A. Haire is the managing member of HEB:
     
Unsecured, two separate $1,000,000 open lines of credit, no maturity date,
and interest at 10% per annum.  Accrued interest at June 30, 2010 and
December 31, 2009 is $260,390 and $317,178, respectively.  Unsecured
lines available at June 30, 2010 are $1,905,125.                 
  $ 94,875  
SWCC, dated 7/21/06, no stated interest rate
    21,900  
    $ 116,775  

 
 
 
8

 
 
Notes Payable

On November 1, 2009 the Company entered into an Assignment and Assumption of Lease (“Lease Assumption”) with an unrelated party (“Assignor”) for $50,000 for the assignment of a lease purchase option for the Gulch Mine.   According to the terms of the Lease Assumption, the Company will make two payments of $25,000 each to the Assignor in the year 2010.  The first payment was made on February 8, 2010 and a second payment of $5,000 was made on June 11, 2010.  The remaining balance was paid subsequent to June 30, 2010 and the note has been paid in full as of the date of this filing.  See Note 3-- Mining Lease Rights for additional information on the Gulch Mine.

On December 7, 2009 the Company executed a convertible promissory note in the amount of $45,000 to an unrelated party.  The principal and accrued interest, at 8% per annum, is due nine months from date of execution.   On February 4, 2010, March 9, 2010 and May 7, 2010, the Company executed three additional convertible promissory notes with the same terms to the same unrelated party in the amounts of $25,000, $30,000, and $30,000, respectively.    The total discount related to the notes is $10,000 and this amount is being amortized over the term of each loan.  The unamortized discount balance at June 30, 2010 is $5,280.  During June 2010, $39,500 of the debt was converted to the Company’s unrestricted common stock and a loss on settlement was recognized of $25,683     related to this debt conversion for the six months ending June 30, 2010.  The balance at June 30, 2010 is $85,220 net of the discount.

On May 21, 2010, the Company executed a convertible promissory note to an unrelated party in the amount of $50,000.  In June 2010, the Company made principal payments against the note and the remaining balance on the note as of June 30, 2010 is $20,000, which is due on November 22, 2010.  Interest accrues on the principal at 8% per annum and the amount of accrued interest as of June 30, 2010 is $280.  In June 2010, an additional promissory note was executed for $20,000.  Interest accrues on the principal at 10% per annum and the principal and interest is due on September 30, 2010.

On June 8, 2010, the Company executed a promissory note as part of the purchase of the mining lease rights from the Seller (see Note 3 – Mining Lease Rights).  The principal balance of the promissory note is $240,000 and interest accrues on the principal at 6% per annum, with an accrued interest balance at June 30, 2010 of $907.  The original due date on the promissory note was July 9, 2010; however, this date has been extended to September 30, 2010.  A principal payment in the amount of $40,000 was paid on July 22, 2010.
 
Debentures

On December 17, 2008 the Company issued convertible debentures which have all been converted into unrestricted shares of the Company’s common stock as of June 30, 2010 with no remaining debenture balance at June 30, 2010.  The balance of debentures at December 31, 2009 was $275,362.   The unamortized deferred loan costs remaining at June 30, 2010 relating to the debentures have been recorded as interest expense as of this same date and accrued interest related to the debentures in the amount of $28,759, which was not paid as a result of conversion, has been recorded as a reduction of the loss on conversion amount of $126,364.  The net amount of loss on conversion recorded as of June 30, 2010 is $98,945.

NOTE 8 - CAPITAL STOCK

Preferred Stock

The Company is authorized to issue 10,000,000 shares of Preferred Stock, par value $.001 per share. The Company has designated 300,000 shares of Class B Voting Preferred Stock, and at June 30, 2010 and December 31, 2009 there were 70,000 shares outstanding.  Accrued, but unpaid, dividends totaled $33,750 at June 30, 2010 and December 31, 2009.
 
 
 
9

 

Common Stock

The Company is authorized to issue 100,000,000 common shares, par value $0.001 per share.  These shares have full voting rights.  At June 30, 2010 there were 76,724,659 shares issued and outstanding.  At December 31, 2009, there were 57,352,644 shares issued and outstanding.

During the three month period ending June 30, 2010, the Company issued 1,527,251 shares in payment of debt, 5,000,000 shares for mining claim leases held in escrow, 2,250,000 shares for payment of services, and 4,212,154 shares for debenture conversion, resulting in a loss on settlement amount of $124,628, before the gain on sale of subsidiary of $23,576, or a net loss on settlement amount of $101,053.

During the three month period ending March 31, 2010, the Company issued 3,207,610 shares in payment of debt, 2,000,000 shares for mining claim leases and 1,175,000 shares for payment of services resulting in a loss on settlement amount of $188,194.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Lawsuit – The Company was previously a defendant in a Florida state court lawsuit regarding the alleged nonpayment of certain brokerage commissions.  During the second quarter of 2010, this lawsuit was mediated and a settlement was reached with no liability to the Company.  The settlement agreement is being negotiated and has not yet been signed.
 

NOTE 10 – SUBSEQUENT EVENTS

On July 1, 2010, the Company executed a promissory note (the “Note”) to an unrelated party in the amount of $100,000. The principal and accrued interest, at 10% per annum, is due one month from date of execution. The Company  has agreed to issue 500,000 shares of the Company’s common stock to this lender to facilitate obtaining the loan.

On July 30, 2010, the Company entered into an asset purchase agreement (the “MOS Agreement”) with MOS Acquisition, LLC, a Florida limited liability company (the “Purchaser”), pursuant to which VHGI sold to Purchaser, for a total purchase price of $1,300,000, certain assets and liabilities including, without limitation, the following:

(a) all intellectual property, machinery, equipment, furniture, fixtures, accounts receivable and all other assets of the company except as identified as “Excluded Assets” in the MOS Agreement (the “Purchased Assets”); and

(b)  specific liabilities related to purchases of vendor software sold by MOS prior to the purchase date, as specifically identified in the MOS Agreement.

The purchase price of $1,300,000 consists of (i) $300,000 in cash; (ii) a secured promissory note in the principal amount of $1,000,000 (the “MOS Note”); plus (iii) a warrant with a five-year exercise period which provides the right to purchase up to 1% of the equity of the Purchaser for a purchase price equal to the lesser of current fair market value of 1% equity of the Purchaser or $200,000.

The MOS Note carries an interest rate of 6% per annum, and a $100,000 payment was made August 2, 2010, with the remaining principal and interest due on September 30, 2010.  However, if the final payment is paid on or before August 31, 2010 then the balance due shall be reduced to $800,000 and the total principal of the MOS Note reduced to $900,000.  The MOS Note is secured by a security interest in the Purchased Assets.

Prior to the execution of the MOS Agreement, the Purchaser paid the Company $100,000 in June 2010, while performing due diligence, and this amount was non-refundable to the Purchaser.  As of June 30, 2010, this amount has been recorded as a liability and, upon recording the closing of the sale of MOS at July 30, 2010, this amount was applied to the purchase price received pursuant to the terms of the MOS Agreement.

VHGI Energy, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company that was formed in February 2010, has entered into a letter of intent to purchase for $514,000 certain oil and gas leases on 1,280 contiguous acres located in shallow waters in the Gulf of Mexico off of Jefferson County, Texas.  An exploration and production consultant has been engaged to help with this phase of the Company’s growth as additional companies and/or assets are being considered for acquisition. This transaction has not been consummated as of this date and there can be no assurances that it will be consummated or, if consummated, what the ultimate terms will be for the transaction.
 
 
 
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The Company has evaluated all subsequent events from the balance sheet date through the date of this filing.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
 
Forward-Looking Statements

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" and similar expressions identify such a statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in this and our other SEC filings. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

The following discussion and analysis of our financial condition is as of June 30, 2010.  Our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2009.
 
Business Overview
 
In the first and second quarter of 2010, the Company made the transition from a healthcare technology company to a holding company, with both operating subsidiaries and operating assets acquired in the precious metals/energy resources industries as evidenced by the following:
 
1)  
On February 1, 2010, the Company completed the sale of the healthcare technology assets of the Company to WMT for a total purchase price of $500,000 plus royalties, and the Company sold the remaining assets of its healthcare related subsidiary, MOS, effective July 30, 2010, for a total purchase price of $1,200,000 to $1,300,000, plus a warrant to purchase equity in the new company, as described above in Note 4 – Asset Acquisitions.
 
2)  
VHGI Gold, LLC, a Nevada limited liability company and wholly-owned subsidiary of the Company that was formed in November 2009, has purchased for $735,000 certain mining lease rights for the Treasure Gulch and Sun Gold mines located in Northern Arizona and has entered into a letter of intent to purchase additional mining lease rights for the Gold Creek Placer Mines located in Granite County, Montana (the “Montana Leases”).  The Montana Leases transaction has not been consummated, and there can be no assurances that it will be consummated or, if consummated, what the ultimate terms will be for the transaction.  In addition, a Nevada Professional Geologist with National Instrument Certification has been retained to complete the National Instrument 43-101 technical report and a Chief Operating Officer for this subsidiary has been appointed who will also serve on the Board of Directors of VHGI.
 
 
 
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3)  
VHGI Energy, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company that was formed in February 2010, has entered into a letter of intent to purchase for $514,000 certain oil and gas leases on 1,280 contiguous acres located in shallow waters in the Gulf of Mexico off of Jefferson County, Texas.  An exploration and production consultant has been engaged to help with this phase of the Company’s growth as additional companies and/or assets are being considered for acquisition. This transaction has not been consummated as of this date and there can be no assurances that it will be consummated or, if consummated, what the ultimate terms will be for the transaction.
 
The year 2010 marks a major milestone in the history of the Company as a result of the recently initiated steps to leverage the Company’s operating history and corporate resources within these new business segments. Although gold is selling at 25 year high prices and oil and gas continues to be trading at significant premiums, global economic events have created significant opportunities within these markets for assets to be acquired at significant discounts.  The strategy going forward is to continue to add to the Company’s holdings through a series of planned acquisitions of oil and natural gas projects, as well as multiple lease holdings containing proven precious metal reserves, in order to generate solid, ongoing revenue streams for the goal of enhanced shareholder value.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. We believe the footnotes to the consolidated financial statements provide the description of the significant accounting policies necessary in fully understanding and evaluating our consolidated financial condition and results of operations.  The Company has not materially changed its significant accounting policies.
 
Results of Operations and Financial Condition
 
Three months ended June 30, 2010 compared with the three months ended June 30, 2009

Revenues.  The Company generated revenues for the three months ended June 30, 2010 of $193,609, as compared to revenues of $228,853 for the three months ended  June 30, 2009, or a  15% decrease in revenues.
 
The decrease in revenues is a direct result of the impact of the Federal Government financial incentives for practices incorporating EMR systems.   Over the long term, these incentives should help generate revenue but in the short term they have slowed the decision making process which has had a negative impact on sales of new installations.
 
Cost of revenues. Costs of revenues for the three months ended June 30, 2010 were $56,878, as compared to costs of revenues of $53,254 for the three months ended June 30, 2009, or a 7% increase in costs of revenues.  This increase resulted from an increase in support costs provided by third parties and this increase has not been passed on to the customer.
 
General and administrative expenses (“G&A"). G&A expenses for the three months ended June 30, 2010 were $645,040, as compared to G&A expenses of $299,478 for the three months ended June 30, 2009, or a 115% increase in G&A expenses.  The increase in expenses is primarily due to an increase in consulting fees paid between 2009 and 2010 as the company transitions to different industries in 2010.
 
Interest Income.   Interest income was $9,190 for the three months ended June 30, 2010, as compared to $38,247 for the three months ended June 30, 2009, or a decrease of 76%. The decrease is the result of the sale of the $1,500,000 note receivable with Private Access on February 1, 2010 and the decrease in the accrual of related interest income associated with the note.
 
 
 
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Loss on Settlement.   We had a loss on settlement for the three months ended June 30, 2010 of $101,053 and there was no loss on settlement incurred for the three months ended June 30, 2009.
 
Interest Expense.   Interest expense was $36,098 for the three months ended June 30, 2010, as compared to $80,718 for the three months ended June 30, 2009, or a decrease of 55%.  Interest expense decreased as a result of the sale of $1,000,000 of debt related to the Private Access note on February 1, 2010, as mentioned above.
 
Net loss. We had a net loss for the three months ended June 30, 2010 of $636,270, as compared with a net loss of $166,350 for the three months ended June 30, 2009, or an increase in net loss of 282%. The increase in loss is primarily due to the increase in consulting fees for 2010 incurred as the Company shifts the focus into new industries.  In addition, there was a loss on settlement of $101,053 recognized in the second quarter of 2010 which had not been incurred in the second quarter of 2009.

All material changes in results of operations for the six months ended June 30, 2010 compared with the six months ended June 30, 2009 are identified in the above analysis for the three month periods ended June 30, 2010 and 2009.
 
Liquidity and Capital Resources
 
Historically, we have financed our operations primarily from the sale of debt and equity securities. Our financing activities generated $ 365,879 for the six months ended June 30, 2010 and $196,871 for the six months ended June 30, 2009.
 
We will need to raise additional capital in fiscal year 2010 to fund our business plan and support our operations. As our prospects for funding, if any, develop during the fiscal year, we will assess our business plan and make adjustments accordingly. The report of our independent auditors with regard to our financial statements for the fiscal year ended December 31, 2009 included a going concern qualification. Although we have successfully funded our operations to date by attracting additional equity investors, there is no assurance that our capital raising efforts will be able to attract additional necessary capital for our operations. If we are unable to obtain additional funding for operations at any time now or in the future, we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail various aspects of our operations or cease operations.
 
 
 
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Off-Balance Sheet Arrangements
 
None.
 
Recent Accounting Pronouncements
 
For the period ended June 30, 2010, there were no changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a smaller reporting company, we are not required to provide this information.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures.
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officer, the effectiveness of our disclosure controls and procedures as of June 30, 2010, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of June 30, 2010, our disclosure controls and procedures were effective.
 
 
 
 
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Changes in Internal Control over Financial Reporting.
 
There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  We will continue to evaluate the effectiveness of internal controls and procedures on an on-going basis.

PART II — OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
Lawsuit – The Company was previously a defendant in a Florida state court lawsuit regarding the alleged nonpayment of certain brokerage commissions.  During the second quarter of 2010, this lawsuit was mediated and a settlement was reached with no liability to the Company.  The settlement agreement is being negotiated and has not yet been signed.
 
Item 1A. Risk Factors
 
As a smaller reporting company, we are not required to provide this information.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
Item 3. Defaults upon Senior Securities
 
None
 
Item 4.  Removed and Reserved

Item 5. Other Information

Effective May 20, 2010, the Company has appointed Eric Leonetti as a new member of the Company’s Board of Directors by unanimous consent of the current Board of Directors of the Company.  Mr. Leonetti will be serving in the capacity of Chief Operating Officer of VHGI Gold, LLC.
 
Item 6. Exhibits
 
The following documents are filed as part of this Report:
 
EXHIBIT INDEX

EXHIBIT NO.
DESCRIPTION OF EXHIBIT
 
3(i)
Amended and Restated Certificate of Incorporation
3(ii)
By-Laws (Incorporated by reference to Exhibit 3(ii).1 of the Company’s Form 10-KSB, dated December 31, 2003)
10.1
Asset Purchase Agreement dated June 8, 2010 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on June 15, 2010)
10.2
Purchase Agreement, dated July 30, 2010, by and between Medical Office Software, Inc., VHGI Holdings, Inc. and MOS Acquisition, LLC  (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on August 5, 2010)
10.3
Secured Promissory Note dated July 30, 2010 (Incorporated by reference to Exhibit 10.2 to the Company's Current  Report on Form 8-K filed with the Commission on August 5, 2010)
31.1*
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*Filed herewith
 
 
 
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SIGNATURES
 

Pursuant to the requirements of the Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
Date: August 17, 2010
 
VHGI HOLDINGS, INC.
 
 
By   /s/ James M. Renfro                                        
James M. Renfro,
President
   
 
 
 
 
 
 
 
 
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