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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: September 30, 2011

[_] 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.)

777 Main St. Suite 3100
Fort Worth, TX  76102
(Address of principal executive offices)
(Zip Code)
(817) 820-7080
(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 $.001 par value common stock as of September 30, 2011:  88,919,076.
 
 
 
1

 
 

PART I – FINANCIAL INFORMATION
 
   
Item 1:  Financial Statements
 
   
Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited)
3
and December 31, 2010 (audited)
 
   
Unaudited Condensed Consolidated Statements of Operations
4
for the three and nine months ended September 30, 2011and 2010
 
   
Unaudited Condensed Consolidated Statements of Cash Flows
5
for the nine months ended September 30, 2011and 2010
 
   
Notes to Unaudited Condensed Consolidated Financial Statements
6
   
Item 2:  Management’s Discussion and Analysis of Financial Condition
14
and Results of Operations
 
   
Item 3: Quantitative and Qualitative Disclosures about Market Risk
17
   
Item 4:  Controls and Procedures
17
   
PART II – OTHER INFORMATION
 
   
Item 1:   Legal Proceedings
18
   
Item 1A: Risk Factors
18
   
Item 2:    Unregistered Sales of Equity Securities and Use of Proceeds
18
   
Item 3:    Defaults upon Senior Securities
19
   
Item 4:    Removed and reserved
19
   
Item 5:   Other Information
19
   
Item 6:  Exhibits
19
   
Signatures
20
 

 
 
2

 
 
PART I – FINANCIAL INFORMATION
 
VHGI HOLDINGS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30, 2011 (Unaudited) and December 31, 2010 (Audited)
 
             
             
   
September 30, 2011
   
December 31, 2010
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 17,739     $ -  
Accounts Receivable, net
    59,546       55,998  
Notes Receivable - Related Parties
    499,536       583,398  
Interest Receivable - Related Parties
    75,797       62,994  
Notes Receivable
    1,625,000       -  
Interest Receivable
    171,526       151,868  
      Total Current Assets
    2,449,144       854,258  
                 
                 
OTHER ASSETS:
               
Mining Lease Rights
    1,529,536       1,525,000  
Deposits
    -       11,500  
Deferred Charges
    9,620       -  
Goodwill
    1,228,856       1,228,856  
TOTAL ASSETS
  $ 5,217,156     $ 3,619,614  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Bank Overdraft
  $ -     $ 45,654  
Accounts Payable
    528,368       460,170  
Accrued Payroll and Payroll Taxes
    13,919       33,252  
Other Accrued Liabilities
    1,886       1,639  
Dividends Payable
    33,750       33,750  
Notes Payable, net of discount
    743,462       110,721  
Notes Payable - Related Parties
    1,821,064       534,375  
Accrued Interest
    19,049       12,980  
Accrued Interest - Related Parties
    384,240       324,308  
Stock Subscription Payable
    6,240       -  
Total Current Liabilities
    3,551,978       1,556,849  
                 
                 
TOTAL LIABILITIES
    3,551,978       1,556,849  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, Class B - $0.001 par value, 300,000
shares designated, 70,000 issued and outstanding as of  
September 30, 2011 and December 31, 2010
    70       70  
Common stock  - $0.001 par value, 100,000,000 shares
authorized, 88,919,076 and 84,776,718 issued and
outstanding as of September 30, 2011 and December 31, 2010
    88,919       84,777  
Additional Paid-in Capital
    8,972,122       8,307,874  
Stock Subscription Receivable
    (89,904 )     (89,904 )
Retained Deficit
    (7,306,029 )     (6,240,052 )
TOTAL STOCKHOLDERS'  EQUITY
    1,665,178       2,062,765  
                 
TOTAL LIABILITIES AND STOCKHOLDERS'
  $ 5,217,156     $ 3,619,614  
   EQUITY
               
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
3

 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
                         
                         
   
THREE MONTHS
   
THREE MONTHS
   
NINE MONTHS
   
NINE MONTHS
 
   
ENDED
   
ENDED
   
ENDED
   
ENDED
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
                         
Total Revenue
  $ 170,604     $ 40,592     $ 471,296     $ 379,770  
                                 
Cost of Sales
    (57,646 )     (4,585 )     (138,078 )     (90,580 )
                                 
Gross Profit
    112,958       36,007       333,218       289,190  
                                 
OPERATING EXPENSES:
                               
   Selling, General and Administrative
    (363,646 )     (316,713 )     (931,440 )     (1,394,375 )
                                 
LOSS FROM CONTINUING OPERATIONS
    (250,688 )     (280,706 )     (598,222 )     (1,105,185 )
                                 
OTHER INCOME (EXPENSES):
                               
   Interest Income
    36,057       19,376       66,772       47,780  
   Loss on  Settlement
    (15,441 )     (44,142 )     (55,531 )     (356,964 )
   Gain on Disposition
    -       378,323       -       401,899  
   Debt Related Expense
    (386,498 )     (82,500 )     (406,719 )     (82,500 )
   Interest Expense
    (34,266 )     (82,445 )     (72,277 )     (141,452 )
Other Income (Expenses)
    (400,148 )     188,612       (467,755 )     (131,237 )
                                 
NET LOSS BEFORE TAXES
    (650,836 )     (92,094 )     (1,065,977 )     (1,236,422 )
   Current Tax Expense
    -       -       -       -  
   Deferred Tax Expense
    -       -       -       -  
NET LOSS
  $ (650,836 )   $ (92,094 )   $ (1,065,977 )   $ (1,236,422 )
                                 
                                 
Basic gain (loss) per common share
  $ (0.01 )   $ (0.00 )   $ (0.01 )   $ (0.02 )
                                 
Weighted average number of common shares
    87,770,134       78,421,358       86,290,983       68,416,538  
                                 
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 NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
             
             
   
Nine Months
   
Nine Months
 
   
Ended
   
Ended
 
   
September 30, 2011
   
September 30, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (1,065,977 )   $ (1,236,422 )
Adjustments to reconcile net loss to net cash used
         
    in operating activities:
               
Depreciation and amortization
    -       910  
Amortization of deferred financing costs
    219,189       41,719  
Gain on failed sale of MOS assets
    -       (378,323 )
Non-cash expenses
    103,237       15,168  
Loss on convertible debentures
    -       98,945  
Loss on debt settlement
    55,531       253,019  
Gain on disposal of subsidiary
    -       (23,576 )
Stock issued for debt related costs
    164,490       82,500  
Stock issued for interest and extensions
    23,040       62,800  
Stock issued for employee compensation
    17,000       -  
Stock issued for services
    -       637,312  
Changes in assets and liabilities:
               
(Increase) decrease in accounts receivable
    (3,547 )     31,133  
(Increase) decrease in prepaids and other assets
    11,500       -  
(Increase) decrease in interest receivable - related parties
    (47,114 )     (35,973 )
(Increase) decrease in interest receivable
    (19,658 )     (11,625 )
Increase (decrease) in accounts payable
    68,198       138,058  
Increase (decrease) in accrued payroll and payroll taxes
    (19,333 )     (14,733 )
Increase (decrease) in other accrued liabilites
    247       (2,247 )
Increase (decrease) in accrued interest
    9,069       30,767  
Increase (decrease) in accrued interest - related parties
    63,207       4,771  
Net cash provided (used) by operating activities
    (420,921 )     (305,797 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from failed sale of MOS assets
    -       400,000  
Expenses on failed sale of MOS assets
    -       (21,677 )
Purchase of notes receivable-related parties
    (1,117,400 )     (343,730 )
Proceeds from notes receivable-related parties
    1,244,850          
Purchase of notes receivable
    (1,625,000 )        
Proceeds from notes receivable
    -       100,000  
Deposit on oil and gas leases
    -       (10,000 )
Purchase of mining lease rights
    (4,536 )     (72,500 )
Net cash provided (used) in investing activities
    (1,502,086 )     52,093  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net change in bank overdraft
    (45,654 )     -  
Proceeds from notes payable
    874,000       294,000  
Payments on notes payable
    (190,000 )     (288,000 )
Proceeds from notes payable - related parties
    1,441,300       727,330  
Payments on notes payable -  related parties
    (138,900 )     (682,700 )
Proceeds from sale of stock
    -       165,000  
Proceeds from debentures
    -       21,749  
Net cash provided by financing activities
    1,940,746       237,379  
                 
NET INCREASE (DECREASE) IN CASH
    17,739       (16,325 )
                 
Cash, beginning of period
    -       26,343  
Cash, end of period
  $ 17,739     $ 10,018  
                 
                 
Cash paid during the period for:
               
Interest
  $ -     $ -  
Income Taxes
  $ -     $ -  
                 
Supplemental Non-Cash Investing and Financing Activities:
         
Sale of note receivable (and associated debt) for note
  $ -     $ 400,000  
Common Stock issued in payment of debt
  $ -     $ 398,319  
Common Stock issued for mining lease rights
  $ -     $ 910,000  
Purchase of mining lease rights with debt
  $ -     $ 480,000  
Debentures converted to common stock
  $ -     $ 297,111  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
5

 
 

VHGI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011

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., a Delaware corporation.  The accompanying unaudited condensed consolidated balance sheet as of September 30, 2011 and unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and September 30, 2010 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 nine month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any other period.  These financial statements and notes should be read in conjunction with the financial statements for the years ended December 31, 2010 and 2009, included in the Company’s Annual Report on Form 10-K.  The audited consolidated balance sheet as of December 31, 2010 has been included for comparison purposes in the accompanying balance sheet.  Certain prior year amounts have been reclassified to conform to current year presentation.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of VHGI and its wholly-owned subsidiaries:  Medical Office Software, Inc. (“MOS”), a Florida corporation, VHGI Gold, LLC (“VHGI Gold”), a Nevada limited liability company, VHGI Energy, LLC (“VHGI Energy”), a Delaware limited liability company, and VHGI Coal, Inc. (“VHGI Coal”), a Delaware corporation.   MOS has not been included for the period August 1, 2010 thru September 30, 2010 due to the failed sale of certain assets and liabilities of MOS on September 30, 2010 (see Note 5 – “Asset Dispositions”). All intercompany accounts and transactions have been eliminated.

Beneficial Conversion Feature of Convertible Notes Payable

The convertible feature of certain notes payable provides for a rate of conversion that is below the market value of the Company’s common stock. Such a feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). In accordance with ASC Topic No. 470-20-25-4, the intrinsic value of the embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital.  When applicable, the Company records the estimated fair value of the BCF in the condensed consolidated financial statements as a discount from the face amount of the notes. Such discounts are accreted to interest expense over the term of the notes using the effective interest method.

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.
 
 
 
6

 

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 of 2010.

On June 8, 2010, the Company entered into an Asset Purchase Agreement (the “Mining Agreement”) for the purchase of a group of mining lease rights located in Northern Arizona (including Sun Gold and Gulch Mine), from Western Sierra Mining Corporation (“Western Sierra”), 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, ninety (90) days following the payment of the Western Sierra Note, VHGI will issue to Western Sierra 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 Western Sierra may elect to receive, $250,000 in lieu of VHGI’s issuing Western Sierra shares of common stock.  In addition, the Company will pay Western Sierra 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, the 5,000,000 shares of the Company’s common stock mentioned above were issued at a closing price of $.11 per share and these shares, in addition to title of ownership for the mining lease rights, were held in escrow until payment was received by Western Sierra for the Western Sierra Note.  The value of the issued shares, which were initially recorded as a deposit, has been recorded as an increase in the value of the mining lease rights in the amount of $550,000.  The principal balance owed on the initial Western Sierra Note was paid in full in October 2010.

On September 8, 2010, the Company negotiated the terms for the final payment due to Western Sierra under the Mining Agreement mentioned above and a second promissory note was issued to Western Sierra by the Company in the principal amount of $240,000, which has been recorded as an increase in the value of the mining lease rights.  This principal balance of the second promissory note was paid in full during the first quarter of 2011.

In addition, during the first quarter of 2011, the Sun Gold group of mines was increased from 4 claims to 28 claims for a cost of $4,536.  Although these claims have no significant prior mining activity, they provide value to our existing claims by enlarging the holdings, allowing us to best utilize the resources on and around the original claims.  The balance of the mining lease rights as of September 30, 2011, including these additions, is $1,529,536.

NOTE 4 – ASSET ACQUISITIONS

On June 15, 2010, the Company 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 and the Company made a non-refundable deposit payment of $10,000 to the seller.  In the third quarter of 2010 the Company decided not to pursue the purchase.

On 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 they needed a higher bid and the Company decided not to bid for the assets, therefore the deposit of $250,000 was returned to the Company.
 
 
 
7

 

On May 27, 2011, the Company entered into a letter of intent (the “Letter of Intent”) with the sole shareholder of Lily Group Inc. (“Lily”) to purchase all of the stock of Lily, which currently owns a coal mining operation in Indiana.  Though the terms of the Letter of Intent are non-binding (excluding customary standstill and confidentiality provisions), the Letter of Intent required the Company to loan Lily $500,000 pursuant to a convertible promissory note dated as of June 28, 2011 (the “Lily Note”). The Lily Note has a one-year term and accrues interests at a rate of 10% per annum. In addition, if the closing of the Lily transaction does not occur on or before June 28, 2012, all outstanding principal and accrued but unpaid interest under the Lily Note shall automatically convert into 2.5% of the fully diluted capital stock of Lily.  The Company funded the principal under the Lily Note in multiple installments between July 1, 2011, and July 19, 2011.  On August 31, 2011 the Company and Lily entered into an agreement to extend the Letter of Intent expiration date from September 1, 2011 to September 30, 2011.  This letter of intent was replaced on October 2, 2011 by a second letter of intent.

In relation to the May 27, 2011 Letter of intent, the Company executed an additional five convertible notes receivable with Lily in the third quarter of 2011 in the total amount of $1,125,000.  The notes mature one year from the date of execution and accrue interest at 10% per annum. In the event of default, the interest rate will increase to 12% per annum. If the closing of the Lily transaction does not occur on or before September 30, 2012, all outstanding principal and accrued but unpaid interest under these Lily notes shall automatically convert into a total of 5.63% of the fully diluted capital stock of Lily.  As of September 30, 2011 the balance of accrued interest receivable on these notes is $7,055.

On August 15, 2011the Company (VHGI Energy) entered into an agreement with Outdoor Resources of Crossville, Tennessee to drill an initial oil well within 120 days.   The well is to be located in the "Upper Cumberland Region" of north central Tennessee (Morgan, Fentress and/or Scott Counties).  The plan is for a shallow drilling program with a target of the Monteagle formation (750'); traditionally Tennessee's top gas and oil producing formation.  The Monteagle is the most wide spread oil and gas producing formation in the Cumberland Plateau. This is a single well "Turnkey" drilling agreement allowing VHGI Energy, LLC a 65% "Over Riding Royalty" while Outdoor Resources, Inc. and the land owners will hold the remaining interest.   Outdoor Resources, Inc. will hold 100% of the "Working Interest".  VHGI Energy, LLC has retained the right to acquire up to an additional four (4) wells upon completion of this initial effort.  The "Turnkey" drilling costs are to be $150,000 per well.  There can be no assurances as to whether or not the transactions within this agreement shall come to fruition.   But if such a transaction is completed, the Company will be engaged through Outdoor Resources as the licensed operating company (in Tennessee to drill and operate oil and natural gas wells) in the oil and natural gas business in the State of Tennessee.

On October 2, 2011, the Company entered into a second letter of intent (the “Second Letter of Intent”) with Lily reiterating the Company’s plans to purchase all of the stock of Lily.  The second Letter of Intent, which terminates on November 15, 2011, requires the Company to provide Lily with a line of credit for working capital.  The loan will be for one year and will accrue interest at 12% per annum.  If for any reason the transaction does not close, the loan will be converted into 7.5% non-diluted equity in Lily.  As of the date of this filing, the Company has established a $1,500,000 line of credit and has made payments to Lily in the amount of $955,000. There can be no assurances as to whether or not the transactions contemplated by the Letter of Intent will be consummated, or, if consummated, what the definitive terms of such transactions will be. But if such a transaction is consummated, the Company will be engaged through its ownership of Lily in the coal mining business.

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 payable)  incurred by VHGI in conjunction with the Private Access Note transaction.  The accrued interest receivable amount of $151,868 on the Private Access Note was not purchased by WMT.
c)  
VPS intellectual property assets of the real-time prescription drug monitoring business, including its “Veriscrip” technology.

 
 
8

 
 
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 of eHealth resulted in a gain on disposition of $23,576.  The balance of the WMT Note, including interest, has been paid in full as of September 30, 2011.

Scott A. Haire, the Company's 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, 2010, 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.

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 of MOS (the “Assets”).  The purchase price consisted 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 provided the right to purchase up to 1% of the equity of the Purchaser.The MOS Note, which was secured by a security interest in the Assets, carried an interest rate of 6% per annum, and provided for an initial $100,000 payment due August 2, 2010 (the “Initial Payment”), interim payments of $300,000 (the “Interim Payments”) with the remaining principal and interest due on September 30, 2010 (the “Final Payment”).  Per the terms of the MOS Note, if the Purchaser failed to make the Final Payment by September 30, 2010, ownership and title of the Purchased Assets were to immediately vest in the Company, with the holder of the MOS Note remaining entitled to exercise and enforce its rights under the MOS Note.

By letter dated September 30, 2010, the Company informed the Purchaser that the Final Payment had not been received, and that if the Final Payment was not received by the Company on or before October 4, 2010, it would constitute an uncured default under the terms of the MOS Note.  As of October 5, 2010, the Final Payment had not been received and, effective October 5, 2010, the Company has (i) taken all ownership and title to the Assets per the terms of the MOS Note, (ii) retained the $300,000 cash received and the $100,000 Initial Payment and (iii) reserved the right to exercise any and all of its other rights and remedies under the MOS Note. The total proceeds received of $400,000, less expenses associated with the sale which were not reimbursed by the Purchaser in the amount of $19,336, have been recorded as a gain on disposition in the amount of $380,664 as of December 31, 2010.  The Company has recorded a bad debt allowance for the $900,000 balance due on the MOS note.
 
 
 
9

 

NOTE 6 - NOTES RECEIVABLE

Notes ReceivableRelated Parties

The following is a summary of amounts due from related parties, including accrued interest separately recorded, as of September 30, 2011:

Related party
Nature of relationship
Terms of the agreement
Principal
Interest
         
H.E.B., LLC, a Nevada
 limited liability company
 
Scott Haire is the managing
member of HEB.
Unsecured $500,000 line of credit due on demand
 with interest rate of 10% per annum.   Line available
as of September 30, 2011 is $75,464.
$424,536
$40,634
         
Commercial Holding AG, LLC
Commercial Holding AG, LLC
has provided  previous lines of
credit to affiliates of VHGI.
Unsecured note with interest accrued at rate of 10%
per annum and is due on demand.
    75,000
 
23,771
 
         
MAH Holding, LLC
 
MAH Holding, LLC has provided
previous lines of credit to affiliates
of VHGI.
Unsecured note with interest accrued at a rate of 10%
per annum and is due on demand.
-
  11,392
TOTAL
   
$499,536
$75,797

Notes Receivable

The following is a summary of amounts due from unrelated parties, including accrued interest separately recorded, as of September 30, 2011:

Notes Receivable
Terms of Agreement
Principal
Interest
       
Private Access Note
The Company sold the 1,500,000 note receivable to WMT
in the asset disposition described in Note 5 “Asset Dispositions”
 $              -
 $       151,868
       
2nd Q Lily Note, convertible
One year note with interest accrued at 10% per annum, convertible
into 2.5% of fully diluted capital stock of Lily if acquisition described
in Note 4 “Asset Acquisitions” does not occur by June 28, 2012.
   500,000
           12,603
       
3rd Q Lily Notes, convertible
One year notes with interest accrued at 10% per annum, convertible
into 5.63% of fully diluted capital stock of Lily if acquisition described
in Note 4 “Asset Acquisitions” does not occur by September 30, 2012.
1,125,000
             7,055
Total
 
$1,625,000
 $        171,526

 
 
10

 

 
NOTE 7- NOTES PAYABLE

Notes Payable - Related Parties

Funds are advanced to the Company from various related parties including Scott A. Haire, the Company's Chairman, 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 as of September 30, 2011:

Related party
Nature of relationship
Terms of the agreement
Principal
Interest
         
H.E.B., LLC, a Nevada limited liability company
Scott 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.  Aggregate amount of line
available at September 30, 2011 is $1,582,525.
$ 417,475
$ 266,175
         
SWCC
Investor  in eHealth
Dated 7/21/06, no stated interest rate and
 no maturity date.
   21,900
 
-
 
         
Wound Management Technologies, Inc.
Scott Haire is an officer and director
of both WMT and VHGI.
Unsecured note with interest accrued at a rate
of 10% per annum with no maturity date.
45,664
4,418
         
Commercial Holding AG, LLC
Commercial Holding AG, LLC has
provided previous lines of credit
to affiliates of VHGI.
Unsecured note with interest accrued at a
rate of 10% per annum with no maturity date
142,600
98,006
         
MAH Holdings, LLC
MAH Holdings, LLC has provided
 previous lines of credit to affiliates
of VHGI.
Unsecured, three separate $500,000 lines
of credit, no maturity date with an interest
rate of 10% per annum. Aggregate amount
of line available at September 30, 2011 is $306,575.
  1,193,425
  15,641
Total
   
    $1,821,064
  $384,240
         
 

 
 
11

 

Notes Payable

The following is a summary of amounts due to unrelated parties, including terms of the debt, and the interest accrued as of September 30, 2011:

Notes Payable
Terms of Agreement
Principal
Discount
Interest
         
8% Notes, Convertible
Four convertible notes payable with principal and accrued
interest at 8% per annum due nine months from date of
execution.  The maturity dates range from January 6, 2012
to June 12, 2012. Notes are convertible into common stock
at a 45% discount on the market price.
 $  150,000
 $ 27,679
 $ 3,413
         
12% Notes, Convertible
 Two convertible notes payable with principal and accrued
interest, at 12% per annum, due July 19, 2012.  Notes are
convertible into common stock at a 50% discount on the
market price.
       200,000
    160,109
      4,734
         
Western Sierra Notes
Two notes payable issued in relation to the Mining Agreement
with Western Sierra Mining Corporation discussed in Note 3.
                   -
                -
    10,902
         
July 1 Notes
Two notes payable due September 1, 2011. Initially, a total
of 625,000 shares of common stock were issued to the
lenders in lieu of interest. The maturity dates were later
extended to December 31, 2011 in exchange for 256,000
shares of common stock issued as extension fees.
       100,000
                -
              -
         
July Senior Notes
Six senior promissory notes payable with two to three
month terms, with  maturity dates ranging from September
2, 2011 to December 31, 2011.  Proceeds are to be used to
consummate the transaction described in the May 27
letter of intent with Lily Group, Inc. (see note 4).  $81,250
of the balance is currently in default.
       481,250
                -
              -
Total
 
 $  931,250
$187,788
$19,049

Debentures

On December 17, 2008, the Company issued convertible debentures which were all converted into shares of the Company’s common stock as of June 30, 2010 with no remaining debenture balance as of December 31, 2010.

NOTE 8 - STOCKHOLDERS’ EQUITY

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 as Class B Voting Preferred Stock, and at September 30, 2011 and December 31, 2010 there were 70,000 shares outstanding.  Accrued, but unpaid, dividends totaled $33,750 at September 30, 2011 and December 31, 2010.
 
 
 
12

 

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 September 30, 2011, there were 88,919,076 shares issued and outstanding.  At December 31, 2010, there were 84,776,718 shares issued and outstanding.

During the first quarter of 2011, the Company issued 1,181,818 shares of common stock valued at $92,090 to an unrelated party for payment of debt and accrued interest in the amount of $52,000 and, as a result, a loss on settlement was recognized in the amount of $40,090.

There were no stock issuances for the second quarter of 2011.

During the third quarter of 2011, the Company issued 629,540 shares of common stock valued at $46,131 to an unrelated party for payment of debt and accrued interest in the amount of $26,000 and, as a result, a loss on settlement was recognized in the amount of $20,131.  The Company issued 1,875,000 shares of common stock valued at $150,000 to unrelated parties for loan origination fees valued at $158,250 based on the market value of the common stock on the date of the agreements.  At the time the stock was issued the fair market value of the Company’s stock had decreased, resulting in a gain on settlement of $8,250.  The Company also recorded loan origination fees in the amount of $6,240, the fair market value of 80,000 shares of common stock that were not issued until October 2011. The Company also issued 200,000 shares of common stock valued at $17,000 to an employee as part of an employment agreement and recorded a loss on settlement of $1,000.    The Company also issued 256,000 common shares valued at $25,600 to unrelated parties for extension fees valued at $23,040 and recorded a loss on settlement in the amount of $2,560.

Warrants

In July 2011, the Company issued 1,250,000 three-year warrants to purchase shares of common stock at an exercise price of $.08.  The fair market value of the warrants, calculated using the Black Scholes model, was recorded at $71,869.  As of September 30, 2011 all 1,250,000 warrants remain outstanding.

NOTE 9 - RELATED PARTY TRANSACTIONS

The Company’s corporate office is located in Fort Worth, Texas, in a space leased by HEB, LLC.  The Company shares the space with the WMT corporate office and other HEB affiliated companies.  The Fort Lauderdale office occupied by MOS is also leased by HEB and shared with a subsidiary of WMT.  The Company reimburses HEB for the cost of both office spaces.

The Company also reimburses HEB for the cost of accounting and administrative services provided to the Company by employees of HEB. Additionally, the Company pays HEB for the actual costs of health benefits provided to Company employees through HEB.

NOTE 10 – SUBSEQUENT EVENTS

The Company has evaluated all subsequent events from the balance sheet date through the date of this filing and with the exception of the items below there are no events to disclose.

In October of 2011, the Company issued 80,000 shares of common stock to an unrelated party for $6,240 of loan origination fees incurred in the third quarter.  The Company also issued 582,472 shares of common stock to an unrelated party for payment of 8% convertible debt in the amount of $28,000.

In October of 2011, the Company executed an 8% convertible note payable with an unrelated party in the amount of $30,000.  The note is due nine months from the date of execution.

In October of 2011, the Company executed notes payable in the amount of $350,000 with unrelated parties.  In consideration for the notes payable the Company agreed to issue 1,700,000 shares of common stock and $32,000 of bonus payment to the lenders.  The Company also issued 400,000 warrants to the lenders with an exercise price of $.15 per share.  The warrants expire December 31, 2016. The notes mature between December 12 and December 24, 2011.
 
 
 
13

 

In October of 2011, the Company paid $20,000 of the principal due on the July 1, 2011 notes payable to an unrelated party.

On October 2, 2011, the Company extended a $1,500,000 line of credit to Lily group according to the terms of the Second Letter of Intent (see Note 4 “Asset Acquisitions).  The line of credit accrues interest at 12% per annum.  As of the date of this filing the Company has funded the line of credit in the amount of $955,000.

On October 25, 2011 the Company made an initial payment of $25,000 to Outdoor Resources, Inc. related to the “Turnkey” drilling agreement (see Note 4 “Asset Acquisitions”).
 
 
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, 2010 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 prepared as of September 30, 2011.  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, 2010.

Business Overview
 
VHGI Coal.  The Company formed VHGI Coal, Inc., a Delaware corporation (“VHGI Coal”), on June 27, 2011. Through VHGI Coal, as described in Note 4 “Asset Acquisitions”, the Company entered into the Letter of Intent for the acquisition of Lily Group Inc. (“Lily”), through which it intends to operate certain coal mining properties in Indiana.

VHGI Coal, Inc. is currently soliciting funding for the purpose of completing the acquisition, development and operation of an underground coal mine, which is located on a property owned by Lily. The property, known as Landree Mine, is located in Greene County, Indiana in Wright Township.  Lily has acquired all of the necessary permits to operate a small surface and underground mine. It has verified reserves of 21 million saleable tons and is in the process of optioning an additional 75 million tons. This process began in 2007, and Lily currently has in place a qualified team of employees, officers, and advisory board members, as well as legal and accounting advisors.
 
 
 
14

 

Lily has acquired the rights to mine 1,400 acres from Western Pocahontas Properties Limited Partnership, in addition to the 1,400 acres owned by Lily. A 2010 "Geology Report" estimated a total of 21 million tons of Coal III and Coal IV, which is good quality low sulfur, low ash, high Btu (British Thermal Unit), high fusion coal. The depth of the coal ranges from 114 to 220 feet within the property.  Landree Mine property is adjacent to a spur of the Indiana Rail Road Company, which will make transportation to markets worldwide accessible and cost effective. It has also secured a bonded coal truck route in the event opportunity develops from local truck sales. Lily began initial mining production in January of 2011 and currently has contracts for the purchase of this output in house.

VHGI Gold.  With the completion of the National Instrument 43-101 technical report in 2010, which acknowledged the historical data on the mineralization opportunities on the Sun Gold mines, we believe the assets already acquired are viable economic prospects.  For this reason, we feel there is ample justification to move toward commercial mining, while simultaneously continuing to perform additional exploratory work for lease acquisitions to supplement the existing mining claim leases.

During the first quarter of 2011 the Company added an additional 24 claims to the Sun Gold claim group thus allowing for greater resource analysis and operational expansion.

During the remainder of 2011, we are continuing to work within the first phase of the mining operational plan, which includes the additional sampling and geophysical work on the claims.  In addition, we continue to pursue additional sources of capital to allow us to move into the next phase of permitting and purchasing the necessary capital equipment.
 
VHGI Energy.  On August 15, 2011, the Company entered into an agreement with Outdoor Resources, Inc., of Crossville, TN (“Outdoor Resources”) to initiate an oil/natural gas drilling program.   The wells are to be located in the "Upper Cumberland Region" of north central Tennessee (Morgan, Fentress and/or Scott Counties).  The plan is for a shallow drilling program with a target of the Monteagle formation (750'); traditionally Tennessee's top gas and oil producing formation.  The Monteagle is the most wide spread oil and gas producing formation in the Cumberland Plateau. The wells in this program are within a "Turnkey" drilling agreement allowing VHGI Energy, LLC a 65% "Over Riding Royalty" while Outdoor Resources and the land owners will hold the remaining interest.   Outdoor Resources will hold 100% of the "Working Interest".  VHGI Energy, LLC has retained the right in this agreement to drill up to an additional four (4) wells upon completion of the initial effort.  The "Turnkey" drilling costs are to be $150,000 per well.
 
We chose Outdoor Resources as our working partner based on their experience and success in this geographic / geologic area.  Formed in 1982 in Crossville, Tennessee, Outdoor Resources has explored over 400 well sites and has been successful in completing 75% of those with a find of oil or gas.   Outdoor Resources has performed operations all over Tennessee but focuses on five (5) primary counties where known reserves exist.  Outdoor Resources currently has 20 full time employees and has the capability to manage three (3) simultaneous drilling operations.    Outdoor Resources owns all of its own drilling equipment and inventory to complete any operation, from site prep to restoration and reclamation. Outdoor Resources has never been required to use any of its insurance or bonds.    While the current well sites average 1,800 feet, the capability exists to drill in excess of 4,000 feet, if required.
 
MOS.  The main objective of MOS is to assist the medical practice by providing healthcare software support and a fully integrated Practice Management/EMR Software, and by continuing to develop and enhance the underlying computer hardware and network systems those solutions depend on.  MOS has also expanded its services to include web design and consulting about billing and other aspects of medical practice.
 
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, 2010. 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.
 
 
 
15

 
 
Results of Operations and Financial Condition
 
Three and nine months ended September 30, 2011 compared with the three and nine months ended September 30, 2010:

Revenues.  The Company generated revenues for the three months ended September 30, 2011 of $170,604, as compared to revenues of $40,592 for the three months ended  September 30, 2010, or a  320% increase in revenues.  The Company generated revenues of $471,296 and $379,770 for the nine months ended September 30, 2011 and 2010, respectively, for an increase of 24%.  The increase in revenue is due primarily to the sale of MOS in the third quarter of 2010 (see Note 5).  MOS was under the control of MOS Acquisitions during August and September of 2010 until the sale entered default on October 5, 2010 and the Company regained possession of MOS.  As a result, the Company’s revenue for the three months ended September 30, 2010 does not include all of the sales made by MOS.
 
Cost of Sales. Cost of sales for the three months ended September 30, 2011 were $57,646, as compared to cost of sales of $4,585 for the three months ended September 30, 2010, for an increase in cost of sales of 1157%.  Cost of sales for the nine months ended September 30, 2011 and 2010, respectively, were $138,078 and $90,580, or an increase in cost of sales of 52%.  As mentioned above, MOS was not under the Company’s control for the entire three months ended September 30, 2010.  As a result, the cost of sales recorded for the third quarter of 2010 is significantly lower than the cost of sales recorded in the third quarter of 2011.
 
Selling, General and Administrative expenses (“G&A"). G&A expenses for the three months ended September 30, 2011 were $363,646, as compared to G&A expenses of $316,713 for the three months ended September 30, 2010, or a 15% increase in G&A expenses.  The increase is due to the startup of VHGI Coal. G&A expenses for the nine months ended September 30, 2011 were $931,440, as compared to G&A expenses of $1,394,375 for the nine months ended September 30, 2010, or a 33% decrease. The decrease is due to a reduction of fees paid to consultants.
 
Interest Income.   Interest income was $36,057 for the three months ended September 30, 2011, as compared to $19,376 for the three months ended September 30, 2010, or an increase of 86%. Interest income was $66,772 for the nine months ended September 30, 2011, as compared to $47,780 for the nine months ended September 30, 2010, or an increase of 40%. The increase is the result of the purchase of additional note receivables; particularly the Lily notes receivable (see Note 6).
 
 
Loss on Settlement.   The Company incurred a loss on settlement of $15,441 for the three months ended September 30, 2011, as compared to a $44,142 loss on settlement incurred for the three months ended September 30, 2010, or a decrease of 65%.   The Company incurred a loss on settlement of $55,531 for the nine months ended September 30, 2011, as compared to a $356,964 loss on settlement for the nine months ended September 30, 2010, or a decrease of 84%.
 
Debt Related Expense. Debt related expenses for the three months ended September 30, 2011 were $386,498, as compared to $82,500 for the three months ended September 30, 2010, or a 368% increase.  Debt related expenses for the nine months ended September 30, 2011 were $406,719, as compared to $82,500 for the nine months ended September 30, 2010, or a 393% increase. The increase is due to the increase in complex debt agreements that include loan origination fees and conversion features.
 
Interest Expense.   Interest expense was $34,266 for the three months ended September 30, 2011, as compared to $82,445 for the three months ended September 30, 2010, or a decrease of 58%.  Interest expense was $72,277 for the nine months ended September 30, 2011, as compared to $141,452 for the nine months ended September 30, 2010, or a decrease of 49%. The Company decreased its interest expense by offering the debt holders equity.
 
 
 
16

 
 
Gain on Disposition.  The Company had a gain on disposition for the three months ended September 30, 2010 of $378,323.  For the nine months ended September 30, 2010 the Company recorded a gain of $401,899. There were no such gains on dispositions for the three or nine months ended September 20, 2011.  The gain on disposition in 2010 resulted from the Company’s sale of eHealth in February and the attempted sale of MOS (see Note 5).
 
Net Loss. We had a net loss for the three months ended September 30, 2011of $650,836, as compared with a net loss of $92,094 for the three months ended September 30, 2010, or an increase in net loss of 607%. The Company had a net loss of $1,065,977 for the nine months ended September 30, 2011, as compared to a net loss of $1,236,422 for the nine months ended September 30, 2010, or decrease in net loss of 14%. The increase in net loss for the three months is due partially to the increase in debt related costs incurred to secure financing in 2011.  Also, in 2010 the Company recorded a substantial gain on the attempted sale of MOS.  No such gain was recorded in 2011.  The decrease in net loss of 14% for the nine months ended September 30 is due to the decrease of interest expense and loss on settlement in 2011.

All material changes in financial condition and results of operations for the three and nine months ended September 30, 2011 compared with the three and nine months ended September 30, 2010 are identified in the above analysis for the periods ended September 30, 2011 and 2010.
 
Liquidity and Capital Resources
 
Historically, we have financed our operations primarily from the sale of debt and equity securities. Our financing activities generated approximately $1,940,746 for the nine months ended September 30, 2011 and approximately $237,379 for the nine months ended September 30, 2010.
 
We will need to raise additional capital in fiscal year 2011 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, 2010 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.
 
Off-Balance Sheet Arrangements
 
None.
 
Recent Accounting Pronouncements
 
For the period ended September 30, 2011, 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, 2010.

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 September 30, 2011, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of September 30, 2011, 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
 
None.

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
 
Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the three months ended September 30, 2011.  The securities bear a restrictive legend and no advertising or public solicitation was involved.

As further described in the notes accompanying the financial statements filed herewith:

In July 2011, the Company issued 629,540 shares of common stock to an unrelated party in conversion of debt and accrued interest payable in the amount of $26,000 for a loss on conversion in the amount of $20,131.

In August 2011, the Company issued 1,875,000 shares of common stock to unrelated parties for loan origination fees in the amount of $158,250 for a gain on settlement of $8,250.  The Company also issued 100,000 shares valued at $8,000 to an employee according to the terms of an employment agreement.

In September 2011, the Company issued 256,000 shares of common stock to unrelated parties as extensions of note payable agreements.  The Company recorded extension fees of $23,040 and a loss on settlement of $2,560. The Company also issued an additional 100,000 shares of common stock to an employee according to the terms of the individual’s employment agreement. The Company recorded employee compensation expense of $9,000 and a loss on settlement of $1,000.

The issuances described above were made in private transactions or private placements intending to meet the requirements of one or more exemptions from registration, including the exemption provided under Section 4(2) of the Securities Act of 1933, as amended (the “Act”).  The investors were not solicited through any form of general solicitation or advertising, the transactions being non-public offerings, and the sales were conducted in private transactions where the investor identified an investment intent as to the transaction without a view to an immediate resale of the securities; the shares were “restricted securities” in that they were both legended with reference to Rule 144 as such and the investors identified they were sophisticated as to the investment decision and in most cases we reasonably believed the investors were “accredited investors” as such term is defined under Regulation D based upon statements and information supplied to us in writing and verbally in connection with the transactions.  We have never utilized an underwriter for an offering of our securities and no sales commissions were paid to any third party in connection with the above-referenced sales.
 
 
 
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.

ITEM 4.  REMOVED AND RESERVED
 
ITEM 5. OTHER INFORMATION
 
 
On August 31, 2011 the Company executed an extension of the May 27 letter of intent.  On October 2, 2011, the Company entered into a second letter of intent with Lily, extending the termination date of the agreements to November 15 and requiring the Company to provide Lily with a line of credit for working capital (see Note 4 “Asset Acquisitions”).
 
ITEM 6. EXHIBITS
 
The following documents are filed as part of this Report:
 
EXHIBIT INDEX

EXHIBIT NO.
DESCRIPTION OF EXHIBIT
2.1
Certificate of Ownership Merging VHGI Holdings, Inc. into VirtualHealth Technologies, Inc., effective March 23, 2010 (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 29, 2010)
3(i)
Amended and Restated Certificate of Incorporation, dated August 24, 2006 (Incorporated by reference to Exhibit 3(i) to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 15, 2011)
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*
Outdoor Resources Agreement
10.2*
Letter of Credit to Lily Group, Inc.
31.1*
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Principal Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Principal Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*Filed herewith
 
101
 
 
 
 
 
 
Interactive data files pursuant to Rule 405 of Regulation S-T.

 
 
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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: November 14, 2011
 
VHGI HOLDINGS, INC.
 
 
 
By   /s/ Douglas  P. Martin                                        
Douglas P. Martin,
Chief Executive Officer
 
   
 
 
 
 
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