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

FORM 10-Q

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

For the quarterly period ended March 31, 2013

o Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

Commission File Number: None

VANGUARD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

COLORADO
 
27-2888719
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1330 Post Oak Blvd., Suite 1600
Houston, Texas 77056
(Address of principal executive offices, including Zip Code)
 
(713) 627-2500
(Issuer’s telephone number, including area code)

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

Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12,741,512 shares of common stock as of May 8, 2013.
 


 
 

 
 
 
    Page Number  
       
Consolidated Balance Sheets     3  
         
Consolidated Statements of Operations      4  
         
Consolidated Statements of Cash Flows     5  
         
Notes to the Consolidated Financial Statements     6  
 
 
2

 

CONSOLIDATED BALANCE SHEETS

   
March 31,
   
September 30,
 
   
2013
   
2012
 
   
(Unaudited)
       
ASSETS
Current assets
           
Cash and cash equivalents
  $ 1,256,147     $ 3,090,422  
Accounts receivable
    526,253       615,631  
Other assets
    36,273       6,132  
Total current assets
    1,818,673       3,712,185  
                 
Property and equipment
               
Oil and gas, on the basis of full cost accounting
               
   Proved properties
    11,762,851       9,288,166  
   Unproved properties and properties under
               
      development, not being amortized
    725,755       1,427,294  
Furniture and equipment
    26,946       24,494  
Less: accumulated depreciation, depletion and amortization
    (1,760,387 )     (1,108,956 )
Total property and equipment
    10,755,165       9,630,998  
                 
Debt issuance costs
    692,614       857,412  
Other assets
    14,417       15,570  
                 
Total assets
  $ 13,280,869     $ 14,216,165  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
               
Accounts payable
  $ 73,424     $ 414,873  
Other liabilities
    383,463       344,712  
Current portion of notes payable, net of discount of $0 and $77,584
    -       247,416  
Current portion of conversion feature liabilities
    -       564  
Total current liabilities
    456,887       1,007,565  
                 
Notes payable, net of discount of $542,961 and $635,748
    7,711,539       7,618,752  
Participation liability
    1,473,184       1,573,605  
Conversion feature liabilities
    50,652       583,454  
Warrant liabilities
    3,919       68,746  
Asset retirement obligations
    115,475       96,410  
                 
Total liabilities
    9,811,656       10,948,532  
                 
Commitments and contingencies
    -       -  
                 
Stockholders' equity
               
Preferred stock, $0.00001 par value; 5,000,000 shares
               
   authorized, none issued or outstanding
    -       -  
Common stock, $0.00001 par value; 50,000,000 shares authorized,
               
   12,741,512 shares issued and outstanding
    127       127  
Additional paid-in capital
    5,522,204       5,522,204  
Accumulated deficit
    (2,053,118 )     (2,254,698 )
                 
Total stockholders' equity
    3,469,213       3,267,633  
                 
Total liabilities and stockholders' equity
  $ 13,280,869     $ 14,216,165  
 
The accompanying notes are an integral part of these consolidated financial statements.
 

CONSOLIDATED STATEMENT OF OPERATIONS
 
   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues
                       
Oil and gas sales
  $ 1,249,353     $ 862,505     $ 2,565,014     $ 1,607,676  
                                 
Costs and expenses
                               
Lease operating expense
    193,074       138,540       370,517       237,636  
Production taxes
    57,601       39,744       118,260       74,087  
Depreciation, depletion and amortization
    282,095       189,899       651,431       311,844  
Asset retirement obligation accretion
    4,799       974       9,273       2,117  
General and administrative
    415,354       402,126       823,004       702,997  
Total costs and expenses
    952,923       771,283       1,972,485       1,328,681  
                                 
Income from operations
    296,430       91,222       592,529       278,995  
                                 
Other income (expense)
                               
Interest income
    332       1,180       858       1,712  
Interest expense
    (461,206 )     (246,524 )     (990,000 )     (492,068 )
Change in fair value of warrant and
                               
conversion feature liabilities
    155,256       408,489       598,193       483,108  
Total other income (expense)
    (305,618 )     163,145       (390,949 )     (7,248 )
                                 
Income (loss) before income taxes
    (9,188 )     254,367       201,580       271,747  
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net income (loss)
  $ (9,188 )   $ 254,367     $ 201,580     $ 271,747  
                                 
Earnings (loss) per share
                               
Basic
  $ (0.00 )   $ 0.02     $ 0.02     $ 0.02  
Diluted
  $ (0.00 )   $ 0.02     $ 0.02     $ 0.02  
                                 
Weighted average shares outstanding
                               
Basic
    12,741,512       12,705,561       12,741,512       11,062,946  
Diluted
    12,741,512       12,798,420       12,741,512       11,109,375  

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended
 
   
March 31,
 
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net income
  $ 201,580     $ 271,747  
Adjustments to reconcile net income
               
to net cash from operating activities:
               
Depreciation, depletion and amortization
    651,431       311,844  
Amortization of debt issuance costs
    164,798       105,632  
Asset retirement obligation accretion
    9,273       2,117  
Amortization of debt discount
    170,371       419,494  
Accretion of participation liability
    75,178       52,189  
Stock-based compensation expense
    -       30,000  
Change in fair value of warrant and conversion
               
feature liabilities
    (598,193 )     (483,108 )
Change in operating assets and liabilities:
               
Accounts receivable
    89,378       (137,021 )
Other assets
    (28,988 )     (28,339 )
Accounts payable
    (67,594 )     (87,462 )
Other liabilities
    (136,848 )     (181,524 )
Net cash from operating activities
    530,386       275,569  
                 
Cash flows from investing activities
               
Purchase of furniture and equipment
    (2,452 )     (1,531 )
Capital expenditures on oil and gas properties
    (2,037,209 )     (2,494,500 )
Net cash from investing activities
    (2,039,661 )     (2,496,031 )
                 
Cash flows from financing activities
               
Equity offering costs
    -       (199,849 )
Proceeds from issuance of common stock and warrants
    -       4,224,000  
Repayment of note payable
    (325,000 )     -  
Net cash from financing activities
    (325,000 )     4,024,151  
                 
Net change in cash and cash equivalents
    (1,834,275 )     1,803,689  
                 
Cash and cash equivalents
               
Beginning of period
    3,090,422       453,243  
                 
End of period
  $ 1,256,147     $ 2,256,932  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 – BASIS OF PRESENTATION

These consolidated financial statements of Vanguard Energy Corporation (Vanguard or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations. These financial statements should be read along with Vanguard’s audited financial statements as of September 30, 2012.

Certain reclassifications have been made to the prior period financial statements and footnote amounts in order to conform to the current period presentation.

On December 2, 2011, the Company sold 4,800,000 units in an initial public offering at a price of $1.00 per unit. Each unit consisted of one share of the Company's common stock and one Class A warrant. Each Class A warrant entitles its holder to purchase one share of the Company's common stock at an exercise price of $1.50. The Class A warrants are exercisable at any time on or before November 29, 2016. The underwriters for the offering were paid a commission of $432,000 (9% of the gross offering proceeds) and a non-accountable expense allowance of $144,000 (3% of the gross offering proceeds). The underwriters also received warrants to purchase up to 480,000 units. Proceeds from the offering were approximately $3,498,859 million net of the underwriters’ discount and offering expenses. As of March 31, 2013, the Company has 12,741,512 shares issued and outstanding.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As of March 31, 2013, Vanguard’s significant accounting policies are consistent with those discussed in the audited financial statements as of September 30, 2012.

Earnings Per Share – Basic earnings per share have been calculated based upon the weighted-average number of common shares outstanding. Diluted earnings per share have been calculated based upon the weighted-average number of common and potential common shares. The calculation of diluted weighted-average shares outstanding for the three and six-month periods ended March 31, 2013 excludes 17,610,960 shares and for the three and six-month periods ended March 31, 2012 excludes 12,060,000 shares issuable pursuant to outstanding warrants, stock options and debt conversion features because their effect is anti-dilutive.

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

NOTE 3 – OIL AND GAS ACQUISITIONS

By agreement dated March 15, 2011, the Company entered into a farmout agreement with an unrelated third party pertaining to a 100-acre lease in the Batson Dome Field. As of March 31, 2013, the Company had drilled five wells on the lease. Pursuant to the farmout agreement, as amended in January 2013, the Company has the option of drilling additional wells on the lease; provided however, that if it does not drill at least three wells in any twelve month period the right to drill any additional wells on the lease will terminate. The estimated cost of drilling and completing any well on this lease is approximately $600,000.

 
VANGUARD ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
By agreement dated May 25, 2011, the Company entered into a farmout agreement with an unrelated third party pertaining to a 100-acre lease in the Batson Dome Field. Pursuant to the agreement, the Company had the obligation to commence drilling a well on the lease by June 14, 2012. In June 2012, the Company paid $10,000 to extend the agreement, whereby it now has an obligation to commence drilling by June 14, 2013. Subject to the commencement of drilling the first well by June 14, 2013, and completing the well if warranted, the Company has the option of drilling additional wells on the lease; provided however, that unless the Company commences drilling each well within 180 days of the date the latest well is completed or abandoned, the right to drill any additional wells on the lease will terminate. The estimated cost of drilling and completing any well on this lease is approximately $1,000,000.

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

By agreement dated May 1, 2012, the Company entered into a farmout agreement with an unrelated third party pertaining to another 45-acre lease in the Hull-Daisetta Field. Pursuant to the agreement, the Company had the obligation to commence drilling a well on the lease by January 31, 2013. In January 2013, the agreement was amended, whereby the Company now has an obligation to commence drilling by January 31, 2014. Subject to the commencement of drilling the first well by January 31, 2014, and completing the well if warranted, the Company has the option of drilling additional wells on the lease; provided however, that unless the Company commences drilling each well within 180 days of the date the latest well is completed or abandoned, the right to drill any additional wells on the lease will terminate. The estimated cost of drilling and completing any well on this lease is approximately $750,000.

Through certain acquisitions in 2010, the Company owns a ninety percent (90%) working interest in mineral leases for 230 acres in the Batson Dome Field. C.F.O., Inc. owns the remaining ten percent (10%) working interest and is the operator for the mineral leases pursuant to a joint operating agreement between the Company and C.F.O., Inc. The Company has recorded a receivable from C.F.O., Inc. for its 10% share of capital expenditures. At March 31, 2013, this amount totaled $120,322.

NOTE 4 – LONG-TERM DEBT

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

Direct costs of $400,051 were incurred in connection with the issuance of the 2010 Convertible Promissory Notes. The Company also issued the placement agent Series B warrants for the purchase of up to 340,000 shares of common stock at a price of $1.20 per share at any time prior to October 31, 2014, 170,000 shares of common stock at a price of $4.00 per share at any time prior to October 31, 2014, and 453,322 shares of common stock at a price of $0.10 per share at any time prior to March 31, 2011. As of March 31, 2013, 453,322 warrants have been exercised. The warrants also provide for adjustment to their exercise prices under certain circumstances.

 
VANGUARD ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
During 2012, $3,075,000 of the 2010 Convertible Promissory Notes outstanding were surrendered in exchange for new 2012 Convertible Promissory Notes as discussed below. The remaining notes, which had an outstanding principal balance of $325,000, were repaid in October 2012.

2012 Convertible Promissory Notes – During 2012, the Company issued $8,254,500 of Convertible Promissory Notes, due and payable on June 30, 2015 and convertible at the holder’s option, into common stock of the Company at $1.25 per share. The Convertible Promissory Notes bear interest at 15% per year, payable quarterly. Of the total amount raised, $5,179,500 represented new cash investors and $3,075,000 represented investors from the 2010 convertible note offering who chose to roll their investment in that earlier offering into the Company's new offering. Net proceeds from this financing are being used to fund an accelerated developmental drilling program in the Company's oil fields located in Southeast Texas and to pay the 2010 Convertible Promissory Notes remaining outstanding on October 31, 2012.
 
Except in certain circumstances, the conversion price of the 2012 Convertible Promissory Notes will be lowered if the Company sells any additional shares of common stock or any securities convertible into common stock, at a price below the then applicable conversion price. The conversion price will also be proportionately adjusted in the event of any stock split, or capital reorganization. On or prior to December 31, 2013, the Company may repay the Notes, without penalty, upon twenty days written notice to the Note holders if, during any twenty trading days within a period of thirty consecutive trading days, the closing price of the Company’s common stock is $2.25 or greater and the Company’s common stock has an average daily trading volume of 100,000 shares or more during the twenty trading days. After December 31, 2013, the Company may prepay the Notes upon twenty days written notice to the Note holders.
 
Direct costs of $813,780 were incurred in connection with the issuance of the 2012 Convertible Promissory Notes. The Company recognized a loss on debt extinguishment of $410,639 related to the investors who chose to roll their investment in the 2010 Convertible Promissory Notes into the new offering. The placement agents for this offering received a cash commission of $619,905 as well as 537,360 Series E warrants. Each Series E warrant entitles the holder to purchase one share of the Company’s common stock. The Series E warrants may be exercised at any time on or before June 30, 2017 at a price of $1.55 per share.
 
Total Indebtedness under Convertible Promissory Notes  The Company’s gross outstanding balance of the Convertible Promissory Notes was $8,254,500 as of March 31, 2013. As of March 31, 2013, the unamortized discount on the Convertible Promissory Notes totaled $542,961. Interest expense for the amortization of debt issuance cost and discount on the notes for the three and six-month periods ended March 31, 2013 was $124,429 and $335,169, respectively. The effective interest rate of the Convertible Promissory Notes (net of the participation liability discussed below) was 26.6% as of March 31, 2013. Accrued interest included in Other Liabilities at March 31, 2013 and September 30, 2012 was $332,044 and $267,374, respectively.

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

The Company has recognized a participation liability related to the net profits interest granted. This participation liability is reflected in the liability section of the balance sheet at its estimated fair value of $1,473,184 as of March 31, 2013. The Company estimated the fair value of the participation liability utilizing a present value factor of 10 applied to proved developed reserves associated with the wells drilled and completed with the proceeds of the notes. At any time, the Company may purchase the net profits interests held by the Fund for $3,400,000.

 
VANGUARD ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
The Company incurred expense associated with the net profits interest granted during the three and six-month periods ended March 31, 2013 of $36,966 and $75,178, respectively. This amount is reported as interest expense in the statement of operations. The Company also made payments of $85,056 and $175,599, respectively under this arrangement during the three and six-month periods ended March 31, 2013.

NOTE 5 – INCOME TAXES

The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the three and six-month periods ended March 31, 2013 because the Company estimates it will record no income tax expense for the year ended September 30, 2013. The Company recorded no income tax expense for the three and six-month periods ended March 31, 2012. The Company has a valuation allowance that fully offsets net deferred tax assets.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

The Company’s material future contractual obligations as of March 31, 2013 were as follows:
 
    Total     2013     2014     2015     Thereafter  
                               
Convertible notes   $ 8,254,500       --       --     $ 8,254,500       --  
Office leases   $ 19,800     $ 19,800       --       --       --  
 
The Company has no contractual capital commitments outstanding at March 31, 2013. Capital expenditures during the first six months of fiscal year 2013 totaled $2.0 million. Management estimates the Company will spend approximately $5.0 million during the remainder of fiscal year 2013 for drilling and completing wells in the Batson Dome Field and for various other projects. Meeting this estimate for drilling and completing wells will require additional financing beyond the Company’s available cash on hand.
 
 
VANGUARD ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of March 31, 2013 and September 30, 2012:

         
March 31,
   
September 30,
 
   
Level
   
2013
    2012  
                   
Participation liability
  3     $ 1,473,184     $ 1,573,605  
Conversion feature liabilities
  3       50,652     $ 584,018  
Warrant liabilities
  3       3,919     $ 68,746  
                       
Total liabilities
        $ 1,527,755     $ 2,226,369  

Assets and liabilities that are not recognized or disclosed on a recurring basis include those measured at fair value in a business combination and the initial recognition of asset retirement obligations.

The conversion feature liability and warrant liabilities are marked to market at each balance sheet date. The fair value of the conversion feature liability at March 31, 2013 was computed using the Black-Scholes model with the following assumptions: (1) expected life of 2.3 years; (2) volatility of 27.0%; (3) risk free interest of 0.29%, and a dividend rate of zero. The fair value of the warrant liabilities at March 31, 2013 was also computed using the Black-Scholes pricing model with the following assumptions: (1) expected life between 1.6 and 2.9 years; (2) volatility between 24.1% and 26.9%; (3) risk free interest between 0.21% and 0.39%, and a dividend rate of zero.

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

   
Participation
Liability
   
Conversion Feature Liabilities
   
Warrant
Liabilities
   
Total
 
                         
Balance at September 30, 2012
  $ 1,573,605     $ 584,018     $ 68,746     $ 2,226,369  
Purchases, issuances and settlements
    (175,599 )     -       -       (175,599 )
(Gains) losses included in earnings
    75,178       (533,366 )     (64,827 )     (523,015 )
                                 
Balance at March 31, 2013
  $ 1,473,184     $ 50,652     $ 3,919     $ 1,527,755  
 
 
VANGUARD ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION

   
Six Months Ended
 
   
March 31,
 
   
2013
   
2012
 
             
Interest paid
  $ 603,088     $ 136,000  
Interest capitalized (non-cash)
    45,935       221,247  
Noncash investing and financing activities:
               
Capital expenditures included in accounts payable
    15,278       139,613  
Asset retirement obligations incurred
    9,792       63,865  
Issuance of restricted shares
    -       29,587  

* * * * *
 

FORWARD LOOKING STATEMENTS

The information contained in this Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, including among other things, statements regarding our capital needs, business strategy and expectations. Any statement which does not contain a historical fact may be deemed to be a forward-looking statement. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. In evaluating forward looking statements, you should consider various factors outlined in our latest Form 10-K, filed with the U.S. Securities Exchange Commission (“SEC”) on December 28, 2012, and, from time to time, in other reports we file with the SEC. These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements.

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

The following discussion analyzes and summarizes the results of our operations and our financial condition for the three month periods ended March 31, 2013 and 2012. This discussion and analysis should be read in conjunction with our financial statements included with this report.

Results of Operations

We were incorporated in Colorado on June 21, 2010 and commenced operations on July 19, 2010. We are in the early stages of implementing our business plan.

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

 In December 2010, we acquired two producing and three shut-in oil wells in the Batson Dome Field. As of April 30, 2013, the two wells were producing approximately one barrel of oil per day, net to our 63% net revenue interest. As of April 30, 2013, one shut-in well had been plugged and abandoned. We estimate the costs of reworking the two remaining shut-in wells will be $125,000 each.

As of April 30, 2013, we had drilled and completed 14 wells in the Batson Dome Field. Our share of the costs of drilling and completing these wells was approximately $9.0 million. Each of these wells has shown multiple potentially productive zones at depths ranging from 2,600 to 4,400 feet.  During the six months ended March 31, 2013, we produced 34,478 gross bbls of oil.

Material changes in our Statement of Operations for the three and six months ended March 31, 2013 as compared to the same periods in the prior year are discussed below:
 
    Increase (I)    
Item   or Decrease (D)   Reason
         
Oil and Gas Sales  
I
  Completion of new wells
         
Cost and Expenses  
I
  Operation of new wells and increased depletion of oil reserves as a result of increased production
 
Operating expenses requiring cash for the six months ended March 31, 2013 consisted primarily of:

  
lease operating expenses, and
  
general and administrative expenses;

Interest expense increased as the result of the sale of our convertible notes in June, July and September 2012.
 
The factors that will most significantly affect our future operating results will be:

  
the sale prices of crude oil;
  
the amount of production from oil wells in which we have an interest;
  
lease operating expenses;
  
the availability of drilling rigs, drill pipe and other supplies and equipment required to drill and complete oil wells, and;
  
corporate overhead costs.

Our revenues will also be significantly affected by our ability to maintain and increase oil production.

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

Liquidity and Capital Resources

In July 2010, we sold 4,900,000 shares of our common stock at a price of $0.001 per share to our officers and directors and third parties. In July, August, and September 2010, we sold 1,012,500 shares of our common stock to a group of private investors at a price of $0.40 per share.

In November and December 2010, we sold 34 units in a private offering at a price of $100,000 per unit. Each unit consisted of one promissory note in the principal amount of $100,000 and 50,000 Series A warrants. At any time after April 30, 2011, the notes can be converted into shares of our common stock, initially, at a conversion price of $1.00 per share. Each Series A warrant entitles the holder to purchase one share of our common stock at a price of $4.00 per share at any time on or before October 31, 2014. The notes bear interest at 8% per year. In June, July and September 2012 notes in the principal amount of $3,075,000 were surrendered in payment of the notes sold in 2012. The remaining notes, which had an outstanding principal balance of $325,000, were repaid in October 2012.

In February and March 2011, we sold 1,500,000 units at a price of $1.00 per unit. Each unit consisted of one share of our common stock and one Series C warrant. Each Series C warrant allows the holder to purchase one share of our common stock at a price of $2.00 per share. In March 2011, we issued 453,322 shares of our common stock to a placement agent upon the exercise of warrants which had an exercise price of $0.10 per share.

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

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

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

  
were used to pay the remaining balance ($325,000) of our 2010 notes, and
  
have been used and are being used to fund a drilling program in our fields located in Southeast Texas.

Our sources and (uses) of funds for the six months ended March 31, 2013 and 2012 are shown below:
 
   
Six Months Ended
March 31, 2013
   
Six Months Ended
March 31, 2012
 
             
Cash provided by operations
  $ 530,386     $ 275,569  
Purchase of furniture and equipment
    (2,452 )     (1,531 )
Drilling and completion costs
    (2,037,209 )     (2,494,510 )
Equity offering costs
    --       (199,849 )
Sale common stock and warrants
    --       4,224,000  
Repayment of notes
    (325,000 )     --  
 
As of April 30, 2013, our operating expenses were approximately $125,000 per month, which amount includes salaries and other corporate overhead, but excludes lease operating and interest expenses.

By agreement dated March 15, 2011, we entered into a farmout agreement with an unrelated third party pertaining to a 100-acre lease in the Batson Dome Field. As of April 30, 2013, we had drilled five wells on the lease. Pursuant to the farmout agreement we have the option of drilling additional wells on the lease. We estimate the cost of drilling and completing any well on this lease will be approximately $600,000.

By agreement dated May 25, 2011, we entered into a farmout agreement with Exxon/Mobil Corporation pertaining to another 100-acre lease adjacent to our existing leases in the Batson Dome Field. Pursuant to the agreement, we have the obligation to commence drilling a well on the lease by June 14, 2013. Subject to the commencement of drilling the first well by June 14, 2013, and completing the well if warranted, we have the option of drilling additional wells on the lease; provided however, that unless we commence drilling each well within 180 days of the date we complete or abandon the latest well drilled, our right to drill any additional wells on the lease will terminate. We estimate the cost of drilling and completing any well on this lease will be approximately $1,000,000.

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

By agreement dated May 1, 2012, we entered into a farmout agreement with an unrelated third party pertaining to a 45-acre lease in the Hull-Daisetta Field. Pursuant to the agreement, we have the obligation to commence drilling a well on the lease by January 31, 2014. Subject to the commencement of drilling the first well by January 31, 2014, and completing the well if warranted, we have the option of drilling additional wells on the lease; provided however, that unless we commence drilling each well within 180 days of the date the latest well is completed or abandoned, the right to drill any additional wells on the lease will terminate. We estimate the cost of drilling and completing any well on this lease will be approximately $750,000.

Capital expenditures during the first six months of fiscal year 2013 totaled 2.0 million. Management estimates the Company will spend $5.0 million during the remainder of fiscal year 2013 for drilling and completing wells in the Batson Dome Field and for various other projects. Meeting this estimate for drilling and completing wells will require additional financing beyond the Company’s available cash on hand.

Any cash generated by our operations, after payment of general, administrative and lease operating expenses, will be used to drill and, if warranted, complete oil wells, acquire oil and gas leases covering lands which we believe are favorable for the production of oil, and to fund working capital reserves. Our capital expenditure plans are subject to periodic revision based upon the availability of funds and expected return on investment.

We expect that our principal source of cash flow will be from the sale of crude oil reserves which are depleting assets. Cash flow from the sale of oil production depends upon the quantity of production and the price obtained for the production. An increase in prices will permit us to finance our operations to a greater extent with internally generated funds, may allow us to obtain equity financing more easily or on better terms, and lessens the difficulty of obtaining financing. However, price increases heighten the competition for oil prospects, increase the costs of exploration and development, and, because of potential price declines, increase the risks associated with the purchase of producing properties during times that prices are at higher levels.

A decline in oil prices (i) will reduce our cash flow which in turn will reduce the funds available for exploring for and replacing oil reserves, (ii) will increase the difficulty of obtaining equity and debt financing and worsen the terms on which such financing may be obtained, (iii) will reduce the number of oil prospects which have reasonable economic terms, (iv) may cause us to permit leases to expire based upon the value of potential oil reserves in relation to the costs of exploration, (v) may result in marginally productive oil wells being abandoned as non-commercial, and (vi) may increase the difficulty of obtaining financing. However, price declines reduce the competition for oil properties and correspondingly reduce the prices paid for leases and prospects.

We plan to generate profits by drilling productive oil wells. However, we plan to obtain the funds required to drill, and if warranted, complete new wells (including any wells pertaining to our farmout agreements) with any net cash generated by our operations, through the sale of our securities, from loans from third parties or from third parties willing to pay our share of the cost of drilling and completing the wells as partners/participants in the resulting wells. We do not have any commitments or arrangements from any person to provide us with any additional capital. We may not be successful in raising the capital needed to drill oil wells. Any wells which may be drilled by us may not produce oil.
 
Other than as disclosed above, we do not know of any:

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

Our material future contractual obligations as of March 31, 2013 were as follows:
 
    Total     2013     2014     2015     Thereafter  
                               
2012 Convertible notes   $ 8,254,500       -       -     $ 8,254,000       -  
Office lease   $ 19,800     $ 19,800       -       -       -  
 
ITEM 4. CONTROLS AND PROCEDURES.

(a) We maintain a system of controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“1934 Act”), is recorded, processed, summarized and reported within time periods specified in the SEC's rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is accumulated and communicated to our management, including our Principal Executive and Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of March 31, 2013, our Principal Executive and Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Principal Executive and Financial Officer concluded that our disclosure controls and procedures were effective.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
PART II

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

Initial Public Offering

In December 2011 we sold 4,800,000 units in an initial public offering at a price of $1.00 per unit. Each unit consisted of one share of our common stock and one Class A warrant. Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price of $1.50. The Class A warrants are exercisable at any time on or before November 29, 2016.

The units were registered by means of a Registration Statement on Form S-1, (Commission file no. 333-174194) which was declared effective by the Securities and Exchange Commission on November 14, 2011. Although the registration statement originally registered 6,000,000 units, the offering closed on December 2, 2011 with the sale of 4,800,000 units. Paulson Investment Company, Inc. and Neidiger, Tucker, Bruner, Inc. were the underwriters for the offering.

As of March 31, 2013 we had used substantially all of the net proceeds of the offering for drilling and completing oil wells.

None of the offering proceeds were paid directly or indirectly to any of our directors or officers or their associates; to person owning 10% or more of any class of our equity securities; or to any of our affiliates.
 
 
ITEM 6. EXHIBITS
 
Exhibits

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

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

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

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

 
VANGUARD ENERGY CORPORATION
 
       
Date: May 14, 2013
By:
/s/ Warren Dillard  
   
Warren Dillard,
 
   
Chief Executive, Financial and Accounting Officer
 
 
 
 
 
 
 
 
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