Graphene & Solar Technologies Ltd - Quarter Report: 2012 June (Form 10-Q)

vnge_10q.htm

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 June 30, 2012

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 July 31, 2012.

CONTENTS

	Page Number
Consolidated Balance Sheets		1

Consolidated Statements of Operations		2

Consolidated Statements of Cash Flows		3

Notes to the Consolidated Financial Statements (Unaudited)		4

VANGUARD ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30,			September 30,
ASSETS	2012			2011
	(Unaudited)
Current assets
Cash and cash equivalents	$	2,738,433		$	453,243
Accounts receivable		517,232			257,147
Other assets		12,813			4,428
Total current assets		3,268,478			714,818

Property and equipment
Oil and gas, on the basis of full cost accounting
Proved properties		7,193,771			3,606,967
Unproved properties and properties under
development, not being amortized		1,347,507			619,679
Furniture and equipment		5,907			2,014
Less: accumulated depreciation, depletion and amortization		(791,143	)		(264,657	)
Total property and equipment		7,756,042			3,964,003

Debt issuance costs		598,841			338,345
Other assets		14,695			527,886

Total assets	$	11,638,056		$	5,545,052

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	283,079		$	180,031
Other liabilities		31,711			75,056
Current portion of notes payable, net of discount of $145,159 and $0		1,217,341			-
Current portion of conversion feature liabilities		13,180			-
Total current liabilities		1,545,311			255,087

Notes payable, net of discount of $326,945 and $1,066,539		4,395,555			2,333,461
Participation liability		928,439			1,172,315
Conversion feature liabilities		326,945			720,593
Warrant liabilities		177,752			400,319
Asset retirement obligations		74,632			24,629

Total liabilities		7,448,634			4,906,404

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 and 7,865,822 shares issued and outstanding		127			79
Additional paid-in capital		5,473,288			1,866,110
Accumulated deficit		(1,283,993	)		(1,227,541	)

Total stockholders' equity		4,189,422			638,648

Total liabilities and stockholders' equity	$	11,638,056		$	5,545,052

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

VANGUARD ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues
Oil and gas sales	$	851,899		$	917,067		$	2,459,575		$	1,314,982

Costs and expenses
Lease operating expense		258,923			19,425			496,559			49,942
Production taxes		39,255			42,258			113,342			60,271
Depreciation, depletion and amortization		214,642			164,688			526,486			213,959
Asset retirement obligation accretion		3,142			1,116			5,259			2,168
General and administrative		485,733			172,699			1,188,104			796,077
Other		82			349			708			47,462
Total costs and expenses		1,001,777			400,535			2,330,458			1,169,879

Income (loss) from operations		(149,878	)		516,532			129,117			145,103

Other income (expense)
Interest income		493			511			2,205			1,337
Interest expense		(299,561	)		(273,524	)		(791,629	)		(469,959	)
Change in fair value of warrant and
conversion feature liabilities		427,162			27,033			910,270			(819,416	)
Loss on debt extinguishment		(306,415	)		-			(306,415	)		-
Total other income (expense)		(178,321	)		(245,980	)		(185,569	)		(1,288,038	)

Income (loss) before income taxes		(328,199	)		270,552			(56,452	)		(1,142,935	)

Provision for income taxes		-			-			-			-

Net income (loss)	$	(328,199	)	$	270,552		$	(56,452	)	$	(1,142,935	)

Earnings (loss) per share – Basic	$	(0.03	)	$	0.03		$	(0.00	)	$	(0.16	)
Weighted average number of
common shares		12,730,916			7,865,822			11,618,860			6,935,857

Earnings (loss) per share – Diluted	$	(0.03	)	$	0.03		$	(0.00	)	$	(0.16	)
Weighted average number of common
and potential common shares		12,730,916			7,865,822			11,618,860			6,935,857

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

VANGUARD ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months			Nine Months
	Ended			Ended
	June 30, 2012			June 30, 2011
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss	$	(56,452	)	$	(1,142,935	)
Adjustments to reconcile net loss
to net cash from operating activities:
Loss on debt extinguishment		306,415			-
Depreciation, depletion and amortization		526,486			213,959
Amortization of debt issuance costs		158,448			152,881
Asset retirement obligation accretion		5,259			2,168
Amortization of debt discount		660,338			179,696
Accretion of participation liability		75,560			86,409
Stock-based compensation expense		59,700			243,731
Change in fair value of warrant and conversion
feature liabilities		(910,270	)		819,416
Change in operating assets and liabilities:
Accounts receivable		(260,085	)		(351,773	)
Other assets		(20,486	)		(5,038	)
Accounts payable		(39,015	)		103,477
Other liabilities		(343,454	)		(51,120	)
Net cash from operating activities		162,444			250,871

Cash flows from investing activities
Purchase of furniture and equipment		(3,893	)		(1,199	)
Purchase of oil and gas properties		-			(309,247	)
Capital expenditures on oil and gas properties		(4,104,298	)		(2,924,136	)
Net cash from investing activities		(4,108,191	)		(3,234,582	)

Cash flows from financing activities
Debt issuance costs		(478,214	)		(397,774	)
Equity offering costs		(199,849	)		(280,219	)
Proceeds from issuance of common stock and warrants		4,224,000			1,340,155
Proceeds from exercise of warrants		-			45,289
Repayment of note payable		-			(642,753	)
Proceeds from issuance of notes payable		2,685,000			3,400,000
Net cash from financing activities		6,230,937			3,464,698

Net change in cash and cash equivalents		2,285,190			480,987

Cash and cash equivalents
Beginning of period		453,243			156,936

End of period	$	2,738,433		$	637,923

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

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 to 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 in conjunction with the audited financial statements as of September 30, 2011.

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 IPO were approximately $3,498,900 net of the underwriters’ discount and offering expenses.

During the three and nine-month periods ended June 30, 2012, the Company issued 31,112 and 60,699 shares, respectively, of restricted stock for investor relations consulting services.

Following the above issuances of common stock, the Company has 12,741,512 shares issued and outstanding as of June 30, 2012.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As of June 30, 2012, Vanguard’s significant accounting policies are consistent with those discussed in the audited financial statements as of September 30, 2011.

Earnings (Loss) Per Share – Basic earnings (loss) per share have been calculated based upon the weighted-average number of common shares outstanding. Diluted earnings (loss) 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 nine-month periods ended June 30, 2012 excludes 12,216,000 shares and for the three and nine-month periods ended June 30, 2011 excludes 4,710,000 shares issuable pursuant to outstanding warrants, stock options and debt conversion features because their effect is anti-dilutive.

Recently Issued Accounting Pronouncements – In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-13. ASU 2010-13 provides amendments to Topic 718, Stock Compensation, to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU No. 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company’s adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, which addresses diversity in practice concerning the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this guidance did not have a material impact on the Company's financial statements.

In May 2011, the FASB issued ASU 2011-04, which clarifies some existing fair value measurement concepts, eliminates wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some fair value measurement principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 is effective for the Company beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's 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 June 30, 2012, the Company had drilled two wells on the lease. Pursuant to the farmout agreement the Company has the option of drilling additional wells on the lease; provided however, that if it does not drill at least six 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 $500,000.

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. Subject to the commencement of drilling the first well by January 31, 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 $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 CFO, Inc. for their 10% share of capital expenditures. At June 30, 2012, this amount totaled $162,889.

NOTE 4 – LONG-TERM DEBT

2012 Convertible Promissory Notes – In June 2012, the Company issued $4,722,500 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, $2,685,000 represents new cash investors and $2,037,500 represents 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 will be used to fund an accelerated developmental drilling program in the Company's oil fields located in Southeast Texas and to pay any of the 2010 Convertible Promissory Notes that remain outstanding on October 31, 2012, the maturity date of the notes.

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 $478,214 were incurred in connection with the issuance of the 2012 Convertible Promissory Notes. The Company recognized a loss on debt extinguishment of $306,415 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 $427,900 as well as 296,300 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.

In July 2012, the Company completed the issuance of an additional $2,127,000 of 2012 Convertible Promissory Notes, with the same terms and conditions as the notes issued in June 2012. Of the total amount raised in July, $1,114,500 represents new cash investors and $1,012,500 represents investors in the 2010 Convertible Promissory Notes who chose to roll their investment in that offering into the Company's new offering.

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 bear 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. The notes are secured by the oil and gas leases acquired, and any oil or gas wells drilled on the leases, with the proceeds from the sale of the notes.

Except in certain circumstances, the conversion price of the 2010 Convertible Promissory Notes will be lowered if the Company sells any additional shares of common stock or any securities convertible into common stock, at a price below the then applicable conversion price. The conversion price will also be proportionately adjusted in the event of any stock split, or capital reorganization. The 2010 Convertible Promissory Notes may be prepaid, without penalty, upon twenty days written notice to the note holders if (i) during any twenty trading days within a period of thirty consecutive trading days, the closing price of the Company’s common stock is $5.00 or greater and has an average daily trading volume of 50,000 shares or more during the twenty trading days, or (ii) the Company completes a registered public offering of its common stock at an offering price of $4.00 per share or more with a minimum offering size of at least $2,000,000.

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 June 30, 2012, 453,322 warrants have been exercised. The warrants also provide for adjustment to their exercise prices similar to potential adjustment to the conversion price of the notes discussed above.

The Company’s combined gross outstanding balance of the 2010 and 2012 Convertible Promissory Notes was $6,085,000 as of June 30, 2012. As of June 30, 2012, the combined unamortized discount on the 2010 and 2012 Convertible Promissory Notes totaled $472,104. Interest expense for the amortization of debt issuance costs and discount on the notes was $293,660 and $818,786 for the three and nine-month periods ended June 30, 2012, respectively. The combined effective interest rate of the 2010 and 2012 Convertible Promissory Notes (net of the participation liability discussed below) was 31.3% as of June 30, 2012.

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

The Company has recognized a participation liability related to the net profits interest granted. This participation liability is reflected in the liability section of the balance sheet at its estimated fair value of $928,439 as of June 30, 2012. The Company estimated the fair value of the participation liability utilizing a present value factor of 10 applied to proved developed reserves associated with the wells drilled and completed with the proceeds of the notes. At any time, the Company may purchase the net profits interests held by the Fund for $3,400,000.

The Company incurred expense associated with the net profits interest granted during the three and nine-month periods ended June 30, 2012 of $23,371 and $75,560, respectively. This amount is reported as interest expense in the statement of operations. The Company also made payments under this arrangement of $59,552 and $276,582, respectively, during the three and nine-month periods ended June 30, 2012.

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 has not recorded any income tax expense because the Company estimates it will not have taxable income for the current fiscal year. The Company has a valuation allowance that fully offsets deferred tax assets.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

The Company’s material future contractual obligations as of June 30, 2012 were as follows:

	Total		2012		2013		2014		Thereafter
Convertible notes	$	6,085,000	$	1,362,500		-		-	$	4,722,500
Office leases	$	24,630	$	24,630		-		-		-
Drilling commitment - Exxon/Mobil farmout	$	1,000,000	$	-	$	1,000,000		-		-

Except for the above, the Company has no contractual capital commitments outstanding at June 30, 2012. Management estimates the Company will spend approximately $2,700,000 during the remainder of fiscal year 2012 for drilling and completing wells in the Batson Dome Field and various other projects.

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and September 30, 2011:

			June 30,		September 30,
	Level		2012		2011

Participation liability		3	$	928,439	$	1,172,315
Conversion feature liabilities		3		340,125		720,593
Warrant liabilities		3		177,752		400,319

Total liabilities			$	1,446,316	$	2,293,227

See Note 4 for information concerning the Participation and Conversion feature liabilities.

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 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, 2011	$	1,172,315		$	720,593		$	400,319		$	2,293,227
Purchases, issuances and settlements		(319,436	)		307,235			-			(12,201	)
(Gains) losses included in earnings		75,560			(687,703	)		(222,567	)		(834,710	)

Balance at June 30, 2012	$	928,439		$	340,125		$	177,752		$	1,446,316

NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION

	Nine Months		Nine Months
	Ended		Ended
	June 30, 2012		June 30, 2011

Interest paid	$	204,000	$	175,881
Interest capitalized (non-cash)		306,718		192,908
Noncash investing and financing activities:
Capital expenditures included in accounts payable		142,063		84,365
Issuance of notes payable for oil and gas		-		357,085
Issuance of 2012 convertible notes		2,037,500
Warrant liability settled on exercise		-		136,015
Recognition of liabilities for issuance of:
Series A warrants		-		1,188
Series B warrants		-		143,948
Series C warrants		-		274,516
Series D warrants		-		49,385
Issuance of Series E Warrants to placement agent		48,668		-
Recognition of conversion feature liabilities		326,945		26,771
Recognition of participation liability		-		737,886
Asset retirement obligations incurred		69,691		4,588
Issuance of restricted shares		60,699		-

* * * * *

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 30, 2011, 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 and nine-month periods ended June 30, 2012 and 2011. 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 the first agreement, and in consideration for the assignment of a 40% working interest (32% net revenue interest) in leases covering 220 acres, we paid $40,000 in cash and issued a promissory note in the principal amount of $285,668. In the second agreement, and in consideration for the assignment of a 50% working interest (40% net revenue interest) in leases covering the same 220 acres, we paid $50,000 in cash and issued a promissory note in the principal amount of $357,085. The notes associated with the first and second agreements bore interest at 8% per year and were repaid in December 2010.

In December 2010, we acquired two producing and three shut-in oil wells in the Batson Dome Field. As of June 30, 2012, the two wells were producing approximately one barrel of oil per day, net to our 63% net revenue interest. As of June 30, 2012, one shut-in well was being reworked. We estimate the costs of reworking the shut-in well will be $375,000.

As of June 30, 2012, we had drilled and completed 7 wells in the Batson Dome Field. Our share of the costs of drilling and completing these wells was approximately $5,480,000.

During June 30, 2012, these 7 wells collectively produced approximately 143 barrels of oil. Each of these wells has shown multiple potentially productive zones at depths ranging from 2,100 to 3,700 feet.

During the three months ended June 30, 2012 we produced 11,875 bbls of oil.

Material changes in our Statement of Operations for the three months ended June 30, 2012 as compared to the same period in the prior year are discussed below:

Item	Increase (I) or Decrease (D)	Reason

Oil and Gas Sales	(D)	Decrease primarily due to a decrease in oil prices, along with a decrease in production of certain wells due to temporary shutdown for workover services

Cost and Expenses	(I)	Operation of new wells; maintenance and repair of wells

Material changes in our Statement of Operations for the nine months ended June 30, 2012 as compared to the same period in the prior year are discussed below:

Item	Increase (I) 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 nine months ended June 30, 2012 consisted primarily of:

●	lease operating expenses;

●	general and administrative expenses; and

●	interest expense.

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 and July 2012, promissory notes in the principal amount of $3,050,000 were surrendered in payment of promissory notes sold in 2012. As a result, the outstanding principal balance of the notes sold in 2010 was $350,000 as of July 31, 2012. The promissory notes sold in 2010 that remain outstanding are due and payable on October 31, 2012. We anticipate using future revenues, or the proceeds from future production-based financing, to repay the outstanding principal amount that remains unconverted and outstanding on the maturity date of the notes.

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 and July 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. The notes are secured by a first lien on a substantial portion of our assets. Notes in the principal amount of $3,799,500 were sold for cash, and notes in the principal amount of $3,050,000 were exchanged for notes that we sold in 2010. As a result, the outstanding principal balance of the notes sold in 2010 was $350,000 as of July 31, 2012.

Net proceeds from this financing will be used to fund a drilling program in our fields located in Southeast Texas and to pay off any of our 2010 convertible notes that remain outstanding on October 31, 2012, the maturity date of the 2010 notes.

Our sources and (uses) of funds for the nine months ended June 30, 2012 and 2011 were as follows:

	Nine months ended June 30,
	2012			2011
Cash from operating activities	$	162,444			250,871
Purchase of oil properties and equipment		(3,893	)		(310,446	)
Drilling and completion costs		(4,104,298	)		(2,924,136	)
Debt issuance costs		(478,214	)		(397,774	)
Equity offering costs		(199,849	)		(280,219	)
Issuance of common stock and warrants		4,224,000			1,340,155
Exercise of warrants		--			45,289
Repayment of notes (1)		--			(642,753	)
Sale of convertible notes		2,685,000			3,400,000

(1)

These notes were issued during 2010 in connection with the acquisition of leases in the Batson Dome field.

As of June 30, 2012, our operating expenses were approximately $235,000 per month, which amount includes salaries and other corporate overhead, but excludes lease operating expenses and production taxes.

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 June 30, 2012 we were drilling two wells on the lease. Pursuant to the farmout agreement we have the option of drilling additional wells on the lease, subject to certain conditions. We estimate the cost of drilling and completing any well on this lease will be approximately $500,000.

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 another 45-acre lease in the Hull-Daisetta Field. Pursuant to the agreement, we had the obligation to commence drilling a well on the lease by January 31, 2013. Subject to the commencement of drilling the first well by January 31, 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 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.

We estimate we will spend approximately $2,700,000 during the twelve months ended July 31, 2013 for drilling and completing wells in the Batson Dome Field and for various other projects.

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 June 30, 2012 were as follows:

		Total		2012		2013	2014		Thereafter

2010 Convertible notes (1)	$	350,000	$	350,000		--	--		--
2012 Convertible notes (1)	$	6,849,500		--		--	--	$	6,849,500
Office lease	$	24,630	$	24,630		--	--		--
Drilling commitment -
Exxon/Mobil farmout	$	1,000,000	$	--	$	1,000,000	--		--

(1) Includes the impact of notes sold in July 2012, including new cash investors and investors who chose to roll their investment in the 2010 Convertible Notes to the new offering.

Critical Accounting Policies and New Accounting Pronouncements

See Note 2 to the financial statements included as part of our annual report on Form 10-K, filed with the Securities and Exchange Commission on December 30, 2011, for a description of our critical accounting policies and the potential impact of the adoption of any new accounting pronouncements.

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 June 30, 2012, 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 June 30, 2012 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.

See our 10-Q report for the three months ended December 31, 2011 for information concerning the expenses associated with our December 2011 public offering.

As of June 30, 2012 we had used approximately $2,947,000 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.

Sale of Convertible Notes

On June 29, July 6 and July 31, 2012 we sold convertible secured promissory notes, in the total principal amount of $6,849,500 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. The notes are secured by a first lien on a substantial portion of our assets.

The placement agents for this offering received cash commissions of $494,455 as well as Series E warrants which collectively entitle the holders to purchase up to 425,960 shares of our 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.

We relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder .with respect to the sale of the notes and warrants. The purchasers of these securities were accredited investors who were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The purchasers acquired these securities for their own account. The notes and warrants, and any shares of common stock issuable upon the conversion of the notes or the exercise of the warrants, cannot be sold unless pursuant to an effective registration statement or an exemption from registration.

Issuance of Restricted Stock

During the three months ended June 30, 2012 we issued 31,112 shares of our common stock to a consultant for investor relations services.

We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 with respect to the issuance of these shares. The person who acquired these shares was a sophisticated investor and was provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The person who acquired these shares acquired them for its own account. The certificate representing these shares bears a restricted legend providing that they cannot be sold except pursuant to an effective registration statement or an exemption from registration. No commission or other form of remuneration was given to any person in connection with the issuance of these shares.

ITEM 6. EXHIBITS

Exhibits

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

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

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

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: August 10, 2012	By:	/s/ Warren Dillard
		Warren Dillard,
		Chief Executive, Financial and Accounting Officer