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Graphene & Solar Technologies Ltd - Quarter Report: 2014 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, 2014

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

For the transition period from __________ to __________

Commission File Number: None

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

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

2 Blvd Place, Suite 1600
1700 Post Oak Blvd.
Houston, Texas 77056
(Address of principal executive offices, including Zip Code)
(713) 627-2500
(Issuer’s telephone number, including area code)
1330 Post Oak Blvd., Suite 1600
Houston, Texas 77056
(Former name or former address if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 12, 711,440 shares of common stock as of June 30, 2014.
 


 
 
 
 
 
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  Form 10-K report for the year ended September 30, 2013, filed with the U.S. Securities Exchange Commission (“SEC”)  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.
 
 
 
 
 
2

 
 
VANGUARD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
September 30,
 
ASSETS
 
2014
   
2013
 
   
(Unaudited)
     
             
Current assets
           
Cash and cash equivalents
  $ 12,908     $ 1,334,285  
Accounts receivable
    157,834       371,765  
Other assets
    -       16,055  
Total current assets
    170,742       1,722,105  
                 
Property and equipment
               
Oil and gas, on the basis of full cost accounting
 
   Proved properties
    -       12,994,766  
Unproved properties and properties under
         
      development, not being amortized
    -       61,470  
Furniture and equipment
    -       26,946  
Less: accumulated depreciation, depletion and amortization
    -       (6,594,081 )
Total property and equipment
    -       6,489,101  
                 
Debt issuance costs
    111,538       538,700  
Other assets
    -       10,808  
                 
Total assets
  $ 282,280     $ 8,760,714  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
       
Current liabilities
               
Accounts payable
  $ 30,391     $ 113,314  
Accrued interest
    590,597       309,544  
Other liabilities
    -       12,650  
Current notes payable, net of discount of $94,677 and $0
    2,900,117       -  
Total current liabilities
    3,521,105       435,508  
                 
Notes payable, net of discount of $0 and $542,961
    -       7,813,368  
Participation liability
    -       465,551  
Asset retirement obligations
    -       177,685  
                 
Total liabilities
    3,521,105       8,892,112  
                 
Commitments and contingencies
    -       -  
                 
Stockholders' deficit
               
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,
 
12,711,440 shares issued and outstanding
    127       127  
Additional paid-in capital
    5,522,204       5,522,204  
Accumulated deficit
    (8,761,156 )     (5,653,729 )
                 
Total stockholders' deficit
    (3,238,825 )     (131,398 )
                 
Total liabilities and stockholders' deficit
  $ 282,280     $ 8,760,714  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
 
VANGUARD ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
 
   
Three Months Ended June 30
   
Nine Months Ended June 30
 
   
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues
                       
Oil and gas sales
  $ 154,294     $ 1,135,938     $ 1,676,231     $ 3,700,952  
                                 
Costs and expenses
                               
Lease operating expense
    46,408       147,083       544,045       517,600  
Production taxes
    7,098       52,393       77,253       170,653  
Depreciation, depletion and amortization
    -       279,940       984,200       931,371  
Impairment of O&G properties
    (18,634 )     -       861,579       -  
Asset retirement obligation accretion
    -       5,299       29,088       14,572  
General and administrative
    212,959       272,090       765,865       1,095,093  
Total costs and expenses
    247,831       756,805       3,262,030       2,729,289  
                                 
Income (loss) from operations
    (93,537 )     379,133       (1,585,799 )     971,663  
                                 
Other income (expense)
                               
   Other income
    2,721       -       3,512       -  
Interest income
    -       294       233       1,152  
Gain on settlement of participation liability
    171,772       -       171,772       -  
Loss on early extinguishment of debt
    (380,539 )     -       (380,539 )        
Interest expense
    (393,293 )     (462,057 )     (1,295,786 )     (1,452,057 )
Change in fair value of warrants and
                               
  conversion feature liabilities
            54,564               652,756  
Furniture and equipment write-down
    -       -       (20,819 )     -  
Total other income (expense)
    (599,339 )     (407,199 )     (1,521,626 )     (798,149 )
                                 
Income (loss) before income taxes
    (692,876 )     (28,066 )     (3,107,426 )     173,514  
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net Income (loss)
  $ (692,876 )   $ (28,066 )   $ (3,107,426 )   $ 173,514  
                                 
Earnings (Loss) per share:
                               
   Basic
  $ (0.05 )   $ (0.00 )   $ (0.24 )   $ 0.01  
   Diluted
  $ (0.05 )   $ (0.00 )   $ (0.24 )   $ 0.01  
                                 
Weighted average shares outstanding;
                               
Basic
    12,711,440       12,711,440       12,711,440       12,711,440  
   Diluted
    12,711,440       12,711,440       12,711,440       12,711,440  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
VANGUARD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Nine Month ended June 30,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net income (loss)
  $ (3,107,426 )   $ 173,514  
Adjustments to reconcile net income/(loss)
               
   to net cash from operating activities:
               
Depreciation, depletion and amortization
    941,294       931,371  
Impairment of O&G properties
    861,579       -  
Amortization of debt issuance costs
    223,933       241,755  
Gain on settlement of participation liability
    (171,772 )     -  
Loss on early debt extinguishment
    380,539       -  
Asset retirement obligation accretion
    29,088       14,572  
Amortization of debt discount
    169,145       220,102  
Accretion of participation liability
    (63,160 )     111,451  
Furniture and equipment write-down
    20,819       -  
Change in fair value of warrant and conversion
               
feature liabilities
    -       (652,756 )
Change in operating assets and liabilities:
               
Accounts receivable
    185,360       91,848  
Other assets
    26,863       (5,747 )
Accounts payable
    (82,923 )     (55,497 )
Other liabilities
    268,403       (190,486 )
Net cash from operating activities
    (318,258 )     880,127  
                 
Cash flows from investing activities
               
Purchase of furniture and equipment
    -       (2,452 )
Capital expenditures on oil and gas properties
    (1,012,794 )     (2,385,271 )
Proceeds from sale of O&G properties
    5,500,000       -  
Net cash from investing activities
    4,487,206       (2,387,723 )
                 
Cash flows from financing activities
               
Repayment of notes payable
    (5,259,706 )     (325,000 )
Settlement of participation liability
    (230,619 )     -  
Net cash from financing activities
    (5,490,325 )     (325,000 )
                 
Net change in cash and cash equivalents
    (1,321,377 )     (1,832,596 )
                 
Cash and cash equivalents
               
Beginning of period
    1,334,285       3,090,422  
                 
End of period
  $ 12,908     $ 1,257,826  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
 
 
NOTE 1 – BASIS OF PRESENTATION

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

On March 31, 2014 the Company failed to make the scheduled interest payments on its 2012 Convertible Notes. As a result, the note holders were entitled to declare the notes in default, in which case the principal amount of the notes, plus all accrued and unpaid interest would be immediately due and payable.  For this reason, the 2012 Convertible Notes are classified as current obligations within the consolidated balance sheet at June 30, 2014.

The sale of the Company’s oil and gas properties, as explained in Note 4, raise substantial doubt as to the ability of the Company to continue as a going concern.  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Earnings Per Share – Basic earnings per share have been calculated based upon the weighted-average number of common shares outstanding.  Diluted earnings per share have been calculated based upon the weighted-average number of common and potential common shares. The calculation of diluted weighted-average shares outstanding for the three-month periods ended June 30, 2014 and 2013 excludes 19,261,860 and 16,760,960 shares, respectively, issuable pursuant to outstanding warrants, stock options and debt conversion features because their effect is anti-dilutive.

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

In prior periods the Company recognized a participation liability related to a net profits interest granted to persons who purchased the Company’s 2010 Convertible Promissory Notes.  The net profits interest was held by Vanguard Net Profits, LLC and covered some of the Company’s oil

 
6

 
 
VANGUARD ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 3 – NET PROFITS INTEREST PARTICIPATION LIABILITY

and gas properties.  On June 17, 2014 the Company settled the net profits interests for $230,619.  The Company recognized a gain on settlement of the participation liability of $171,772 during the quarter ended June 30, 2014 as a result.

The Company incurred expense associated with the net profits interest during the nine-month period ended June 30, 2014 of $63,160. This amount is reported as interest expense in the statement of operations. The Company also made a final payment of $84,577 under this arrangement during the nine month period ending June 30, 2014.

NOTE 4 – SALE OF OIL AND GAS PROPERTIES/PAYMENT OF CONVERTIBLE NOTES

During 2012, the Company sold $8,254,500 of Convertible Promissory Notes.  On March 31, 2014 the Company failed to make the scheduled interest payments on the notes.  As a result, the note holders were entitled to declare the notes in default, in which case the principal amount of the notes, plus all accrued and unpaid interest would be immediately due and payable.

The Company’s inability to make the interest payment to the note holders was the result of the expenditure of considerable capital to work over some of the Company’s wells.  The costs of that work far exceeded the Company’s expectations and yet the work was required in order to get the wells back into production.  This depleted the Company’s cash position far below its expectations.  Further, although the initial work on those wells was successful in boosting production momentarily, further complications resulted in lower production than anticipated, which was not adequate to replenish the cash expended and enable the Company to make required interest payments.

With a view to paying its note holders, the Company, on June 17, 2014, sold its oil and gas properties to Vast Exploration, Inc. for $5,500,000, after obtaining approvals from the holders of a majority of the Company’s outstanding shares of common stock and approvals of a majority of note holders. An impairment charge of $880,213 was recognized during the quarter ended March 31, 2014 for the amount by which the carrying value of the Company’s oil and gas properties exceeded the estimated net proceeds from the planned sale. The Company adjusted the impairment charge by $(18,634) during the quarter ended June 30, 2014 based on final closing of the transaction.

The Company used the proceeds from the sale to:
 
Pay holders of the convertible notes     $ 5,259,706  
         
Purchase the net profits interest held by Vanguard Net Profits, LLC        230,619  
Pay legal and closing costs
    9,675  
    $ 5,500,000  
 
 
 
7

 
 
 
A loss on early extinguishment of debt totaling $380,539 was recognized during the quarter ended June 30, 2014 for the write-off of a portion of the debt issuance costs and debt issuance discount associated with the debt repayment. After the payment of the $5,259,706, approximately $2,900,000 remains to be paid to the convertible note holders.  As of June 30, 2014, the unamortized discount on the 2012 Convertible Promissory Notes totaled $94,677.  Interest expense for the amortization of debt issuance cost and discount on the notes for the nine-month period ended June 30, 2014 was $393,078.  The effective interest rate of the 2012 Convertible Promissory Notes was 15.76% as of June 30, 2014.  Accrued interest at June 30, 2014 was $590,597 and at September 30, 2013 was $309,544.

In consideration for  accepting less than the full amount due on their notes, and releasing their lien on the Company’s oil and gas properties, holders of notes in the approximate principal amount of $2,900,117 as a group, have agreed to receive shares in the Company’s stock in payment of the remaining balances on their notes, plus accrued interest.  The shares to be issued to the note holders, when issued, will represent approximately 90% of the Company’s issued and outstanding shares.

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 six month period ended June 30, 2014 because the Company estimates it will record no income tax expense for the year ended September 30, 2014.  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 June 30, 2014 were as follows:
 
    Total     2014     2015     2016     Thereafter  
                               
Convertible notes (1)
  $ 3,490,714     $ 3,490,714       -       -       -  
 
(1)  
Includes accrued interest of $590,597 as of June 30, 2014.
 
The contractual maturity of the notes is June 30, 2015.  However, on March 31, 2014 the Company failed to make the scheduled interest payments.  As a result, the note holders are entitled to declare the notes in default, in which case the principal amount of the notes, plus all accrued and unpaid interest would be immediately due and payable.
 
 
8

 
 
VANGUARD ENERGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of June 30, 2014 and September 30, 2013:
 
   
Level
   
June 30,
2014
   
September 30,
2013
 
                   
Participation liability
  3     $ -     $ 465,551  
                       
Total liabilities
        $ -     $ 465,551  
 
The following table presents a reconciliation of those liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
   
Participation Liability
 
       
Balance at September 30, 2013
  $ 465,551  
Purchases, issuances and settlements
    (293,779 )
Gain on settlement
    (171,772 )
         
Balance at June 30, 2014
  $ -  
 
NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION
 
   
Nine Month ended June 30,
 
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
 
             
Interest paid
  $ 312,111     $ 603,088  
Interest capitalized (non-cash)
    -       45,935  
                 
                 
Noncash investing and financing activities:
               
Capital expenditures included in accounts payable
    -       (15,278 )
Asset retirement obligations incurred
    29,088       9,273  
 
*  *  *  *  *
 
 
9

 
 

 During 2012 the Company sold secured convertible notes in the principal amount of $8,254,500. The notes bear interest at 15% per year and are due and payable on June 30, 2015.

On March 31, 2014, the Company failed to make its interest payments on its 2012 Convertible Promissory Notes.  With a view to paying its note holders, the Company, on June 17, 2014, sold its oil and gas properties to Vast Exploration, Inc. for $5,500,000.  See Note 4 to the financial statements, which are part of this report, for more information.

The terms of the sale agreement provided that Vast Exploration, Inc. would receive the proceeds from the sale of oil and gas produced from the oil and gas properties, net of lease operating expenses, on and after April 1, 2014.
 
Our material future contractual obligations as of June 30, 2014 were as follows:
 
    Total     2014     2015     2016     Thereafter  
                               
Convertible notes (1)
  $ 3,490,714     $ 3,490,714       -       -       -  
 
(1)  
   Includes accrued interest of $590,597 as of June 30, 2014.

In consideration for  accepting less than the full amount due on their notes, and releasing their lien on the Company’s oil and gas properties, holders of notes in the approximate principal of $2,900,117, as a group, have agreed to receive shares of the Company’s stock in payment of the notes and accrued interest.  The shares to be issued to the note holders, when issued, will represent approximately 90% of the Company’s issued and outstanding shares.

As of July 31, 2014, the Company’s salaries and other corporate overhead were approximately $15,000 per month, consisting primarily of legal and accounting for public filing purposes.  This significantly reduced operating costs, as compared with the same period in the previous year, as a result of material reductions in compensation to management, elimination of investor relations outreach, and other cost cutting efforts.

On July 10, 2014, the Company’s directors approved a 100-for-1 reverse split of the Company’s common stock.  The reverse split will be effective on the OTC Bulletin Board when FINRA completes its review of documentation relating to the reverse split.

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, 2014, our Principal Executive and Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Principal Executive and Financial Officer concluded that our disclosure controls and procedures were effective.
 
(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting during the nine month period ended June 30, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
10

 
 
PART II
 
ITEM 6. EXHIBITS

Exhibits
 
Exhibit No.   Description
     
 
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.
 
 
 
11

 
 
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 14, 2014
By:
/s/ Warren Dillard  
   
Warren Dillard,
 
   
Chief Executive, Financial and Accounting Officer
 
       
 
 
 
 
 
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