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VHGI > SEC Filings for VHGI > Form 10-Q on 30-Nov-2012All Recent SEC Filings

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Form 10-Q for VHGI HOLDINGS, INC.


30-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

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


The following discussion and analysis of our financial condition is prepared as of June 30, 2012. Our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended December 31, 2011.

Business Overview

VHGI Coal. The Company formed VHGI Coal on June 27, 2011. Through VHGI Coal, as described in Note 4 "Asset Acquisitions", the Company entered into a definitive stock purchase agreement with Paul Risinger to purchase 100% of the capital stock of Lily. Lily was owned and controlled by its sole shareholder, Paul Risinger, who now acts as President of VHGI Coal after final closure of the sale.

Lily operates an underground coal mining operation, coal washing facility, and a rail load out facility. The coal mine, known as Landree Mine, is located in Greene County, Indiana and is currently permitted and in production. Lily has verified reserves of 21 million saleable tons (according to independent valuation performed by Skelly and Loy) of coal and has access to additional leases that it can procure adjacent to the current property. The coal from the Landree Mine is a low sulfur, low ash, high BTU thermal (power generation) coal.

VHGI Gold. VHGI Gold currently controls The Sun Gold and Treasure Gulch mining claim groups.

The Sun Gold claims (28 BLM mining claims) are located approximately 24 miles southeast of Prescott, Arizona, within the Turkey Creek Mining District in Yavapai County. The "core" of the property lies adjacent and west of the Senator Road, the primary access route into the area. From U.S. Highway 69 at the small settlement of Mayer approximately 14 miles of County-maintained dirt road serves as access to the mine area. The property is accessible year round, and lies within gentle to moderate terrain that is heavily covered with vegetation.

The Treasure Gulch mine properties (2 BLM mining claims) are situated in the Hassayampa Mining District of Arizona, approximately 10 miles south of Prescott. Access is via a County and National Forest dirt road, which will require clearing prior to utilizing the road for our purposes.

On November 8, 2010, VHGI was issued the Quitclaim of Ownership of Unpatented Mining Claims by Western Sierra Mining Corporation for the Sun Gold and Treasure Gulch mines, which are recorded with the United States Department of Interior, Bureau of Land Management - Arizona State Office. In February of 2011 VHGI expanded the Sun Gold claims from the initial four claims, from the above referenced purchase, to the current 28 claims.

Due to the nature and the immediacy of the coal mining opportunity, funding for the development of these gold mining opportunities has been put on temporary hold; it is our intent to restore all funding to these developmental plans as soon as possible.

VHGI Energy. VHGI Energy is currently investigating drilling opportunities in the Upper Cumberland region of Tennessee (i.e., Morgan, Scott, and Fentress Counties). This region leads the state in oil production due to the relatively low cost of drilling, which has led to more drilling and thus a better understanding of the area's geology through the gathering of empirical data. We can increase product and profits by looking at the geologic settings of these successful oil and gas wells and drilling in areas that closely match. We are also investigating similar opportunities in western Pennsylvania, eastern Ohio and West Virginia in the Utica shale region.

We are working with well-established drilling and operating companies in these areas and hope to have due diligence and program negotiations completed shortly with the goal of opening a one to five well drilling operation in 2012.

MOS. The main objective of MOS is to assist the medical practice by providing healthcare software support and a fully integrated Practice Management/EMR Software, and by continuing to develop and enhance the underlying computer hardware and network systems those solutions depend on. MOS has also expanded its services to include web design and consulting about billing and other aspects of medical practice.


Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's significant accounting policies are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. We believe the footnotes to the consolidated financial statements provide the description of the significant accounting policies necessary in fully understanding and evaluating our consolidated financial condition and results of operations. The Company has not materially changed its significant accounting policies.

Use of Estimates in the Preparation of Financial Statements

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates include certain assumptions related to equity-based services, valuation of financial instruments, asset retirement obligations and income taxes. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our estimates have not been materially inaccurate in past years, and our assumptions are not likely to change in the foreseeable future.

During the year the Company entered into contracts which obligated the company under certain circumstances to issue shares of common stock in excess of the number of shares of common stock authorized. Under accounting guidance provided by FASB ASC 815-40-05, the Company accounts for all derivative financial instruments, including warrants, conversion features embedded in notes payable, and stock options, via the liability method of accounting. Accordingly, all these instruments are valued at issuance utilizing the Black-Scholes valuation method, and are re-valued at each period ending date, also using the Black-Scholes valuation method. Any gain or loss from revaluation is charged to operations during the period.

Results of Operations and Financial Condition

For the three and six months ended June 30, 2012 compared with the three and six months ended June 30, 2011:

Revenues. The Company generated revenues for the three and six month periods ended June 30, 2012 of $110,103 and $247,450 respectively compared to $187,727 and $300,692 respectively in the same periods in 2011. This 41% and 18% decrease in revenue for both periods is due primarily to the reduction in demand for the products from our Medical Office Software subsidiary.

Cost of Sales. Cost of sales for the three and six months periods ended June 30, 2012 were $39,586 and $84,854, as compared to cost of sales of $49,797 and $80,431 for the three months and six month periods ended June 30, 2011, or a 21% decrease and 6% increase respectively in cost of sales. This decrease in the three month period is due primarily to the reduction in sales of our Medical Office Software subsidiary. The increase in the six month period is due primarily to our purchase of the Lily Group in the second half of the first quarter of 2012.

Selling, General and Administrative expenses ("G&A"). G&A expenses for the three and six month periods ended June 30, 2012 were $2,761,758 and $4,954,780 respectively, as compared to G&A expenses of $305,393 and $567,885 for the three and six month periods ended June 30, 2011, or a 804% and 773% respective increase in G&A expenses. Virtually all of the expense increase in both periods is related to the Lily Group.

Interest Income. Interest income was $309,890 and $310,577 for the three and six month periods ended June 30, 2012, as compared to $15,494 and $30,805 for the three and six month periods ended June 30, 2011, or an increase of 1,900% and 908% in the respective periods. The increase is due solely to intercompany lending arrangements between subsidiaries.

Loss on Settlement. The Company incurred a gain on settlement of $676,763 and a loss on settlement of $77,484 for the three and six month periods ended June 30, 2012, as compared to no gain and a loss of $40,091 in the three and six month periods respectively in 2011. The Company's gain or loss in the respective periods is due to the change in that value of the Company's Common Stock.

Debt Related Expense. Debt related expenses for the three and six month periods ended June 30, 2012 were $1,836,051 and $1,869,489 respectively, as compared to $0 for both the three and six month periods ended June 30, 2011. The increase is due to the increase in complex debt agreements that include loan origination fees and conversion features used to finance the Lily acquisition.

Interest Expense. Interest expense was $1,592,525 and $1,785,100 for the three and six month periods ended June 30, 2012, as compared to $38,983 and $58,232 for the three and six month periods ended June 30, 2011, or respective increases of 3,985% and 2,965% in each period. The increase is the result of additional notes payable required to finance the Company's operations in the first and second quarter of 2012.


Net Loss. We had a net loss for the three and six month periods ended June 30, 2012 of $4,857,274 and $10,569,058 respectively, as compared with a net loss of $190,952 and $415,142 for the three and six month period ended June 30, 2011, or an increase in net loss of 2,444% and 2,446% in the respective periods. The increase in net loss for the three and six months is due primarily to the increased borrowing in 2012 to finance the Lily acquisition and the change in fair value of our derivative liabilities.

All material changes in financial condition and results of operations for the three and six month periods ended June 30, 2012 compared with the three and six month periods ended June 30, 2011 are identified in the above analysis for the periods ended June 30, 2012 and 2011.

Liquidity and Capital Resources

Historically, we have financed our operations primarily from the sale of debt and equity securities. Our financing activities used approximately $2,691,241 and $4,792184 for the three and six month periods respectively ended June 30, 2012 and approximately $167,463 and $347,624 for the three and six month periods ended June 30, 2011.

We will need to raise additional capital in fiscal year 2012 to fund our business plan and support our operations. As our prospects for funding, if any, develop during the fiscal year, we will assess our business plan and make adjustments accordingly. The report of our independent auditors with regard to our financial statements for the fiscal year ended December 31, 2011 included a going concern qualification. Although we have successfully funded our operations to date by attracting additional equity investors, there is no assurance that our capital raising efforts will be able to attract additional necessary capital for our operations. If we are unable to obtain additional funding for operations at any time now or in the future, we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail various aspects of our operations or cease operations.

Off-Balance Sheet Arrangements

None.

Recent Accounting Pronouncements

For the period ended June 30, 2012, there were no changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2011.

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