NOVAMEX ENERGY INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - NOVAMEX ENERGY INC.	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - NOVAMEX ENERGY INC.	blug_10q63011ex311.htm
EX-32.1 - EXHIBIT 32.1 - NOVAMEX ENERGY INC.	blug_10q63011ex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from __________ to ___________

Commission File Number 000-54035

BLUGRASS ENERGY INC.

(Exact name of small business issuer in its charter)


Nevada		20-4952339
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

13465 Midway Road, Suite 322, LB 10, Dallas, TX 75244

(Address of principal executive offices)

(972) 404-9995

(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]

No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

	Large accelerated filer [_]	Accelerated Filer [_]

	Non-accelerated filer [_]	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [_]

No [X]

There were 70,866,638 shares of Common Stock outstanding as of June 30, 2011.

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
			Page

	Balance Sheets – June 30, 2011 and December 31, 2010		1

	Statements of Operations -
		Three and Six months ended June 30, 2011 and 2010 and
		From May 19, 2006 (Inception) to June 30, 2011	2

	Statements of Shareholders’ Equity (Deficit)		3

	Statements of Cash Flows –
		Six months ended June 30, 2011 and 2010 and
		From May 19, 2006 (Inception) to June 30, 2011	4

	Notes to the Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	– Not Applicable		14

Item 4.	Controls and Procedures		14

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		14

Item 1A.	Risk Factors		14

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		14

Item 3.	Defaults Upon Senior Securities		15

Item 4.	Reserved		15

Item 5.	Other Information		15

Item 6.	Exhibits		15

SIGNATURES			15

Item 1. Financial Statements

BLUGRASS ENERGY, INC.
(A Development Stage Company)
BALANCE SHEETS

	June 30, 2011
	(Unaudited)			December 31, 2010
ASSETS
Current assets:
Cash	$	17,381		$	-
Other receivable		3,639			-
Total current assets		21,020			-

Oil and gas properties - undeveloped		8,729,434			-

Other assets:
Investment in Quad Energy		25,000			-
Total other assets		25,000			-

Total assets	$	8,775,454		$	-


LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities	$	685,530		$	176,127
Notes payable		20,000			20,250
Convertible notes payable, net		228,796			379,416
Derivative liability		78,333			-
Accrued interest		157,923			85,608
Total current liabilities		1,170,582			661,401

Long-term note payable		3,500,000			-
Total liabilities		4,670,582			661,401

COMMITMENTS AND CONTENGENCIES
Shareholders' equity (deficit):
Common stock par value $.005, 100,000,000 shares authorized,
70,866,638 and 13,811,733 issued and outstanding, respectively		354,333			69,059
Additional paid-in-capital		7,252,418			1,858,064
Deficit accumulated during the development stage		(3,501,879	)		(2,588,524	)
Total shareholders' equity (deficit)		4,104,872			(661,401	)
Total liabilities and shareholders' equity (deficit)	$	8,775,454		$	-

(See accompanying notes to the financial statements)

BLUGRASS ENERGY, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2011
(Unaudited)

	Three Months Ended			(Restated) Three Months Ended			Six Months Ended			(Restated) Six Months Ended			(Restated) May 19, 2006 (Inception) to
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010			June 30, 2011

Operating expenses:
Leasing expense	$	-		$	2,434		$	-		$	2,434		$	453,470
Depreciation expense		-			-			-			-			747
Land development costs		176,130			-			176,130			-			176,130
Professional fees		180,209			305,198			266,846			340,300			893,278
Impairment of oil and gas properties		-			200,000			-			200,000			203,424
General and administrative expenses		203,331			187,069			377,051			207,551			1,097,082
Gain on sale of undeveloped properties		-			-			(500,000	)		-			(500,000	)
Total operating expenses		559,670			694,701			320,027			750,285			2,324,131

Other income:
Gain on forgiveness of debt		-			-			-			-			50,000
Total other income		-			-			-			-			50,000

Other expense:
Loss on investment in Quad Energy		(150,000	)		-			(475,000	)		-			(475,000	)
Interest expense		(91,417	)		(137,722	)		(118,328	)		(163,393	)		(752,748	)
Total other expense		(241,417	)		(137,722	)		(593,328	)		(163,393	)		(1,227,748	)
Net Loss		(801,087	)		(832,423	)	$	(913,355	)	$	(913,678	)	$	(3,501,879	)

Per share information:
Basic and diluted loss per common share	$	(0.01	)	$	(0.09	)	$	(0.02	)	$	(0.10	)

Weighted average shares outstanding		70,042,287			9,584,762			53,388,030			9,418,416

(See accompanying notes to the financial statements)

BLUGRASS ENERGY, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDER'S DEFICIT

										(Restated)
										Deficit Accumulated			(Restated)
										During			Total
	Common Stock						Additional			Development			Stockholders'
	Shares			Amount			Paid-in-Capital			Stage			Equity (Deficit)

Balance at May 19, 2006		-		$	-		$	-		$	-		$	-
Stock issued for cash $0.00167 per share		6,000,000			30,000			(20,000	)		-			10,000
Net loss		-			-			-			(551	)		(551	)
Balances at June 30, 2006		6,000,000			30,000			(20,000	)		(551	)		9,449
Stock issued for cash $0.00167 per share		4,800,000			24,000			16,000			-			40,000
Net loss		-			-			-			(18,131	)		(18,131	)
Balances at June 30, 2007		10,800,000			54,000			(4,000	)		(18,682	)		31,318
Net loss		-			-			-			(13,867	)		(13,867	)
Balances at June 30, 2008		10,800,000			54,000			(4,000	)		(32,549	)		17,451
Shares issued for director services		10,000			50			40,450			-			40,500
Cancelled shares		(800,000	)		(4,000	)		4,000			-			-
Rights to stock issued for convertible notes		-			-			256,666			-			256,666
Net loss		-			-			-			(922,689	)		(922,689	)
Balances at June 30, 2009		10,010,000			50,050			297,116			(955,238	)		(608,072	)
Cancelled shares - December 28, 2009		(700,000	)		(3,500	)		3,500			-			-
Net loss		-			-			-			(94,264	)		(94,264	)
Balances at December 31, 2009		9,310,000			46,550			300,616			(1,049,502	)		(702,336	)
Cancelled shares - February 4, 2010		(100,000	)		(500	)		500			-			-
Shares issued to holders of promissory notes March 29, 2010		73,333			367			21,633			-			22,000
Net loss		-			-			-			(81,255	)		(81,255	)
Balances at March 31, 2010		9,283,333			46,417			322,749			(1,130,757	)		(761,591	)
Conversion of debentures - May 17, 2010		330,000			1,650			148,350			-			150,000
Shares issued to holders of promissory notes - May 28, 2010		30,000			150			8,850			-			9,000
Shares issued for service - June 14, 2010		680,000			3,400			200,600			-			204,000
Beneficial conversion features		-			-			174,473			-			174,473
Net loss		-			-			-			(832,423	)		(832,423	)
Balances at June 30, 2010		10,323,333			51,617			855,022			(1,963,180	)		(1,056,541	)
Conversion of debentures - July 7, 2010		200,000			1,000			49,000			-			50,000
Shares issued for service - August 9, 2010		840,000			4,200			289,800			-			294,000
Conversion of LOC and related interest		2,448,400			12,242			599,844			-			612,086
Beneficial conversion features		-			-			64,398			-			64,398
Net loss		-			-			-			(625,344	)		(625,344	)
Balances at December 31, 2010		13,811,733			69,059			1,858,064			(2,588,524	)		(661,401	)
Conversion of Debentures		3,595,569			17,977			217,823			-			235,800
Shares issued to holders of promissory notes - January 20, 2011		81,000			405			19,845			-			20,250
Shares issued for mineral rights lease - February 23, 2011		52,294,336			261,471			4,967,962			-			5,229,433
Common stock issued for services March 31, 2011		180,000			900			26,100			-			27,000
Stock compensation expense - March 31, 2011		-			-			24,123			-			24,123
Net loss		-			-			-			(112,268	)		(112,268	)
Balances at March 31, 2011		69,962,638			349,813			7,113,917			(2,700,792	)		4,762,937
Stock issued for compensation - Fullerton - April 5, 2011		64,000			320			9,280			-			9,600
Common stock and warrants issued		840,000			4,200			46,200			-			50,400
Stock compensation expense - June 30, 2011		-			-			83,021			-			83,021
Net loss		-			-			-			(801,087	)		(801,087	)
Balances at June 30, 2011		70,866,638		$	354,333		$	7,252,418		$	(3,501,879	)	$	4,104,872

(See accompanying notes to the financial statements)

BLUGRASS ENERGY, INC.
(A Development Stage Company)
STATEMENTS OF CASHFLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)

				(Restated)			(Restated)
	Six months ended			Six months ended			May 19, 2006
	June 30,			June 30,			(Inception) to
	2011			2010			June 30, 2011

Cash Flows from Operating Activities
Net loss	$	(913,355	)	$	(913,678	)	$	(3,501,879	)
Adjustments to reconcile net loss from continuing operations
Depreciation		-			-			747
Gain on debt forgiveness		-			-			(50,000	)
Gain on sale of undeveloped properties		(500,000	)		-			(500,000	)
Loss on investment in Quad Energy		475,000			-			475,000
Debt discount amortization		42,713			174,473			212,834
Interest related to shares granted with debt		-			-			256,666
Impairment of assets		-			-			203,424
Common stock and warrants issued for services and interest expense		36,600			226,000			582,750
Stock compensation		107,144			-			107,144
Cash provided by (used in) operations:								-
Changes in working capital:								-
Accounts payable		509,403			131,427			684,736
Other receivable		(3,639	)		-			(3,639	)
Accrued interest payable		75,615			26,672			254,309
Net cash used in operating activities		(170,519	)		(355,106	)		(1,277,908	)

Cash Flows from investing activities
Purchase of oil and gas leases - undeveloped		-			-			(4,171	)
Purchase of investment		-			-			(200,000	)
Net cash used in investing activities		-			-			(204,171	)

Cash Flows from financing activities:
Proceeds from issuance of short term notes		20,000			-			20,000
Proceeds from convertible promissory notes		117,500			190,279			808,810
Proceeds from issuance of common stock and warrants		50,400			-			100,400
Proceeds from promissory notes		-			-			41,250
Payment of promissory note		-			-			(21,000	)
Proceeds from line of credit		-			171,011			550,000
Net cash provided by financing activities		187,900			361,290			1,499,460

Net increase in cash and cash equivalents		17,381			6,184			17,381
Cash and cash equivalents at the beginning of the period		-			8,483			-
Cash and cash equivalents at the end of the period	$	17,381		$	14,667		$	17,381

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest expense	$	-		$	-		$	-
Cash paid for income taxes	$	-		$	-		$	-
Debt and interest converted to equity	$	252,750		$	537,473		$	1,095,836

(See accompanying notes to the financial statements)

BLUGRASS ENERGY INC.

(A Development Stage Company)

NOTES TO THE FINANCIAL STATEMENTS

JUNE 30, 2011

Organization – Nature of Operations

Blugrass Energy Inc. (the “Company” or “Blugrass”) was incorporated under the laws of the State of Nevada on May 19, 2006, as Coastal Media Inc. The Company was originally formed to engage in the business of manufacturing, marketing, distributing and selling its marine DVDs. On September 11, 2008, the Company amended its Articles of Incorporation to change its name from "Coastal Media Inc." to "Blugrass Energy Inc.", to reflect the change in direction of the Company’s business to the Oil and Gas Industry. As a result of the name change, the Company’s trading symbol was changed to “BLUG”.

On February 23, 2011, Petro Grande, LLC (“Petro Grande”) consummated a transaction with Blugrass whereby Petro Grande acquired a controlling interest in Blugrass. In conjunction with this transaction there was a change of control and Blugrass’ management team was replaced with Petro Grande’s management team. As a result of the acquisition, Blugrass’ new management team has implemented a new business strategy (discussed in detail in the section on Management’s Discussion & Analysis below).

The Company is in the development stage. Its activities to date have been limited to capital formation, organization and development of its business plan. The Company has commenced limited startup operations.

The Company has not earned significant revenues from planned operations. Accordingly, the Company’s activities have been accounted for as those of a “Development Stage Company”. Among the disclosures required are that the Company’s financial statements of operations, shareholders’ equity (deficit) and cash flows disclose activity since the date of the Company’s inception.

Summary of Significant Accounting Policies

Change in Fiscal Year – On March 10, 2011 the Board of Directors approved the change of the Company’s fiscal year from a June 30 fiscal year end to a December 31 calendar year end. The Company filed a transition report on Form 10-KT for the six-month transition period ended December 31, 2010.

Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Key estimates in the accompanying financial statements include, among others, revenue recognition, allowances for doubtful accounts, valuation of long-lived assets, and deferred income tax asset valuation allowances.

Cash Equivalents – The Company considers all highly-liquid investments with a maturity of three months or less, when purchased, to be cash equivalents.

Other Receivable – There was an other receivable totaling $3,639 and $0 as of June 30, 2011 and December 31, 2010, respectively. The balance of other receivable as of June 30, 2011 consisted of a receivable from the Company’s President and Chief Executive Officer, Abe Janz, representing an expense advance to Mr. Janz for business related travel.

Oil and Gas Properties – We follow the successful efforts method of accounting for oil and gas producing activities. Unsuccessful exploration drilling costs are expensed and can have a significant effect on reported operating results. Successful exploration drilling costs and all development costs are capitalized and systematically charged to expense using the units of production method based on proved developed oil and gas reserves as estimated by our engineers and reviewed by independent engineers. Costs incurred for exploratory wells that find reserves that cannot yet be classified as proved are capitalized if (a) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (b) there is sufficient progress being made in assessing the reserves and the economic and operating viability of the project. Proven property leasehold costs are amortized to expense using the units of production method based on total proved reserves. Properties are assessed for impairment as circumstances warrant and impairments to value are charged to expense. The successful efforts method inherently relies upon the estimation of proved reserves, which includes proved developed and proved undeveloped volumes.

Proved reserves are defined by the SEC as those volumes of crude oil, condensate, natural gas liquids and natural gas that geological and engineering data demonstrate with reasonable certainty are recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are volumes expected to be recovered through existing wells with existing equipment and operating methods. Although engineers are knowledgeable of and follow the guidelines for reserves established by the SEC, including the rule revisions designed to modernize the oil and gas company reserves reporting requirements, the estimation of reserves requires engineers to make a significant number of assumptions based on professional judgment. Reserve estimates are updated periodically and consider recent production levels and other technical information. Estimated reserves are often subject to future revisions, which could be substantial, based on the availability of additional information, including: reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price and cost changes and other economic factors. Changes in oil and gas prices can lead to a decision to start-up or shut-in production, which can lead to revisions to reserve quantities. It is difficult to predict what reserve revisions may be required in future periods.

Depletion rates are determined based on reserve quantity estimates and the capitalized costs of producing properties. As the estimated reserves are adjusted, the depletion expense for a property will change, assuming no change in production volumes or capitalized costs. While total depletion expense for the life of a property is limited to the property’s total cost, proved reserve revisions result in a change in timing when depletion expense is recognized. Downward revisions of proved reserves result in an acceleration of depletion expense, while upward revisions tend to lower the rate of depletion expense recognition. Estimated reserves are used as the basis for calculating the expected future cash flows from a property, which are used to determine whether that property may be impaired. Reserves are also used to estimate the supplemental disclosure of the standardized measure of discounted future net cash flows relating to oil and gas producing activities and reserve quantities. Changes in the estimated reserves are considered a change in estimate for accounting purposes and are reflected on a prospective basis.

Income Taxes – The Company estimates its current tax position together with its future tax consequences attributable to temporary differences resulting from differing treatment of items, such as depreciation and other reserves for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. Management must then assess the likelihood that its deferred tax assets will be recovered from future taxable income, prior year carryback, or future reversals of existing taxable temporary differences. To the extent management believes that recovery is unlikely, management establishes a valuation allowance against these deferred tax assets. Significant judgment is required in determining the Company’s provision for income taxes, its deferred tax assets and liabilities, and any valuation allowance recorded against its deferred tax assets. At June 30, 2011 and December 31, 2010, the Company has recorded a full valuation allowance against its net deferred tax assets due to the uncertainty it will be used in the future.

Acquisitions and Dispositions

On January 24, 2011, the Company entered into an asset purchase agreement with Quad Energy Corp. (“Quad Energy”) for the sale of 100% of the Company’s rights, title and interest to certain properties located in and around the Cave Pool Unit (Marks and Garner Productions) in Eddy County, New Mexico (the “Eddy County Properties”). The Eddy County Properties consist of leasehold interests in approximately 2,800 acres and all existing equipment used to produce oil and natural gas located on the Eddy County Properties. As consideration for the transaction the Company was to receive 5,000,000 shares of Quad Energy’s common stock, valued at $.10 per share. The transaction closed on January 25, 2011 and the Company recorded an investment in Quad Energy in the amount of $500,000. During the six months ended June 30, 2011, the value of the investment in Quad Energy had decreased and the Company recorded a loss on the statement of operations of $475,000 as the Company considers the loss other than temporary.

On February 23, 2011, the Company acquired a significant oil and gas lease covering acreage located in Crockett County, Texas from Petro Grande, which contributed the lease as consideration in exchange for 52,294,336 shares of the Company’s restricted common stock, which comprised, at the close of the transaction, approximately 77% of the Company’s then outstanding shares, plus a promissory note in the amount of $3.5 million. As a result of the transaction (the “PG Transaction”), Petro Grande acquired a controlling interest in the Company. On the closing date of the PG Transaction, a change in control of the Company occurred and the senior management and directors of Blugrass resigned and were replaced by Petro Grande’s management team. The PG Transaction was valued at approximately $8.7 million and the Company recorded undeveloped leasehold costs of approximately $8.7 million in conjunction with this transaction.

Oil & Gas Properties

On January 25, 2011, the Company sold 100% of its interests in the Eddy County Properties, which consists of leasehold interests in approximately 2,800 acres in Eddy County, New Mexico, and all existing equipment used to produce oil and natural gas on the Eddy County Properties.

On February 23, 2011, in conjunction with the PG Transaction, the Company acquired a 4,808 acre undeveloped lease located in the Permian Basin in Crockett County, Texas (the “Soto Lease”). Acquisition of the Soto Lease, representing an 87.5% working interest in the underlying acreage, includes full access to Petro Grande’s complete three-dimensional (3D) seismic imaging of the land under lease. The lease expiration date is July 12, 2013 with a 2011 lease obligation to drill one Strawn formation well and one Ellenburger formation well by December 31, 2011. The Company’s plans to drill by December 31, 2011, are contingent upon management raising additional funding to finance drilling costs. This lease has a continuous drilling clause of 120 days provided the drilling obligations previously described are satisfied.

Acquisition of the Soto Lease also included an option to participate as a working interest partner in drilling programs sponsored on an additional 9,850 acres (currently held by Petro Grande) located in close proximity to the Company’s Soto Lease. This acreage also benefits from 3D seismic imaging.

On May 10, 2010, Harding Energy Partners, LLC filed a mechanic’s and materialman’s lien against Petro Grande for unpaid claims in the amount of $176,130 for services, materials and labor furnished for and in connection with the digging, drilling, torpedoing, operating, completing, maintaining and/or repairing of oil and/or gas wells of various Petro Grande leases and properties, which consist of leases and properties in both Crockett County, Texas (including the “Soto Lease”) and Val Verde County, Texas. During the 6 months ended June 30, 2011, Management evaluated the impact of the lien as it relates to the Company and accordingly recorded a reserve for $176,130 for the three months ended June 30, 2011.

Going Concern

The Company’s financial statements for the six-month period ended June 30, 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported a net loss of $913,355 for the six-month period ended June 30, 2011, and an accumulated deficit during the development stage of $3,501,879 as of June 30, 2011. At June 30, 2011, the Company had a working capital deficit of $1,149,562 and the Company had no revenues from its activities during the six-month period ended June 30, 2011.

The Company’s ability to continue as a going concern may be dependent on the success of management’s plan. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

During the 2011 fiscal year, the Company intends to continue its efforts to acquire, either by lease or purchase, an interest in oil or gas prospects or properties for exploration, when available, with third parties. The Company intends to continue to raise funds to support these efforts through the sale of its equity securities.

To the extent the Company’s operations are not sufficient to fund the Company’s capital requirements, the Company may attempt to enter into a revolving loan agreement with financial institutions or attempt to raise capital through the sale of additional capital stock or through the issuance of debt. At the present time, the Company does not have a revolving loan agreement with any financial institution nor can the Company provide any assurance that it will be able to enter into any such agreement in the future or be able to raise funds through the further issuance of debt or equity in the Company.

Notes Payable

During the six months ended June 30, 2011 the Company converted $20,250 of unsecured note payable and accrued interest to 81,000 shares of restricted common stock at a rate of $.25 per share.

In conjunction with the PG Transaction, the Company issued a note payable in the amount of $3.5 million (the “PG Note Payable”) on January 23, 2011. The PG Note Payable accrues interest at a rate of 6.5% per annum beginning on February 23, 2011 with accrued interest payable in semi-annual installments beginning on October 1, 2011. Past due principal and accrued interest accrue interest at a rate of 10% per annum. The balance of the PG Note Payable along with any accrued and unpaid interest is due on February 22, 2013. The PG Note Payable is secured by a first priority interest in the Company’s Soto Lease.

On May 12, 2011 the Company issued an unsecured note payable in the amount of $20,000 (the “Ladner Note”). The Ladner Note matures on August 31, 2011. The note includes a “bonus payment” of $2,500 due at maturity. The “bonus payment” is equivalent to interest which accrues at an annual rate 12.5%.

Convertible Promissory Notes

As of June 30, 2011 and December 31, 2010, the Company had outstanding $228,796 and $379,416 of unsecured convertible commercial promissory notes (the “Convertible Promissory Notes”).

During the six-month period ended June 30, 2011, $235,800 of Convertible Promissory Notes were converted to 3,595,569 shares of common stock.

On April 8, 2011 the Company issued a Convertible Promissory Note totaling $75,000 to a third party (the “April 2011 Convertible Promissory Note”). The April 2011 Convertible Promissory Note accrues interest at a rate of 8% per annum. The principal balance and accrued interest under the April 2011 Convertible Promissory Note is due on January 12, 2012. Holders of the April 2011 Convertible Promissory Note have the right to convert all or any part of the outstanding principal and accrued interest to shares of common stock of the Company beginning 180 days after April 8, 2011. The April 2011 Convertible Promissory Note is convertible at a per share price equal to 60% of the average of the lowest 5 closing bid prices of the Company’s common stock as listed on the Over-the-Counter Bulletin Board over the 10 trading days immediately prior to conversion. In the event of a default, the minimum amount due is 150% of outstanding principal and unpaid interest, and the April 2011 Convertible Promissory Note accrues interest at a rate of 22% per annum until paid or converted.

On May 19, 2011 the Company issued a Convertible Promissory Note totaling $42,500 to a third party (the “May 2011 Convertible Promissory Note”). The May 2011 Convertible Promissory Note accrues interest at a rate of 8% per annum. The principal balance and accrued interest under the May 2011 Convertible Promissory Note is due on January 12, 2012. Holders of the May 2011 Convertible Promissory Note have the right to convert all or any part of the outstanding principal and accrued interest to shares of common stock of the Company beginning 180 days after May 19, 2011. The May 2011 Convertible Promissory Note is convertible at a per share price equal to 60% of the average of the lowest 5 closing bid prices of the Company’s common stock as listed on the Over-the-Counter Bulletin Board over the 10 trading days immediately prior to conversion. In the event of a default, the minimum amount due is 150% of outstanding principal and unpaid interest, and the May 2011 Convertible Promissory Note accrues interest at a rate of 22% per annum until paid or converted.

The Company determined that the conversion features in both the April and May 2011 Convertible Promissory notes should be accounted for as a convertible note derivative liability. The conversion features are treated as a derivative and recorded at their fair value. Accordingly, the Company recorded a derivative liability and debt discount of $78,333 at the date of the note. During the three months ended June 30, 2011 a charge to debt discount in the amount of $22,963 was expensed through interest expense. At June 30, 2011 the debt discount was $55,370. The Company will continue to reevaluate the derivative liability in future reporting periods and adjust the derivative liability as necessary. This derivative will continue to be marked to market in accordance with FASB ASC 815.

During the six months ended June 30, 2011, the Company amortized debt discount of $42,713 associated with the Convertible Promissory Notes. As of June 30, 2011, Convertible Promissory Notes totaling $166,666 were in payment default and, as such, accrued interest at a rate of 18% per annum. For the six-month period ended June 30, 2011, the Company accrued interest related to the Convertible Promissory Notes totaling $16,632.

The balance of the Convertible Promissory Notes consists of the following instruments:

			Ending	Stated	Default			Effective
		Debt	Balance	Interest	Interest	Current		Interest
Date of Issuance	Principal	Discount	@ 6/30/11	Rate	Rate	Rate		Rate
11/17/2008	50,000	-	50,000	6.0%	18.0%	18.0%	(1)	72.55%
12/9/2008	33,333	-	33,333	6.0%	18.0%	18.0%	(1)	88.00%
12/9/2008	33,333	-	33,333	6.0%	18.0%	18.0%	(1)	88.00%
1/29/2009	50,000	-	50,000	6.0%	18.0%	18.0%	(1)	88.00%
4/8/2011	75,000	33,333	41,667	8.0%	22.0%	8.0%		74.67%
5/19/2011	42,500	22,037	20,463	8.0%	22.0%	8.0%		74.67%
Total	284,166	55,370	228,796
(1) Currently in default.

Fair Value of Instruments

The Company's financial instruments, including cash, other receivable and account payable approximated fair value due to the short-term nature of those instruments. The carrying value of notes payable and convertible notes payable approximates fair value as these instruments bear market rates of interest. None of these instruments are held for trading purposes.

Shareholders’ Equity (Deficit)

On February 4, 2011 a special meeting of shareholders was held. An amendment to the Company’s Articles of Incorporation was presented for a vote of shareholders to increase the authorized number of shares of the Company’s common stock from 25,000,000 shares to 100,000,000 shares, par value of $0.005 per share. The amendment was approved by the shareholders.

On February 23, 2011, in conjunction with the PG Transaction, the Company issued 52,294,336 shares of its restricted common stock, or approximately 77% of its restricted common stock outstanding at that time. Upon closing Petro Grande held a controlling interest in the Company.

On February 23, 2011, the Company awarded options to purchase 2,400,000 shares of the Company’s common stock (the “Option Grants”). The Option Grants include options to purchase 1,000,000 shares of the Company’s common stock to each of the Chief Executive Officer and the Chief Financial Officer, plus an option to purchase 400,000 shares of the Company’s common stock to an advisor. Each of the Option Grants provides the option holder the right to purchase shares of the Company’s common stock at an exercise price of $0.25 per share, subject to vesting requirements. Options to purchase 1,200,000 shares of the Company’s common stock vest on February 23, 2012. Beginning on February 23, 2012, options to purchase the remaining 1,200,000 shares of the Company’s common stock vest pro rata on a monthly basis over the succeeding twelve months; accordingly, the Option Grants will vest in full on February 23, 2013. For the six months ended June 30, 2011 the Company recorded stock related compensation expense of $107,144 in connection with the Option Grants.

On March 18, 2011, the Board of Directors of the Company approved a 5-to-1 reduction in the number of shares of the Company’s authorized common stock, and a corresponding 5-to-1 decrease in the number of issued and outstanding shares of the Company’s common stock (reverse split). The reverse split was effective May 17, 2011.

As a result of the reverse split, the number of authorized shares of the Company’s common stock has been reduced, from 500,000,000 shares to 100,000,000 shares. Also as a result of the reverse split, each five shares of the Company’s common stock issued and outstanding on the Effective Date represented one share of the Company’s common stock. Fractional shares existing as a result of the reverse split were rounded up to the nearest whole share.

During the six months ended June 30, 2011, the Company issued 3,676,569 shares of common stock to holders of Convertible Promissory Notes and Notes Payable with an outstanding balance of $256,060. On June 29, 2011, the Company issued 840,000 shares of common stock and 840,000 warrants. As consideration the Company received net cash proceeds of $50,400. The fair value of the 840,000 warrants at the date of issuance was $.04. During the six months ended June 30, 2011, the Company issued 180,000 shares of restricted common stock in lieu of cash payment for services to a related party.

Subsequent Events

On July 12, 2011, the Company issued a Convertible Promissory Note (the “July 2011 Convertible Promissory Note”) in the amount of $35,000. The balance of the July 2011 Convertible Promissory Note is payable in full on April 17, 2012. The July 2011 Convertible Promissory Note accrues interest at a rate of 8.0% per annum. Holders of the July 2011 Convertible Promissory Note have the right to convert all or any part of the outstanding principal and accrued interest to shares of common stock of the Company beginning 180 days after July 12, 2011. The July 2011 Convertible Promissory Note is convertible at a per share price equal to 55% of the average of the lowest 3 closing bid prices of the Company’s common stock as listed on the Over-the-Counter Bulletin Board over the 10 trading days immediately prior to conversion. In the event of a default, the minimum amount due is 150% of outstanding principal and unpaid interest, which accrues interest at a rate of 22% per annum until paid or converted.

The Company recorded a derivative liability in the amount of $28,333. The Company will continue to reevaluate the derivative liability in future reporting periods and adjust the derivative liability as necessary. This derivative will continue to be marked to market in accordance with FASB ASC 815.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act. The words “believes,” “anticipates,” “plans,” “seeks,” “expects,” “intends” and similar expressions identify some of the forward-looking statements. Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. The factors discussed elsewhere in this Form 10-Q could also cause actual results to differ materially from those indicated by the Company’s forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

Business and Plan of Operations

General

Blugrass Energy Inc. is a publicly held Nevada corporation listed on the OTC under the symbol BLUG.PK. The Company was incorporated under the laws of the State of Nevada on May 19, 2006 as Coastal Media Inc. On September 11, 2008, the Company amended its Articles of Incorporation to change its name to Blugrass Energy Inc.

Business Strategy

Our goal is to build shareholder value through consistent growth in reserves and production on a cost-efficient basis. We will prove up our reserves by performing the newer technology 3D seismic surveys, complete detailed seismic analysis, drill the acreage, produce, and sell our oil and natural gas production. Our strategy requires us to make significant investments in human resources, acreage, seismic data and technology.

Strategic initiatives for the Company are defined and driven by a carefully selected management team and business partners that have long, proven records of successes in their specialized disciplines. We are of the belief that the extensive experience and past successes of the professionals on our team are the best indicators of future success. This strategy requires the following principal elements.

Commitment to Advanced Seismic Technology. The Company committed to a 3D seismic data acquisition program, plus advanced processing of the 3D seismic data, as 3D is the most sophisticated technology available for analyzing the formations, faults, integrating land culture, etc. The distinct advantage of 3D seismic surveys over 2D surveys is that 3D provides a continuity of subsurface rocks and fluids (including hydrocarbons), the ability to extract new information from data, and a common focus for integration of reservoir data from all sources. This technology -- both the 3D data and the processing of that data -- significantly reduces risk in the drilling program. This heavy front-end commitment provides current state-of-the-art technology that, in turn, contributes significantly to lowering project risk and identifying potential targets with a much higher degree of accuracy.

Results of the 3D Analysis. The Company’s 3D analysis was performed by our outsourced Geoscientist and trusted member of our advisory team, whose experience spans more than 35 years. He has a high level of expertise with the geology of the Permian and Val Verde Basins, where the Company holds a mineral rights lease, and his expertise extends to the Strawn and Ellenburger Formations which are located beneath the Company’s leased acreage. The results of his analysis were used to generate structural maps and seismic attributes for the Strawn and Ellenburger reservoirs, and comparable structural maps for the shallower Canyon Sands formation also located beneath the Company’s leased acreage. Premised upon the 3D seismic interpretations, the Company believes that there is significant natural gas in its current acreage position.

·	Acreage Acquisition. Blugrass holds a lease covering 4,808 acres in Crockett County, located in West Texas, for the purpose of drilling and developing.

Drilling Targets and HBP Acreage. Drilling targets are carefully evaluated by the Blugrass management and advisory team. A number of considerations are factored into each decision and incorporated into the overall drilling plan. These include the seismic results and analysis of possible well locations, the potential reserves at a specific target, the ease or difficulty of building on specific terrain and the associated cost of the location construction (incorporated into the total drilling expenditures), the overall risk associated with a specific target based on geology and depth of the well, and other known factors that may impact success in the immediate geographic area. Since successful commercial wells hold production acreage, known as HBP (Held by Production) acreage for long-term production for working and royalty interest owners, the overall drilling plan includes the careful selection of drilling locations to maximize HBP acreage within the contracted lease terms. The drilling plan also incorporates the state’s spacing and other requirements while trying to maximize the desired HBP acreage.

The principal target formations in the Permian and Val Verde Basins are the Strawn formation at approximately 12,500 feet total depth, and the Ellenburger formation at approximately 14,000 feet total depth. These formations are known to contain natural gas in relatively large quantities, based on previous wells drilled either in adjacent properties or in close proximity to the Company’s acreage position.

Premised upon the 3D seismic interpretations, the Company has also identified numerous drilling targets in the Canyon Sands formation at a shallower depth of approximately 6,500 feet. Regionally, the Company’s land position is on trend with numerous giant, multipay gas fields which include the Gomez Field, the Brown Bassett, the JM Field, and others.

Advanced Drilling Technology. Blugrass has selected air drilling technology that uses an air hammer for drilling. This technology has the advantage of being more economical, as well as time-effective. Air hammers drill straight holes because their drilling power comes from high frequency percussion rather than from high rotation and pulldown, and because the air hammer piston impacts directly on the bit rather than through a drill string, which can bend over long hole depths. This technology minimizes hole deviations and doglegs, and the speed of the process, coupled with open hole completions, results in significant savings in total drilling costs.

Continuous Monitoring, Cost Controls, and Auditing. Since control activities are a vital part of making business processes work effectively, Blugrass uses the extensive internal audit and contract compliance experience of its CFO in reviewing bid processes, contract compliance with operators, contractors, and vendors including expenditure and revenue audits and reviewing gas measurement controls and contract terms that eventually determine the gas volumes that go into gas settlement statements.

Plans for 2011

During calendar 2011, Blugrass plans to drill an Ellenburger formation natural gas well and a Strawn formation natural gas well, each on the Company’s Soto Lease acreage in Crockett County, Texas. Also during 2011, and in concert with Petro Grande, an affiliate of the Company, we plan to drill a Strawn formation well on acreage held by Petro Grande. All of the Company’s acreage, and all of Petro Grande’s acreage, has complete 3D seismic surveys, with processing of the resultant seismic data, all of which reduces some of the risk in locating targeted formations. The 3D seismic has been analyzed and evaluated using inversion, relief, and instantaneous frequency interpretations. Blugrass’ ability to drill during 2011 is dependent upon Blugrass obtaining additional funding.

In addition to its drilling plans, Blugrass is reviewing favorable producing oil and gas acquisitions.

Results of Operations

For the Six months Ended June 30, 2011 compared to the Six months Ended June 30, 2010

We are still in our development stage and have no revenues to date.

We incurred operating expenses of $320,027 and $750,285 for the six-months ended June 30, 2011 and 2010, respectively. The decrease in operating expenses was primarily related to a gain on sale of undeveloped properties recorded during the six months ended June 30, 2011, which did not appear in the prior year period. Also contributing was the absence of certain impairment losses during the six months ended June 30, 2011 that had been recorded during the prior year period, as well as a decline in professional fees for the current period when compared with the same period in the prior year. Favorable year over year variances in components of operating income were partially offset by an increase in general and administrative expenses and an increase in land development costs of $176,130 related to a reserve booked to the Soto Lease related to a lien on that property (described in Oil & Gas Properties section) during the six months ended June 30, 2011 compared to the same period in the prior year.

During the six months ended June 30, 2011, we recognized a net loss of $913,355 compared to a net loss of $913,678 for the six months ended June 30, 2010.

For the Three months Ended June 30, 2011 compared to the Three months Ended June 30, 2010

We incurred operating expenses of $559,670 and $694,701 for the three-months ended June 30, 2011 and 2010, respectively. The decrease in operating expenses was primarily related to an impairment of oil and gas properties recorded during the three months ended June 30, 2010, which did not appear in the current period. In addition there was a decline in professional fees of approximately $125,000 for the current period when compared with the same period in the prior year. As noted above the decrease in operating expenses was offset by an increase in general and administrative expenses and an increase in land development costs of $176,130 during the three months ended June 30, 2011.

During the three months ended June 30, 2011, we recognized a net loss of $801,087 compared to a net loss of $832,423 for the three months ended June 30, 2010. The decrease was a result of decreases in operating expenses indicated above, partially offset by a loss on the Company’s investment in Quad Energy.

Liquidity and Capital Resources

At June 30, 2011, we had total assets of $8,775,454 consisting primarily of $8,729,434 undeveloped leases (the Soto Lease) acquired in conjunction with the PG Transaction as well as an investment in Quad Energy valued at $25,000. At June 30, 2011, we had total current liabilities of $1,170,582 consisting of accounts payable and accrued liabilities totaling $685,530, accrued interest totaling $157,923 and $228,796 of convertible promissory notes outstanding.

During the six months ended June 30, 2011, we used cash $170,519 in operations. During the six months ended June 30, 2010, we used $355,106 in operations.

During the six months ended June 30, 2011 and 2010, we had cash inflows from investment activities of $0 and $0, respectively.

During the six months ended June 30, 2011 we received $187,900 from our financing activities. During the six months ended June 30, 2010, we received $361,290 from our financing activities.

We have only on class of common stock. We have no material commitments for capital expenditures within the next year, however if operations are commenced, substantial capital will be needed to pay for participation, investigation, exploration, acquisition and working capital.

Our auditors have expressed their doubt about our ability to continue as a going concern unless we are able to generate profitable operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Need for Additional Financing

We do not have capital sufficient to meet our cash needs. We will have to seek loans or equity placements to cover such cash needs. Once exploration commences, our need for additional financing is likely to increase substantially.

No commitments to provide additional funds have been made by our management or other shareholders. Accordingly, there can be no assurance that any additional funds will be available to us to allow us to cover our expenses as they may be incurred.

ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2011, as required by Rule 13a-15(b) of the Exchange Act, new management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2011 at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

As a result of our change in management subsequent to year end, the Company’s new management performed an evaluation of the Company’s internal controls over financial reporting for the six-month period ended December 31, 2010, and such controls were determined to be ineffective at the reasonable assurance level, as disclosed in the Company’s 10-KT filing for that period. During the six months ended June 30, 2011, the Company’s new management team, including the Company’s Chief Executive Officer and Chief Financial Officer, developed and implemented new internal controls over financial reporting which replaced the existing internal controls over financial reporting and evaluated the effectiveness of the design and operation of the Company’s new internal controls over financial reporting in accordance with the Sarbanes-Oxley Act of 2002 Section 404. Accordingly, new management determined the design and operation of the Company’s newly implemented internal controls over financial reporting were effective.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not currently involved in any legal proceedings and we are not aware of any pending or potential legal actions.

Item 1A. Risk Factors.

We are subject to various risks and uncertainties in the course of our business. In addition to the factors discussed elsewhere in this report, you should carefully consider the risks and uncertainties described under Item 1A. Risk Factors filed in our Transition Report on Form 10-KT for the year ended December 31, 2010. There have been no material changes from the risk factors previously disclosed in that Form 10-KT.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In a series of transactions commencing January 28, 2011 and ending March 25, 2011, the Company issued an aggregate of 3,595,569 shares of its common stock to the holders of convertible promissory notes, upon conversion of all or part of the principal amount of such notes. The shares of common stock issued upon conversion were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Company made this determination based on the representations of each note holder that it is an “accredited investor,” as defined in Regulation D of the Securities Act.

On February 24, 2011, the Company issued an aggregate of 180,000 shares of its common stock to an executive officer of the Company, in lieu of the payment of accrued salary. Such shares of common stock were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Company made this determination based on the executive officer’s tenure with the Company and his knowledge and experience in financial and business matters.

On April 13, 2011, the Company issued an aggregate of 64,000 shares of its common stock to a provider of professional services to the Company, in lieu of the payment of cash for such services. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Company made this determination based on the individual’s long-standing business relationship with the Company and his knowledge and experience in financial and business matters. Appropriate legends have been affixed to all shares of the Company’s common stock issued in the transaction.

Item 3. Defaults Upon Senior Securities.

There were no defaults upon senior securities during the period covered by this report.

Item 4. Reserved.

Item 5. Other Information.

Item 6. Exhibits.

The following documents are filed as part of this report:

Exhibit 31.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to

Section 302 of the Sarbanes-Oxley Act

Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer 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.

August 15, 2011

Blugrass Energy Inc. (Registrant)

	By:	/s/ Abram Janz
		Abram Janz, Chief Executive Officer


	By:	/s/ Laurence K. Maguire
		Laurence K. Maguire, Chief Financial Officer

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