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EX-3.4 - EXHIBIT 3.4 - NOVAMEX ENERGY INC.blug_10k2011ex34.htm
EX-3.3 - EXHIBIT 3.3 - NOVAMEX ENERGY INC.blug_10k2011ex33.htm
EX-32.1 - EXHIBIT 32.1 - NOVAMEX ENERGY INC.blug_10k2011ex321.htm
EX-31.1 - EXHIBIT 31.1 - NOVAMEX ENERGY INC.blug_10k2011ex311.htm
EX-3.1 - EXHIBIT 3.1 - NOVAMEX ENERGY INC.blug_10k2011ex31.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
___________________

FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Or

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

 Fiscal Year Ended December 31, 2011

Commission file number: 000-54035

BLUGRASS ENERGY INC.
 
(Exact name of registrant as specified in its charter)
 
 
 
 Nevada
 
 20-4952339
 
 
 State or other jurisdiction of
 
  I.R.S. Employer
 
 
 incorporation or organization
 
   Identification No.
 
         
 
13465 Midway Road, Suite 114, LB 10, Dallas, TX  75244
 
 
(Address of principal executive offices) (Zip Code)
 
         
 
Registrant's telephone number, including area code:
(972) 404-9995
 
     
 
 
  Securities registered pursuant to Section 12(b) of the Act:
 
     
 
Title of each class
Registered
 
Name of each exchange
on which registered
 
 
Not Applicable
 
  Not Applicable
 
         
 
Securities registered pursuant to Section 12(g) of the Act:
 
     
 
Common Stock
 
 
(Title of class)
 
         

 
1

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       
Yes  [_]       No  [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  [_]
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of  registrant's  knowledge,  in definitive proxy or information statements  incorporated  by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and “smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One).
 
Large accelerated filer     [_]
Accelerated filer     [_]
   
Non-accelerated filer     [_]
Smaller reporting company     [X]
(Do not check if a smaller reporting company)
 

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

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of December 31, 2011:  $230,731.

As of December 31, 2011, the registrant had 79,562,497 shares of common stock issued and outstanding.
 
2

 
BLUGRASS ENERGY INC.
 
TABLE OF CONTENTS
 
   
 Page
FORWARD LOOKING STATEMENTS
   
     
PART I
     
ITEM 1. Description of Business
 
4
     
ITEM 1A. Risk Factors
 
 8
     
ITEM 1B. Unresolved Staff Comments
 
 17
     
ITEM 2. Properties
 
17
     
ITEM 3. Legal Proceedings
 
17
     
ITEM 4. Reserved
 
17
     
     
PART II
     
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
17
     
ITEM 6. Selected Financial Data
 
18
     
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
19
     
ITEM 7A. Quantitive and Qualitative Disclosures about Market Risk
 
22
     
ITEM 8. Financial Statements and Supplementary Data
 
22
     
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
22
     
ITEM 9A. Controls and Procedures
 
22
     
PART III
     
ITEM 10. Directors, Executive Officers and Corporate Governance
 
24
     
ITEM 11. Executive Compensation
 
26
     
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  
 
27
     
ITEM 13. Certain Relationships and Related Transactions and Director Independence
 
28
     
ITEM 14. Principal Accountant Fees and Services
 
28
     
PART IV
     
ITEM 15. Exhibits and Financial Statement Schedules
 
29

3

 
FORWARD-LOOKING STATEMENTS
 
Our disclosure and analysis in this Form 10-K may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are subject to risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events or developments that we expect or anticipate will occur in the future, including such things as estimated future net revenues from oil and gas reserves and the present value thereof, future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strength, goals, expansion and growth of our business and operations, plans, references to future success, reference to intentions as to future matters, and other such matters are forward-looking statements.
 
These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control.
 
Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-K are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this Form 10-K. All forward-looking statements speak only as of the date of this Form 10-K. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

PART I
 
References in this Report on Form 10-K to “we,” “us,” “Blugrass  ” or “the Company” refer to Blugrass  Energy Inc., a Nevada corporation.
 
ITEM 1.  DESCRIPTION OF BUSINESS
 
General
 
Blugrass Energy Inc. ("Blugrass") is a publicly held corporation quoted 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.  Upon the reverse merger the new inception date is December 11, 2007.
 
Business Strategy
  
We continue to seek out opportunities to acquire additional oil and gas properties. However, the ability to consummate these transactions will likely be contingent on our ability to obtain financing.  Our goal is to acquire oil and gas acreage through purchase or merger with or acquisition of an oil and gas producing partner.  To date, we have no revenues and limited capital resources.  Our ability to continue as a going concern will depend on our ability to raise additional debt or equity capital in the near-term.  Our lease of 4,808 acres in Crockett County, in west Texas expired as of December 31, 2011 as we were unable to perform under the terms of the lease due to capital constraints.  Subsequent to December 31, 2011 we were unable renew the Soto Lease and we currently have no acreage under lease.  Management continues to attempt to raise additional debt and equity capital and is engaged in discussions with numerous potential capital sources.
 
4

 
Industry Operating Environment
 
The oil and gas industry is affected by many factors that we generally cannot control.  Government regulations, particularly in the areas of taxation, energy, climate change and the environment, can have a significant impact on operations and profitability.
 
Plans for 2012
 
During the 2012 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 the efforts through the sale of equity, debt securities and/or working interest partners.

Headquarters
 
As of December 31, 2011, Blugrass leases approximately 800 square feet in an office building at 13465 Midway Road, Suite 114, LB 10, Dallas, Texas  75244 that serves as corporate headquarters.
 
Available Information
 
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other documents with the United States Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any document we file with the SEC at http://www.sec.gov. Information contained on or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
  
Competition
 
There is substantial competition in developing and acquiring oil and gas properties, securing and retaining personnel, conducting drilling and field operations and marketing production. Competitors in exploration, development, acquisitions and production include the major oil companies as well as numerous independent oil and gas companies, individual proprietors and others. As of December 31, 2011, we held no acreage under lease, placing us at a competitive disadvantage to peers.  Additionally, many competitors have financial and other resources substantially exceeding ours. Therefore, competitors may be able to pay more for desirable leases and evaluate, bid for and purchase a greater number of properties or prospects than our financial or personnel resources allow. Our ability to grow depends on our ability to raise additional capital, attract and retain quality personnel and identify and acquire suitable producing properties and prospects for future drilling. See “Item 1A. Risk Factors.”
 
5

 
Marketing and Customers
 
We currently have no production and no property held under lease.  In the event we are able to raise additional capital, acquire oil and gas properties suitable for drilling and successfully produce and extract hydrocarbons from those properties, we will market our natural gas and oil we will sell our natural gas pursuant to a variety of contractual arrangements, generally month-to-month and in longer term contracts that appear appropriate.  Sales will be based on the New York Mercantile Exchange (“NYMEX”) pricing, published regional index pricing or percentage of proceeds sales based on local indices.  Our natural gas will be sold to utilities, marketing companies and industrial users.  Proximity to local markets, availability of competitive fuels and overall supply and demand are factors affecting the prices for which our production will be sold.  Market volatility due to international political developments, overall energy supply and demand, fluctuating weather conditions, economic growth rates and other factors in the United States and wordwide have had, and will continue to have a significant effect on energy prices.
 
We will incur gathering and transaction expenses to move our natural gas from the wellhead to purchaser specified delivery points.  These expenses vary base on volume, distance shipped and the fees charged by third-party transporters.  Transportation capacity on these gathering systems and pipelines is occasionally constrained.  For additional information, see “Risk Factors – Our business depends on oil and gas transportation facilities, many of which are owned by others,” in Item 1A of this report.
 
Regulation
 
Regulation of Gas and Oil Production
 
Oil and natural gas operations such as ours are subject to various types of legislation, regulation and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry is under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability.
 
In addition many of the states in which we have owned or may potentially acquire regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing new fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowable for wells on a market demand or conservation basis.

Environmental Regulation

Oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or EPA, issue regulations which often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for failure to comply. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically sensitive and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing pits, and impose substantial liabilities for pollution resulting from operations or relate to owned or operated facilities. The strict liability nature of such laws and regulations could impose liability upon us regardless of fault. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements.

6

 
Waste Handling

The Resource Conservation and Recovery Act, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent requirements of non-hazardous waste provisions. However, there can be no assurance that the EPA or the state or local governments will not adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.”
Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe that the current costs of managing our wastes as they are presently classified to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes.
 
Comprehensive Environmental Response, Compensation and Liability Act

The Comprehensive Environmental Response, Compensation and Liability Act, also known as CERCLA or the “Superfund” law, generally imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination and those persons that disposed or arranged for the disposal of the hazardous substance. Under CERCLA and comparable state statutes, such persons may be subject to strict joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment. In the course of our operations, we anticipate the use of materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released.

Water Discharges

The Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act, the Oil Pollution Act and analogous state laws and regulations promulgated hereunder impose restrictions and strict controls regarding the discharge of pollutants, including produced waters and other gas and oil wastes, into state waters or waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. These laws and regulations also prohibit certain activity in wetlands unless authorized by a permit issued by the U.S. Army Corps of Engineers. The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain permits for storm water discharges. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans. We believe that we have obtained or applied for and are in substantial compliance with all permits required under the Clean Water Act. Sanctions for failure to comply with Clean Water Act requirements include administrative, civil and criminal penalties, as well as injunctive obligations.

7

 
Air Emissions

The federal Clean Air Act, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. Some of our new facilities will be required to obtain permits before work can begin, permits may be required for our facilities’ operations, and existing facilities may be required to incur capital costs to remain in compliance. These laws and regulations may increase the costs of compliance for some facilities and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects.  Air emissions may also soon be affected by rapidly emerging regulation of “green house gases,” such as carbon dioxide and methane, which are emitted in the course of oil and natural gas exploration and production.

Intellectual Property and Other Proprietary Rights

We believe that our success depends in part on our ability to protect our proprietary rights. We rely on a combination of trade secret laws and confidentiality agreements and processes to protect our proprietary rights.

We generally require our employees, customers, and potential distribution participants to enter into confidentiality and non-disclosure agreements, often with non-circumvention provisions, before we disclose any confidential aspect of our technology, services, or business. In addition, our employees are required to assign to us any proprietary information, inventions, or other technology created during the term of their employment with us. However, these precautions may not be sufficient to protect us from misappropriation or infringement of our intellectual property.

Employees

As of December 31, 2011, there was one full-time employee of the Company, its Chief Executive Officer, Abram Janz.

ITEM 1A. RISK FACTORS
 
We are subject to various risks and uncertainties in the course of our business. The following summarizes some, but not all, of the risks and uncertainties which may adversely affect our business, financial condition or results of operations. Our business could also be impacted by additional risks and uncertainties not currently known to us or that we currently deem to be immaterial. Any of these risks could harm our business. The trading price of our common stock could decline significantly due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this transition report on Form 10-K, including our consolidated financial statements and related notes.
 
Risks Related to Our Business
 
Volatility of oil and gas prices significantly affects our cash flow and capital resources and could hamper our ability to produce oil and gas economically
 
Oil and gas prices are volatile, and a decline in prices adversely affects our profitability and financial condition. The oil and gas industry is typically cyclical, and prices for oil and gas have been volatile. Historically, the industry has experienced downturns characterized by oversupply and/or weak demand. Long-term supply and demand for oil and gas is uncertain and subject to a myriad of factors such as:  
 
·
the domestic and foreign supply of oil and gas;
   
·
the price and availability of alternative fuels;
   
·
weather conditions;
   
·
the level of prices, and expectations about future prices, of oil and natural gas;
   
·
the level of consumer demand;
 
8

 
·
the cost of exploring for, developing, producing and delivering oil and natural gas;
   
·
the price of foreign imports;
   
·
worldwide economic conditions;
   
·
the availability, proximity and capacity of transportation facilities and processing facilities;
   
·
the effect of worldwide energy conservation efforts;
   
·
risks associated with operating drilling rigs;
   
·
technical advances affecting energy consumption;
   
·
political conditions in oil and gas producing regions; and
   
·
domestic and foreign governmental regulations and taxes.
 
If oil and gas prices decrease or drilling efforts are unsuccessful, we may be required to record write downs of oil and gas properties as appropriate

Write-downs may occur when oil and gas prices are low, or if we have downward adjustments to our estimated proved reserves, increases in our estimates of operating or development costs, deterioration in our drilling results or mechanical problems with wells where the cost to redrill or repair is not supported by the economics.
 
Accounting rules require that the carrying value of oil and gas properties be periodically reviewed for possible impairment. Impairment is recognized when the book value of a proven property is greater than the expected undiscounted future net cash flows from that property, and impairment is recognized on acreage when conditions indicate the carrying value is not recoverable. We may be required to write down the carrying value of a property based on oil and gas prices at the time of the impairment review, or as a result of continuing evaluation of drilling results, production data, economics and other factors. While an impairment charge reflects our long-term ability to recover an investment, it does not impact cash or cash flow from operating activities, but it does reduce our reported earnings and increases our leverage ratios.

Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered.  There can be no assurance that any unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive, or that we will recover all or any portion of our investment in such unproved property or wells.

Our future success depends on our ability to find, finance and produce reserves

Because the rate of production from oil and gas properties generally declines as reserves are depleted, our future success depends upon our ability to finance economically viable projects. Except to the extent that we acquire additional properties containing proved reserves, conduct successful exploration and development activities or, through engineering studies, identify additional behind-pipe zones or secondary recovery reserves, our proved reserves will decline as reserves are produced. Future oil and gas production, therefore, is highly dependent upon our level of success in in financing, acquiring or finding additional reserves that are economically recoverable. We cannot assure you that we will be able to find or acquire and develop additional reserves at an acceptable cost.

We have a minimal operating history, so investors have no way to gauge our long-term performance

We were formed in May 2006, and only recently adopted a business plan in the energy industry.  As evidenced by the financial reports, we have had no revenue. We must be regarded as a new or development-stage venture with all of the unforeseen costs, expenses, problems, and difficulties to which such ventures are subject.

9

 
Our indebtedness could limit our ability to successfully operate our business

We are leveraged and our exploration and development program will require substantial capital resources depending on the level of drilling and the expected cost of services. Our existing plans will also require ongoing capital expenditures. In addition, if we decide to pursue additional acquisitions, our capital expenditures will increase, both to complete such acquisitions and to explore and develop any newly acquired properties.
 
The degree to which we are leveraged could have other important consequences, including the following:
 
·
we may be more highly leveraged than some of our competitors, which could place us at a competitive disadvantage;
   
·
our degree of leverage may make us more vulnerable to a downturn in our business or the general economy;
   
·
our debt level could limit our flexibility to grow the business and in planning for, or reacting to, changes in our business and the industry in which we operate; and
   
·
we may have difficulties borrowing money in the future.
 
Despite our current levels of indebtedness, we still may be able to incur substantially more debt. This could further increase the risks described above. In addition to those risks above, we may not be able to obtain funding on acceptable terms because of the deterioration of the credit and capital markets. This may hinder or prevent us from meeting our future capital needs. In particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished significantly.
 
Our business is subject to operating hazards that could result in substantial losses or liabilities

Oil and gas operations are subject to many risks, including well blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic natural gas and other environmental hazards and risks. If any of these hazards occur, we could sustain substantial losses as a result of:
 
·
injury or loss of life;
   
·
severe damage to or destruction of property, natural resources and equipment;
   
·
pollution or other environmental damage;
   
·
clean-up responsibilities;
   
·
regulatory investigations and penalties; or
   
·
suspension of operations.
 
We do not maintain any insurance to cover exposure to potential loses under any of the above mentioned scenarios and we do not maintain any business interruption insurance. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs that is not fully covered by insurance, it could have a material adverse effect on our financial condition and results of operations.

10

 
Information concerning reserves and future net cash flow estimates is uncertain

There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and their values, including many factors beyond our control. Estimates of proved reserves are by their nature uncertain.  Actual production, revenues and costs to develop will likely vary from estimates and these variances could be material.
 
Reserve estimation is a subjective process that involves estimating volumes to be recovered from underground accumulations of oil and gas that cannot be directly measured. As a result, different petroleum engineers, each using industry-accepted geologic and engineering practices and scientific methods, may calculate different estimates of reserves and future net cash flows based on the same available data. Because of the subjective nature of oil and gas reserve estimates, each of the following items may differ materially from the amounts or other factors estimated:
 
·
the amount and timing of oil and gas productions
·
the revenues and costs associated with that production; and
·
the amount and timing of future development expenditures
 
For discounted future net cash flows, proved reserves included should not be considered as the market value of the reserves attributable to our properties.  As required by generally accepted accounting principles, the estimated discounted future net revenues from proved reserves are based on a twelve month average price (beginning of month) while cost estimates are as of the end of the year. Actual future prices and costs may be materially higher or lower. In addition, the 10 percent discount factor that is required to be used to calculate discounted future net revenues for reporting purposes under generally accepted accounting principles is not necessarily the most appropriate discount factor based on the cost of capital in effect from time to time and risks associated with our business and the oil and gas industry in general.

We are subject to financing and interest rate exposure risks

Our business and operating results can be harmed by factors such as the availability, terms of and cost of capital and increases in interest rates. These changes could cause our cost of doing business to increase, limit our ability to pursue acquisition opportunities, reduce cash flow used for drilling and place us at a competitive disadvantage. Recent and continuing disruptions and volatility in the global finance markets may lead to a contraction in credit availability, impacting our ability to finance our operations. We require continued access to capital, and accordingly, a significant reduction in cash flows from operations or the availability of credit could materially and adversely affect our ability to achieve our planned growth and operating results.
 
Difficult conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations

Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The debt and equity capital markets have been exceedingly distressed. These issues will likely continue to make it difficult to obtain financing. In addition, as a result of concerns about the stability of financial markets generally, the cost of accessing the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and limited the amount of funding available to borrowers.

As a result, we may be unable to obtain adequate funding, we may be unable to implement our business plans or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our results of operations.

Many of our current and potential competitors have greater resources than we have and we may not be able to successfully compete in acquiring, exploring and developing new properties

We face competition in every aspect of our business, including, but not limited to, acquiring reserves and leases, obtaining goods, services and employees needed to operate and manage our business and marketing oil and gas. Competitors include multinational oil companies, independent production companies and individual producers and operators. Many of our competitors have greater financial and other resources than we do. As a result, these competitors may be able to address these competitive factors more effectively than we can or weather industry downturns more easily than we can.

11

 
Shortage of rigs, equipment, supplies or personnel may restrict our operations

The oil and natural gas industry is cyclical, which can result in a shortage of drilling rigs, equipment, supplies and personnel. As a result, the costs and delivery times of rigs, equipment and supplies increase and demand for, and wage rates of qualified drilling rig crews also rise with increases in the number of active rigs in service. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. Shortages of drilling rigs, equipment, supplies, personnel, trucking services, tubulars, hydraulic fracturing and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations.

The oil and gas industry is subject to extensive regulation

The oil and gas industry is subject to various types of regulations in the United States by local, state and federal agencies. Legislation affecting the industry is under constant review for amendment or expansion, frequently increasing our regulatory burden. Numerous departments and agencies, both state and federal, are authorized by statute to issue rules and regulations binding on participants in the oil and gas industry. Compliance with such rules and regulations often increases our cost of doing business, delays our operations and, in turn, decreases our profitability.

Our operations are subject to numerous and increasingly strict federal, state and local laws, regulations and enforcement policies relating to the environment. We may incur significant costs and liabilities in complying with existing or future environmental laws, regulations and enforcement policies and may incur costs arising out of property damage or injuries to employees and other persons. These costs may result from our current and former operations and even may be caused by previous owners of property we own or lease. Any past, present or future failure by us to completely comply with environmental laws, regulations and enforcement policies could cause us to incur substantial fines, sanctions or liabilities from cleanup costs or other damages. Those costs or damages could reduce or eliminate funds available for exploration, development or acquisitions or cause us to incur losses.
 
Climate change is receiving increasing attention from scientists and legislators alike. The debate is ongoing as to the extent to which our climate is changing, the potential causes of this change and its potential impacts. Some attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.
 
There are a number of legislative and regulatory proposals to address greenhouse gas emissions, which are in various phase of discussion or implementation. The outcome of federal and state actions to address global climate change could result in a variety of regulatory programs including potential new regulations, additional charges to fund energy efficiency activities, or other regulatory actions. These actions could:
 
·
result in increased costs associated with our operations;
·
increase other costs to our business
·
affect the demand for natural gas, and
·
impact the process we charge our customers
 
Any adoption of new laws or regulations by federal or state governments mandating a substantial reduction in greenhouse gas emissions could have far-reaching and significant impacts on the energy industry and the U.S. economy. We cannot predict the potential impact of such laws or regulations on our future consolidated financial condition, results of operations or cash flows.

Certain federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation

Among the changes contained in President Obama’s budget proposal for fiscal year 2011, is the elimination of certain U.S. federal income tax provisions currently available to oil and gas exploration and production companies. Proposed changes include (i) the repeal of the percentage depletion allowance for oil and gas properties; (ii) the elimination of current deductions for intangible drilling and development costs; (iii) the elimination of the deduction for certain U.S. production activities; and (iv) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective.

12

 
The passage of any legislation as a result of the budget proposal or any other similar change in U.S. federal income tax law could eliminate certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial condition and results of operation.

Acquisitions are subject to the risks and uncertainties of evaluating reserves and potential liabilities and may be disruptive and difficult to integrate into our business

We could be subject to significant liabilities related to acquisitions. It generally is not feasible to review in detail every individual property included in an acquisition. Ordinarily, a review is focused on higher valued properties. However, even a detailed review of all properties and records may not reveal existing or potential problems in all of the properties, nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities.
 
In addition, there is intense competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to successfully complete any acquisition is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Our ability to pursue our acquisition strategy may be hindered if we are unable to obtain financing on terms acceptable to us or regulatory approvals.
 
Acquisitions often pose integration risks and difficulties. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Acquisitions could result in our incurring additional debt, contingent liabilities, expenses and diversion of resources, all of which could have a material adverse effect on our financial condition and operating results.

Drilling is a high-risk activity

The cost of drilling, completing, and operating a well is often uncertain, and many factors can adversely affect the economics of a well. Our efforts, along with those of our independent operators, will be uneconomical if we drill dry holes or wells that are productive but do not produce enough oil and gas to be commercially viable after drilling, operating and other costs. Furthermore, our drilling and producing operations may be curtailed, delayed, or canceled as a result of other factors, including:
 
·
high costs, shortages or delivery delays of drilling rigs, equipment, labor, or other services;
·
unexpected operational events and drilling conditions;
·
reductions in oil and gas prices;
·
limitations in the market for oil and gas;
·
adverse weather conditions;
·
facility or equipment malfunctions;
·
equipment failures or accidents;
·
title problems
·
pipe or cement failures;
·
casing collapses
·
compliance with environmental and other government requirements;
·
environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures, and discharges of toxic gases;  
·
lost or damaged oilfield drilling and service tools;
·
pressure or irregularities in formations;  
·
fires;
·
natural disasters;
·
surface craterings and explosions; and
·
uncontrollable flows of oil, natural gas or well fluid. 
 
13

 
If any of these factors were to occur with respect to a particular well, we could lose all or a part of our investment in the well, or we could fail to realize the expected benefits from the well, either of which could materially and adversely affect our revenue and profitability.
 
New technologies may cause our current exploration and drilling methods to become obsolete

The oil and gas industry is subject to rapid and significant advancements in technology, including the introduction of new products and services using new technologies. As competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. In addition, our competitors have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. One or more of the technologies that we currently use or that we may implement in the future may become obsolete. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. If we are unable to maintain technological advancements consistent with industry standards, our operations and financial condition may be adversely affected.

Legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays

Federal, State, and Local regulatory bodies are currently considering legislation to strengthen legislation to regulate safe drinking water to eliminate an existing exemption for hydraulic fracturing activities. Hydraulic fracturing involves the injection of water, sand and additives under pressure into rock formation to stimulate natural gas production. The use of hydraulic fracturing is necessary to produce commercial quantities of natural gas and oil from many reservoirs.  If adopted, this legislation could establish an additional level of regulation and permitting at the federal level. This additional regulation and permitting could lead to operational delays or increased operating costs and could result in additional burdens that could increase our costs of compliance and doing business as well as delay the development of gas resources which are not commercial without the use of hydraulic fracturing.

Our business depends on oil and gas transportation facilities, most of which are owned by others

The marketability of our oil and gas production depends in part on the availability, proximity and capacity of pipeline systems owned by third parties. The lack of available capacity on these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. Federal and state regulation of oil and gas production and transportation, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce, gather and transport oil and gas. If any of these third party pipelines and other facilities become partially or fully unavailable to transport our product, or if the natural gas quality specifications for a natural gas pipeline or facility changes so as to restrict our ability to transport natural gas on those pipelines or facilities, our revenues could be adversely affected.

The disruption of third-party facilities due to maintenance and/or weather could negatively impact our ability to market and deliver our products. We have no control over when or if such facilities are restored or what prices will be charged. A shut-in of production could materially affect us due to a lack of cash flow.

Any failure to meet our debt obligations could harm our business, financial condition and results of operations

If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to sell shares, seek additional equity or restructure our debt. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness could harm our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient for payment of interest on and principal of our debt in the future and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and impair our liquidity.

14

 
We exist in a litigious environment

Any constituent could bring suit regarding our existing or planned operations or allege a violation of an existing contract. Any such action could delay when planned operations can actually commence or could cause a halt to existing production until such alleged violations are resolved by the courts. Not only could we incur significant legal and support expenses in defending our rights, but halting existing production or delaying planned operations could impact our future operations and financial condition. Such legal disputes could also distract management and other personnel from their primary responsibilities.
 
Interruptions to our business could adversely affect our operations

As with any company, our operations are at risk of being interrupted by earthquake, fire, flood, and other natural and human-caused disasters, including disease and terrorist attacks. Our operations are also at risk of power loss, telecommunications failure, and other infrastructure and technology based problems.

A terrorist attack or armed conflict could harm our business
 
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.
 
Conflicts of Interest

The management teams for Blugrass and Petro Grande, LLC are the same.  Consequently, it is possible that a conflict of interest could arise between these two companies, for resources, as well as management time and attention.

Risks Related to Our Common Stock
 
Common stockholders will be diluted if additional shares are issued

If we issue additional shares of our common stock in the future, it may have a dilutive effect on our current outstanding stockholders.

The regulation of penny stocks by the SEC and FINRA may discourage the tradability of our securities
 
We are a "penny stock" company,  and are subject to an SEC rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors.  For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Effectively, this discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of our stockholders sell their securities in any market that might develop therefore because it imposes additional regulatory burdens on penny stock transactions.
 
In addition, the SEC has adopted a number of rules to regulate "penny stocks." Because our securities constitute "penny stocks" within the meaning of the rules, the rules would apply to us and to our securities. The rules will further affect the ability of owners of shares to sell our securities in any market that might develop for them because these rules impose additional regulatory burdens on penny stock transactions.
 
15

 
Shareholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired consequent investor losses.
 
We do not currently pay dividends on our common stock and do not anticipate doing so in the future

We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We intend to retain any earnings to fund our operations. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Our stock price is volatile and you may not be able to resell shares of our common stock at or above the price you paid

The price of our common stock fluctuates significantly, which may result in losses for investors. We expect our stock to be subject to fluctuations as a result of a variety of factors, including factors beyond our control. These factors include:
 
·
changes in oil and gas prices;
   
·
variations in drilling, recompletions, acquisitions and operating results;
   
·
changes in governmental regulation;
   
·
changes in financial estimates by securities analysts;
   
·
changes in market valuations of comparable companies;
   
·
additions or departures of key personnel;
   
·
future sales of our stock;
   
·
statement changes in opinions, ratings, or earnings estimates made;
   
·
disparity between our reported results and any projections;
   
·
technological innovations by us or our competitors;
   
·
ability to maintain profitable relationships with our customers;
   
·
ability to report financial information in a timely manner; or
   
·
the markets in which our stock is traded.
 
We may fail to meet expectations of our stockholders or of securities analysts at some time in the future and our stock price could decline as a result.
 
The issuance of options or other derivative securities to acquire our common stock could result in dilution to other holders of our common stock.

Sales of additional shares of our common stock could have a negative effect on the market price of our common stock.
 
16

 
Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices and could impair our ability to raise capital through the sale of our equity securities. Most shares of common stock currently outstanding are eligible for sale in the public market, subject in certain cases to compliance with the requirements of Rule 144 under the securities laws. We also have the authority to issue additional shares of common stock. The issuance of such shares could dilute the voting power of the currently outstanding shares of our common stock and could dilute earnings per share.

Our common stock could be delisted, and, as a result, become more volatile and less liquid.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. [Reserved]
 

ITEM 3. LEGAL PROCEEDINGS

None
 
ITEM 4. [Reserved]
 
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company’s common stock is presently traded on the over-the-counter market on the OTC Bulletin Board maintained by the Financial Industry Regulatory Authority ("FINRA"). The OTCBB symbol for the Company’s common stock is BLUG.PK. The following table sets forth the range of high and low bid quotations for the Company’s common stock of each full quarterly period during the two most recent fiscal years and any subsequent interim period for which financial statements are included. The quotations were obtained from information published by FINRA and reflect interdealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.


Quarter Ended
HIGH
LOW
December 31, 2011
.003
.002
September 30, 2011
.002
.0002
June 30, 2011
.007
.0005
March 31, 2011
.005
.003
December 31, 2010
.007
.002
September 30, 2010
.012
.005
June 30, 2010
.045
.011
March 31, 2010
.053
.015
 
17

 
Holders

On December 31, 2011, there were over 5,000 holders of record of our common stock.

Dividend Policy

Holders of the Company’s common stock are entitled to receive such dividends as may be declared by the Company’s Board of Directors.  The Company has not declared or paid any dividends on the Company’s common stock and it does not plan on declaring any dividends in the near future.  The Company currently intends to use all available funds to finance the operation and expansion of its business.

Recent Sales of Unregistered Securities

Blugrass made the following unregistered sales of its securities from January 1, 2011 through December 31, 2011:

DATE OF SALE
 
TITLE OF
SECURITIES
CLASS
NO. OF SHARES
 
CONSIDERATION
June 29, 2011
Common Stock
420,000
$25,200
June 29, 2011
Common Stock
420,000
$25,200

Exemption from Registration Claimed

All of the unregistered sales by Blugrass Energy of its securities were made in reliance upon Section 4(2) of the Securities Act of 1933.  The purchasers were existing shareholders, officers, and directors, known to the Company and its management, through pre-existing business relationships, as long standing business associates.  Each purchaser was provided access to all material information which it requested, and all information necessary to verify such information and was afforded access to Company management in connection with the purchases.  Each purchaser of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to the Company. All certificates representing such securities contained restrictive legends, prohibiting further transfer of the certificates representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition.
 
Issuer Purchases of Equity Securities

The Company did not repurchase any shares of its common stock during the period ended December 31, 2011.
 
ITEM 6. SELECTED FINANCIAL DATA

Summary of Statements of Operations of Blugrass Energy, Inc.

Twelve Months Ended December 31, 2011
 
Sales
 
$
Nil    
 
Gross Profit
 
$
Nil    
 
Net Loss
 
$
(3,786,993
)
Net Loss Per Share, diluted
 
$
Nil    
 

    Summary of Balance Sheet of Blugrass Energy Inc. as at December 31, 2011
 
       
Working Capital
 
$
(1,389,207
)
Total Assets
 
$
6,212
 
Stockholders’ Deficit
 
$
(4,889,207
)
 
18

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the financial statements and related notes included in this report, as well as our other filings with the SEC. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and the cautionary note regarding “Forward-Looking Statements” appearing elsewhere in this Form 10-K.

Overview of our Business

We are an independent oil and natural gas exploration and production company.  We had no revenues during the period January 1, 2011 and December 31, 2011.  We have minimal capital and minimal cash.  We are illiquid and need cash infusions from investors or shareholders or loans from any sources to provide capital.

During the 2012 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 the efforts through the sale of equity and/or debt securities.

We use the successful efforts method of accounting for our oil and gas activities.  As of December 31, 2011, our corporate headquarters is located in Dallas, Texas.
 
For a more detailed discussion on risks related to our business and industry, see Item 1A, Risk Factors.

Results of Operations

For the 10-K period January 1, 2011 through December 31, 2011, we did not recognize any revenues from our business activities.  For the period January 1, 2011 through December 31, 2011, we incurred operating expenses of $2,944,035.  For the period January 1, 2011 through December 31, 2011, we incurred a net loss of $3,786,993.

The Company was unable to fulfill its drilling obligations under an oil and gas lease agreement by the expiration date of December 31, 2011.  As a result, management was unable to secure the renewal of that oil and gas lease and has recorded an impairment charge of $1,984,383 for the period ended December 31, 2011.

Operating Expenses

Operating expenses since February 23, 2011 totaled $2,944,035 and consisted of professional fees of approximately $348,441 and general and administrative expenses of approximately $611,211.  Professional fees included charges for accounting, consulting, engineering, investor relations and legal.  General and administrative fees included employee related expenses, meals and entertainment, travel related expenses including lodging, filing and bookkeeping services and rent and other office related expenses.

Liquidity

At December 31, 2011, we had total assets of $6,212.  At December 31, 2011, we had total liabilities of $4,895,419 including $630,889 in accounts payables and accrued liabilities.

As of December 31, 2011 and December 31, 2010 we had cash and cash equivalents of $1,581 and $0, respectively. We didn’t have any marketable securities as of December 31, 2011 and December 31, 2010, respectively. Our working capital was $(1,389,207) and $0 as of December 31, 2011 and December 31, 2010, respectively.

19

 
Capital Resources

We have only common stock as our capital resource.  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.

Going Concern

The Company's financial statements for the twelve months ended December 31, 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 $3,786,993 for the year ended December 31, 2011 and an accumulated deficit during the development stage of $3,786,993 as of December 31, 2011. At December 31, 2011, the Company had a working capital deficit of $1,389,207 and the Company had no revenues from its activities during the year ended December 31, 2011.

The Company’s financial statements as of December 31, 2011, have been prepared on the assumption that the Company will continue as a going concern.  Our independent accountants have issued a report stating that our lack of revenue, significant losses accumulated during the development stage, and our net capital deficiency raise substantial doubt as to our ability to continue as a going concern.  There can be no assurance that we will be able to continue as a going concern.

The Company's ability to continue as a going concern may be dependent on the success of management's plan discussed below.  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.

Critical Accounting Policies

We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management.  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Accounting Estimates

Some accounting policies involve judgments and uncertainties to such an extent there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Certain accounting estimates are considered to be critical if (a) the nature of the estimates and assumptions is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to changes; and (b) the impact of the estimates and assumptions on financial condition or operating performance is material.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less and money market instruments to be cash equivalents.

20

 
Oil and Gas Properties and Method of Accounting

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 the 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.

Revenue Recognition

Oil, gas and natural gas liquids revenues are recognized when the products are sold and delivery to the purchaser has occurred. We use the sales method to account for gas imbalances, recognizing revenue based on gas delivered rather than our working interest share of gas produced. We recognize the cost of revenues, such as transportation and compression expense, as a reduction of revenue. There were no revenues for the twelve months ended December 31, 2011.

Earnings (loss) Per Share

Earnings (loss) per share require dual presentation of basic and diluted earnings or loss per share (EPS) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

21

 
Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, such as property and equipment and definite-lived intangibles subject to amortization, annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates.  If circumstances change, such estimates could also change. Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell.

Income Taxes

We estimate our current tax position together with our future tax consequences attributable to temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation, and other reserves for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, prior year carryback, or future reversals of existing taxable temporary differences. To the extent we believe that recovery is not more likely than not, we establish a valuation allowance against these deferred tax assets. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The response to this item is submitted as a separate section of this Form 10-K beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the period covered by this report.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Form 10-K. The Disclosure Controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (SEC’s) rules and forms. Disclosure Controls are also designed to provide reasonable assurance that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
 
22

 
The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Form 10-K. During the course of our evaluation of our internal control over financial reporting, we advised our Board of Directors that we had identified a material weakness as defined under standards established by the Public Company Accounting Oversight Board (United States). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness we identified is discussed in “Management’s Report on Internal Control Over Financial Reporting” below. Our Chief Executive Officer has concluded that as a result of the material weakness, as of the end of the period covered by this Annual Report on Form 10-K, our Disclosure Controls were not effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting should be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  

Our internal control over financial reporting includes those policies and procedures that:

(1)     
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(2)     
provide reasonable assurance that transactions are recorded necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(3)     
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Management has undertaken an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), which summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.  

Based on our evaluation, our management concluded that there is a material weakness in our internal control over financial reporting. The material weakness identified resulted in the restatement of previously reported financial statements and related financial disclosures. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness relates to the monitoring and review of work performed by our Chief Accounting Officer in the preparation of audit and financial statements, footnotes and financial data provided to the Company’s registered public accounting firm in connection with the annual audit. This lack of accounting staff results in a lack of segregation of duties, and accounting technical expertise necessary for an effective system of internal control.

Because of the material weakness described above, management concluded that, as of December 31, 2011, our internal control over financial reporting was not effective based on the criteria established in Internal Control-Integrated Framework issued by COSO.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit smaller reporting companies like us to provide only management’s report in this annual report.

This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

23

 
Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the twelve months ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III


ITEM  10. Directors, Executive Officers and Corporate Governance

The following table set forth certain information regarding our directors and executive officers, effective December 31, 2011.

 
 
Age
Tenure
Position
       
Abram Janz  
60
2011        
Director, President & CEO / Chief Accounting Officer
 
Abram Janz was first elected director in 2011.  Mr Janz is President and CEO of Blugrass Energy Inc. Mr. Janz has been an Independent Consultant and Partner in numerous projects since 1985, mainly in the natural resource industry.  He is also President & CEO of Petro Grande, LLC, a privately owned company, and President and CEO of PG Operating, LLC, the operating company for Blugrass and Petro Grande.  He has acquired an in-depth knowledge of how small businesses develop and grow, as well as how the financing of small businesses is achieved.  This expertise has been developed through hands on involvement in a range of complex projects in international markets.  Mr. Janz has raising equity capital,  structured and developed natural resource exploration projects, engaged professional advisors and industry experts, and negotiated/contracted for seismic and processing services.  Mr. Janz has been actively involved in creating oil and gas and other resources opportunities with investors, including securing leases and working with operators to complete seismic, exploration and pipelines.  He has initiated projects in the US, Canada, and South America.

Laurence Maguire, who previously had served as Chief Financial Officer, resigned from the Company on September 30, 2011 but continues to serve as a financial advisor to the Company.

Committees of the Board of Directors

Blugrass Energy does not have a separate executive committee.  The Board as a whole functions as the Executive Committee for Blugrass.

Audit Committee and Financial Expert

The Company does not have a separate audit committee.  At this point, we do intend to add independent directors to our Board of Directors, and to establish a separate audit committee whose members are independent directors.

Compensation Committee

As all our executive officers are currently at-will employees, we do not have a separate compensation committee. At this point, we do not intend to establish a separate compensation committee as this function will be performed by our full Board of Directors.

24

 
Nominating Committee

We do not currently have a separate nominating committee as this function is performed by our full Board of Directors.

Shareholder Communication

We communicate regularly with shareholders through press releases, as well as annual, quarterly, and current (Form 8-K) reports.  Our Chief Executive Officer addresses investor concerns on an on-going basis.  Interested parties, including shareholders and other security holders, may communicate directly with our Board of Directors or with individual directors by writing to our Chief Executive Officer at the Company’s executive offices.

Code of Conduct

We have adopted a Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions (as well as directors and all other employees).  Company employees annually sign an acknowledgement to confirm that they have read and understand the Code of Conduct.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the SEC.  Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

To the best of the Company's knowledge, based solely on review of the copies of such forms furnished to it, or written representations that no other forms were required, the Company believes that all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% stockholders were complied with during 2011.
 
Corporate Governance

Family Relationships

There are no family relationships between or among the directors, executive officers or persons nominated or charged by us to become directors or executive officers.

Involvement in Legal Proceedings

To the best of our knowledge, during the past five years, none of the following occurred with respect to a present or former director or executive officer of the Company:

(1) any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

(2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

(4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

25

 
ITEM 11.  Executive Compensation

The following table shows all the cash compensation paid by the Company, as well as certain other compensation paid or accrued, for the years ended December 31, 2011 and 2010, to our highest paid executive officers and employees, who were employed by us during the years ended December 31, 2011 and 2010.  No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, were paid to these executive officers during these fiscal periods.

SUMMARY COMPENSATION TABLE

The below table shows compensation of the named officers for the years ended December 31, 2011 and  2010:

 
 
Annual Compensation
 
Long-Term Compensation
 
   
 
Awards
 
Payouts
 
 
Name and
Principal Position
 
Year
 
Salary
 
Bonus
 
Other
Annual
Compensation
 
Restricted
Stock
Award(s)
 
Options/
SARs
 
LTIP
Payouts
 
All Other
Compen-
sation
   
 
($)
 
($)
 
($)
 
($)
 
(#)
 
($)
 
($)
                 
Abram Janz,
2011
33,718
           
Chief Executive Officer
2010
23,419
           
                 
Laurence Maguire,
2011
58,258
           
Chief Financial Officer
2010
95,586
           
 
Outstanding Equity Awards
 
The below table shows information of outstanding equity awards of the named officers at December 31, 2011 and 2010:
 
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2011
Option Awards
Stock Awards
Name 
Number  of  Securities  Underlying  Unexercised  Options  (#)  Exercisable 
Number  of  Securities  Underlying  Unexercised  Options  (#)  non-exercisable 
Equity  Incentive  Plan  Awards:  Number  of  Securities Underlying  Unexercised  Unearned  Options  (#) 
Option  Exercise  Price  ($) 
Option  Expiration  Date 
Number  of Shares  or Units  of Stock  That Have  Not  Vested  (#)
Market  Value of  Shares or  Units of  Stock  That Have  Not  Vested  ($) 
Equity  Incentive  Plan Awards:  Number  of  Unearned  Shares,  Units or  Other Rights  That Have  Not  Vested  (#) 
Equity Incentive  Plan Awards:  Market or Payout  Value  of Unearned  Shares,  Units or  Other  Rights  That Have  Not  Vested  ($) 
 
-
-
-
-
-
-
-
-
-
 
-
-
-
-
-
-
-
-
-

Compensation of Directors
 
For the years ended December 31, 2011 and 2010, the Company’s directors received no compensation for their services as directors. The Company has not established any standard arrangements pursuant to which directors have been compensated for their services, although all directors are reimbursed for out-of-pocket expenses, including those incurred in connection with attendance at Board of Directors meetings.  The Company may establish a compensation plan for its directors in the future.

26

 
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
 
There are no employment agreements or other contracts or arrangements with officers or directors. There are no compensation plans or arrangements, including payments to be made by us, with respect to our officers, directors or consultants that would result from the resignation, retirement or any other termination of service in respect of such directors, officers or consultants. There are no arrangements for directors, officers, employees or consultants that would result from a change-in-control.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
 
Security Ownership of Certain Beneficial Owners and Management
 
The following table sets forth certain information with respect to the beneficial ownership, as of December 31, 2011 of the Company’s common stock, which is the Company’s only outstanding class of voting securities, and the voting power resulting from such beneficial ownership, by:
 
  ·
each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s outstanding common stock;
 
·
each director of the Company;
 
·
each executive officer of the Company; and
 
·
all directors and executive officers of the Company as a group.


Beneficial Owner (1)
Amount and Nature
of Beneficial
Ownership
Percent
of Class
Petro Grande, LLC
13465 Midway Rd Ste 322 Lock Box 10
Dallas, TX 75244
46,294,337 shares
58.2%
Cede & Co.
PO Box 222
Bowling Green Station
New York, New York
17,083,059 shares
21.5%
Global Convertible Megatrend Ltd.
Caceris BL C/O Scherrer & Partner
Zurich, SWI 8002
 
4,400,000 shares
 
5.53%

(1)    
We understand that each beneficial owner has sole voting and investment power with respect to all shares attributable to that owner.

27

 
ITEM 13. Certain Relationships and Related Transactions and Director Independence

Transactions with Related Persons, Promoters and Certain Control Persons

For the year ended December 31, 2011, none of the following persons has had any direct or indirect material interest in any transaction to which the Company was or is a party, or in any proposed transaction to which the Company proposes to be a party:
 
  ·
any director or officer of the Company;
 
·
any proposed director of officer of the Company;
 
·
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to the Company’s common stock; or
 
·
any member of the immediate family of any of the foregoing persons (including a spouse, parents, children, siblings, and in-laws).
 
Director Independence

The Company’s common stock is quoted through the OTC Bulletin Board System.  For purposes of determining whether members of the Company’s Board of Directors are “independent,” the Company’s Board utilizes the standards set forth in the NASDAQ Stock Market Marketplace Rules.  At present, the Company’s entire Board serves as its Audit, Compensation and Nominating Committees.  The Company’s Board of Directors has determined that, of the Company’s present directors, none is an “independent director,” as defined under NASDAQ’s Marketplace Rules, for purposes of qualifying as independent members of the board and an Audit, Compensation and Nominating Committee of the board, since they serve as executive officers of the Company.

Since February 23, 2011, the Company has not changed the structure of its Board of Directors and currently, Mr. Abram Janz serve as both director, and as Chief Executive and Accounting Officer.  On September 30, 2011, Mr.  Laurence Maguire transitioned his role as Chief Financial Officer of Blugrass Energy Inc. (the “Company”), to that of a financial advisor. It is anticipated that independent directors will be added to the Board, however, the Company’s Board of Directors has not set a timetable for such action.
 
ITEM 14. Principal Accounting Fees and Services

The aggregate fees billed for the two most recently completed periods ended December 31, 2011 and December 31, 2010 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:

 
Year Ended December 31,
 
2011
2010
     
Audit Fees
$56,801
$0
     
Tax Fees
$5,694
$0
     
All Other Fees
$0
$0
     
Total Fees
$62,495
$0

28

 
PART IV

ITEM 15. Financial Statements and Supplementary Data
Financial Statements

Report of Independent Registered Public Accounting Firm – Whitley Penn, LLP
Balance Sheets as of December 31, 2011 and 2010
Statements of Operations for the fiscal years ended December 31, 2011 and 2010
Statements of Shareholders’ Deficit for years ended December 31, 2011 and 2010
Statements of Cash Flows for years ended December 31, 2011, and 2010
Notes to Financial Statements

EXHIBIT INDEX

Exhibits. The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K

Exhibit
Number
 
Articles of Incorporation
   
Certificate of Amendment to Articles of Incorporation
   
Certificate of Change
   
Bylaws
   
Certification of Chief Executive and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act
   
Certification of Principal Executive and Accounting 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.

April 12, 2012

 
Blugrass Energy Inc. (Registrant)
   
/s/ Abram Janz
   
Abram Janz
   
Chief Executive Officer
   
and President, and Accounting Officer
   
 
29

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Board of Directors and Stockholders
 
Blugrass Energy, Inc.
 
We have audited the accompanying balance sheets of Blugrass Energy, Inc. (the “Company”), as of December 31, 2011 and 2010, and the related statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended.  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 6 to the financial statements, as of December 31, 2011, the Company has an accumulated deficit of $3,786,993 and negative working capital of $1,389,207, both of which raise substantial doubt about its ability to continue as a going concern.  Management’s plans concerning these matters are also described in Note 6.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Whitley Penn, LLP

 
Dallas, Texas
 
April 12, 2012
 
30

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

   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash
  $ 1,581     $ -  
Other receivable
    4,631       -  
Total current assets
    6,212       -  
                 
Oil and gas properties - undeveloped
    -       1,984,383  
                 
Total assets
  $ 6,212     $ 1,984,383  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 342,373     $ -  
Accounts payable - related party
    288,516       -  
Notes payable
    20,000       -  
Line of credit
    22,500       -  
Convertible notes payable, net
    305,518       -  
Derivative liability
    123,075       -  
Accrued interest
    100,841       -  
Accrued interest - related party
    192,596       -  
Total current liabilities
    1,395,419       -  
                 
Long-term note payable
    3,500,000       -  
Total liabilities
    4,895,419       -  
                 
Commitments and Contingencies
               
Shareholders' equity (deficit):
               
Common stock par value $.005, 1,000,000,000 shares authorized,
               
 79,562,497 and 0 issued and outstanding, in 2011 and 2010, respectively
    397,846       -  
Additional paid-in-capital
    (1,500,060 )     1,984,383  
Deficit accumulated during the development stage
    (3,786,993 )     -  
Total shareholders' equity (deficit)
    (4,889,207 )     1,984,383  
Total liabilities and shareholders' equity (deficit)
  $ 6,212     $ 1,984,383  
 
See accompanying notes to the financial statements

31

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
 
               
December 11, 2007
 
   
Year ended December 31,
   
(Inception) to
 
   
2011
   
2010
   
December 31, 2011
 
                   
Operating expenses:
                 
Professional fees
  $ 348,441     $ -     $ 348,441  
Impairment of oil and gas properties
    1,984,383       -       1,984,383  
General and administrative expenses
    611,211       -       611,211  
Total operating expenses
    2,944,035       -       2,944,035  
                         
Other expense:
                       
Loss on investment in Quad Energy
    (500,000 )     -       (500,000 )
Interest expense
    (150,362 )     -       (150,362 )
Interest expense - related party
    (192,596 )     -       (192,596 )
Total other expense
    (842,958 )     -       (842,958 )
Net Loss
    (3,786,993 )     -       (3,786,993 )
                         
Per share information:
                       
Basic and diluted loss per common share
  $ (0.06 )   $ -          
                         
Weighted average shares outstanding
    61,416,938       -          
                         
 
See accompanying notes to financial statements
 
32

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
 
                     
Deficit Accumulated
   
Total
 
                During    
Stockholders'
 
   
Common Stock
   
Additional
   
Development
    Equity  
   
Shares
   
Amount
   
Paid-in-Capital
   
Stage
   
 (Deficit)
 
                               
                               
Balance at December 11, 2007
    -     $ -     $ 1,984,383     $ -     $ 1,984,383  
Balance at December 31, 2010
    -       -       1,984,383       -       1,984,383  
Reverse Merger - February 23, 2011
    69,818,386       349,092       (3,876,668 )     -       (3,527,576 )
Conversion of debentures
    8,660,111       43,334       37,459       -       80,793  
Common stock issued for services
    244,000       1,220       35,380       -       36,600  
Common stock and warrants issued
    840,000       4,200       46,200       -       50,400  
Stock compensation expense
    -       -       273,186       -       273,186  
Net loss
    -       -       -       (3,786,993 )     (3,786,993 )
Balances at Decemebr 31, 2011
    79,562,497     $ 397,846     $ (1,500,060 )   $ (3,786,993 )   $ (4,889,207 )
 
See accompanying notes to financial statements

33

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
 
               
December 11, 2007
 
   
December 31,
   
(Inception) to
 
   
2011
   
2010
   
December 31, 2011
 
                   
Cash flows from operating activities:
                 
Net Loss
  $ (3,786,993 )   $ -     $ (3,786,993 )
Adjustments to reconcile net loss to net cash
                       
used in operating activities:
                       
Debt discount amortization
    133,344       -       133,344  
Loss in investment in Quad Energy
    500,000       -       500,000  
Impairment of oil and gas properties
    1,984,383       -       1,984,383  
Stock issued for services
    36,600       -       36,600  
Stock compensation
    273,186       -       273,186  
Changes in assets and liabilities:
                       
Other receivable
    (4,631 )     -       (4,631 )
Accounts payable
    (4,161 )     -       (4,161 )
Accounts payable - related party
    288,516       -       288,516  
Accrued interest
    100,841       -       100,841  
Accrued interest - related party
    192,596       -       192,596  
Net cash used in operating activities
    (286,319 )     -       (286,319 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of short term notes
    20,000       -       20,000  
Proceeds from line of credit
    22,500               22,500  
Proceeds from convertible promissory notes
    195,000       -       195,000  
Proceeds from issuance of common stock and warrants
    50,400       -       50,400  
Net cash provided by financing activities
    287,900       -       287,900  
                         
Net increase in cash and cash equivalents
    1,581       -       1,581  
Cash and cash equivalents at the beginning of the year
    -       -       -  
Cash and cash equivalents at the end of the year
  $ 1,581     $ -     $ 1,581  
 
See accompanying notes to the financial statement

34

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
 
1.   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.  This transaction effected a change of control and Blugrass’ management team was replaced with Petro Grande’s management team.  Upon the reverse merger on February 23, 2011 the inception date of the Company changed to December 11, 2007, the date of the acquisition of the lease by Petro Grande, LLC.

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 not earned  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.

2.   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 $4,631 and $0 as of December 31, 2011 and 2010, respectively.  The balance of other receivable as of December 31, 2011 consisted of amounts representing business related expenses owed to the Company.
 
35

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2011 AND 2010

Summary of Significant Accounting Policies - Continued

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 December 31, 2011 and 2010, the Company has recorded a full valuation allowance against its net deferred tax assets due to the uncertainty these assets will be used in the future.

36

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2011 AND 2010
 
Summary of Significant Accounting Policies – continued
 
As of January 1, 2009, the Company adopted Accounting Standard Codification “ASC” Topic No. 740-10, Income Taxes. This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more likely than not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained. ASC 740-10 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions and it has expanded disclosure requirements. The adoption of ASC 740-10 had no impact on the Company’s financial statements and there are no uncertain tax positions as of December 31, 2011. The Company is currently subject to a three year statute of limitation by major tax jurisdictions.

3.   Reverse Merger

On February 23, 2011, the Company was acquired by Petro Grande, which contributed a significant oil and gas lease covering acreage located in Crockett County, Texas from Petro Grande as consideration in exchange for 52,294,336 shares of the Company’s restricted common plus a promissory note in the amount of $3.5 million. 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. Although Petro Grande is the surviving legal entity; Blugrass remained the financial reporting entity and the merger was treated as a reverse recapitalization as, prior to the PG transaction, Blugrass was a public holding company with limited assets or operations and, upon completion of the PG transaction, Petro Grande shareholders emerged with a controlling 77% interest in the merged Company.

4.   Oil and Gas Properties

The Company was unable to fulfill its drilling obligations under the Soto Lease agreement by the lease expiration date of December 31, 2011.  As a result, management was unable to secure the renewal of the Soto Lease.  In accordance, management has reduced the amount recorded as “Oil and gas properties – undeveloped” as of the December 31, 2011 balance sheet, to $0.

5.   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. As of December 31, 2011 the value of the investment in Quad Energy had decreased to $0 and the Company recorded a loss on the statement of operations of $500,000 as the Company considers the loss other than temporary.

For accounting purposes, in a transaction like the PG Transaction, which is accounted for as a reverse recapitalization, the legal acquiree, Blugrass, has been treated as the continuing reporting entity.  Furthermore, this and future reports to be filed by the Company after the reverse recapitalization will parallel the financial reporting required under generally accepted accounting principles (“GAAP”) as if Blugrass, the accounting acquirer were the legal successor in connection with the Company’s reporting obligation, as registrant, as of the date of the PG Transaction.  Blugrass, as the accounting acquirer, is considered, as of the date of consummation of the PG Transaction, to be predecessor as registrant.  The assets and liabilities of Blugrass have been brought forward at their book value and no goodwill has been recognized.
 
37

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2011 AND 2010

5.   Acquisitions and Dispositions - continued

For accounting purposes, in a transaction like the PG Transaction, which is accounted for as a reverse recapitalization, the legal acquiree, Blugrass, has been treated as the continuing reporting entity.  Furthermore, this and future reports to be filed by the Company after the reverse recapitalization will parallel the financial reporting required under generally accepted accounting principles (“GAAP”) as if Blugrass, the accounting acquirer were the legal successor in connection with the Company’s reporting obligation, as registrant, as of the date of the PG Transaction.  Blugrass, as the accounting acquirer, is considered, as of the date of consummation of the PG Transaction, to be predecessor as registrant.  The assets and liabilities of Blugrass have been brought forward at their book value and no goodwill has been recognized.

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.

The Company was unable to fulfill its drilling obligations under the Soto Lease agreement by the lease expiration date of December 31, 2011.  As a result, management was unable to secure the renewal of the Soto Lease.  In accordance, management has reduced the amount recorded as “Oil and gas properties – undeveloped” as of the December 31, 2011 balance sheet, to $0.

6.   Going Concern

The Company’s financial statements for the year ended December 31, 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 $3,786,993 for the year ended December, 31, 2011, and an accumulated deficit during the development stage of $3,786,993 as of December 31, 2011.  At December 31, 2011, the Company had a working capital deficit of $1,389,207 and the Company had no revenues from its activities during the years ended December 31, 2011 and 2010.

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 2012 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 the efforts through the sale of equity and/or debt 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.

38

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2011 AND 2010

7.   Notes Payable

In conjunction with the PG Transaction, the Company issued a note payable in the amount of $3.5 million (the “PG Note Payable”) on February 23, 2011.  The PG Note Payable accrues interest at the rate of 6.5% per annum.  The balance of the PG Note Payable along with any accrued and unpaid interest is due on February 22, 2013. 

On May 12, 2011 the Company issued an unsecured note payable in the amount of $20,000 (the “Ladner Note”).  The Ladner Note matured on August 31, 2011, and is considered to be in default.  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 of 12.5%.
  
8.   Line of Credit

On October 7, 2011, the Company entered into an unsecured Line of Credit with a third party for up to $100,000.  The Line of Credit carries an interest rate of 12% per annum on amounts outstanding and is scheduled to mature on October 7, 2012.  In the event of a default under the Line of Credit, the interest rate on the Line of credit increases to the lower of 14% per annum or the maximum amount allowed by law.  As of December 31, 2011, the Company had $22,500 outstanding under the line of credit.

9.   Convertible Promissory Notes

As of December 31, 2011, the Company had outstanding $333,666 of unsecured convertible commercial promissory notes (the “Convertible Promissory Notes”). 

On April 8, 2011 the Company issued a Convertible Promissory Note (the “April 2011 Convertible Promissory Note”) in the amount of $75,000. 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 (the “May 2011 Convertible Promissory Note”) in the amount of $42,500. 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.

39

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2011 AND 2010

9.   Convertible Promissory Notes - continued

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.

On August 11, 2011, the Company issued a Convertible Promissory Note (the “August 2011 Convertible Promissory Note”) in the amount of $42,500.  The balance of the August 2011 Convertible Promissory Note is payable in full on May 15, 2012.  The August 2011 Convertible Promissory Note accrues interest at a rate of 8.0% per annum.  Holders of the August 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 August 15, 2011.  The August 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.

On October 14, 2011, the note holder of the April 2011 Convertible Promissory Notes elected to convert $10,000 principal amount of the April 2011 Convertible Promissory Notes into 1,369,863 shares of common stock in the Company based on a conversion price of $0.0073 per share. On November  21, 2011, the note holder of the April 2011 Convertible Promissory Notes elected to convert $12,000 principal amount of the April 2011 Convertible Promissory Notes into 3,428,571 shares of common stock in the Company based on a conversion price of $0.0035 per share. On December 29, 2011, the note holder of the April 2011 Convertible Promissory Notes elected to convert $6,000 principal amount of the April 2011 Convertible Promissory Notes into 3,333,333 shares of common stock in the Company based on a conversion price of $0.0018 per share.  As of December 31, 2011, the balance of the April 2011 Convertible Promissory Notes was $47,000.

The Company determined that the conversion features in the April, May, July, and August 2011 Convertible Promissory Notes (collectively, the “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 for each of the Convertible Promissory Notes. As of December 31, 2011 the derivative liability for the Convertible Promissory Notes recorded on the Company’s balance sheet, adjusted for the conversions noted earlier, totaled $123,075. During the period ended December 31, 2011 a charge to debt discount in the amount of $133,344 was expensed through interest expense. At December 31, 2011 the debt discount was $28,148. 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.

As of December 31, 2011, Convertible Promissory Notes totaling $166,666 were in payment default and, accordingly, accrued interest at a rate of 18% per annum.  For the period ended December 31, 2011, the Company accrued interest related to the Convertible Promissory Notes totaling $33,946.  Subsequent to December 31, 2011, the Company converted Convertible Promissory Notes totaling $66,666 along with accrued and unpaid interest of $12,734 to 1,621,333 shares of common stock.

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

40

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2011 AND 2010

9.   Convertible Promissory Notes - continued
 
                Ending     Stated     Default               Effective  
   
Principal
   
Debt
   
Balance
   
Interest
   
Interest
   
Current
   
Interest
 
Date of Issuance
 
@ 12/31/11
   
Discount
   
@ 12/31/11
   
Rate
   
Rate
   
Rate
   
Rate
 
11/17/2008
    50,000       -       50,000       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%  
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%  
1/12/2011
    47,000       -       47,000       8.0%               8.0 %         74.67%  
2/23/2011
    42,500       3,148       39,352       8.0%               8.0 %         74.67%  
4/17/2011
    35,000       9,545       25,455       8.0%               8.0 %         89.82%  
5/15/2011
    42,500       15,455       27,045       8.0%               8.0 %         89.82%  
Total
    333,666       28,148       305,518                                      
(1) Currently in default
                                                           
 
10.   Income Taxes

No provision for federal income taxes has been recognized for the years ended December 31, 2011 and 2010 as the Company has a net operating loss carry forward for income tax purposes available in each period.  Additionally, it is uncertain if the Company will have taxable income in the future so a valuation allowance has been established for the full value of net tax assets. The deferred tax asset consists of net operating loss carry forwards and the Company has no deferred tax liabilities.

At December 31, 2011, the Company has net operating loss carry forwards of $6,355,135 for federal income tax purposes. These net operating loss carry forwards may be carried forward in varying amounts until 2031 and may be limited in their use due to significant changes in the Company's ownership.
 
   
December 31,
 
   
2011
   
2010
 
Net operating loss carryforwards
  $ 2,160,746     $ 873,168  
Less: valuation allowance
    (2,160,746 )     (873,168 )
Net deferred tax asset
  $ -     $ -  

The Company has valued its net deferred tax asset at zero with a valuation allowance due to the substantial doubt taxable income will be generated in the future to utilize the deferred tax asset.

11.  Subsequent Events

On January 19, 2012, the note holder of the April 2011 Convertible Promissory Notes elected to convert $6,000 principal amount of the April 2011 Convertible Promissory Notes into 3,529,412 shares of common stock in the Company based on a conversion price of $0.0017 per share.

On February 7, 2012, the note holder of the April 2011 Convertible Promissory Notes elected to convert $4,500 principal amount of the April 2011 Convertible Promissory Notes into 3,214,286 shares of common stock in the Company based on a conversion price of $0.0014 per share.

On March 7, 2012, the note holder of the April 2011 Convertible Promissory Notes elected to convert $18,000 principal amount of the April 2011 Convertible Promissory Notes into 7,826,087 shares of common stock in the Company based on a conversion price of $0.0023 per share.  As of March 7, 2012, the balance of the April 2011 Convertible Promissory Notes totaled $18,500.

41

 
BLUGRASS ENERGY INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2011 AND 2010

11.  Subsequent Events - continued

On March 7, 2012, the $3,500,000 PG Note Payable and accrued and unpaid interest totaling $215,035 were converted to 74,300,700 shares of common stock.

On March 7, 2012, trade payables in the amount of $150,000 were converted to 3,000,000 shares of common stock.

On March 7, 2012, a convertible promissory note in the amount of $33,333 and accrued and unpaid interest in the amount of $6,367 were converted to 794,000 shares of common stock.
 
On March 7, 2012, a convertible promissory note in the amount of $33,333 and accrued and unpaid interest in the amount of $6,367 were converted to 827,333 shares of common stock.

Subsequent to December 31, 2011 the Company made two separate draws under its Line of Credit, $10,000 and $50,000, respectively.  The funds were borrowed on January 1, 2012 and February 17, 2012.  As of February 17, 2012 the amount drawn under the Line of Credit totaled $82,500.  The Company had remaining undrawn capacity under the Line of Credit of $17,500.

On March 5, 2012, The Company entered into a non-binding letter agreement with RiverBend Drilling Partners, LLC (“Seller”) to acquire all assets the Seller has the right re-acquire through another third party. These assets represent a 19.0% interest in the DeAgua Area of Woods County, Oklahoma and include a proportionate interest in approximately 4,000 gross acres, well bores and associated equipment and infrastructure.  The proposed acquisition price includes 2,000,000 shares of common stock of Blugrass issued to Seller and approximately $1,062,990 cash paid and a $400,000 3 year convertible note issued to Eagle Energy.  Additionally, the Company will be required to issue additional equity to the third party, the amount of which will be based on a function of production of the acquired assets as outlined in the letter agreement dated March 5, 2012.  Closing is scheduled for no later than April 30, 2012.  The transaction is contingent upon Blugrass securing the appropriate financing.
 
42