NOVAMEX ENERGY INC. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - NOVAMEX ENERGY INC.	blug_10q93012ex321.htm
EX-31.1 - EXHIBIT 31.1 - NOVAMEX ENERGY INC.	blug_10q93012ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

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

For the transition period from __________ to ___________

Commission File Number 000-54035

BLUGRASS ENERGY INC.

(Exact name of small business issuer in its charter)


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

13465 Midway Road, Suite 114, LB 10, Dallas, TX 75244

(Address of principal executive offices)

(214) 695-5848

(Telephone Number)

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

Yes [X]

No [_]

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

Yes [_] No [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.

	Large accelerated filer [_]	Accelerated Filer [_]

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

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

Yes [_]

No [X]

There were 275,064,898 shares of Common Stock outstanding as of November 12, 2012.

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
			Page

	Balance Sheets – September 30, 2012 and December 31, 2011		1

	Statements of Operations -
		Three and Nine months ended September 30, 2012 and 2011 and
		From December 11, 2007 (Inception) to September 30, 2012	2

	Statements of Shareholders’ Deficit		3

	Statements of Cash Flows –
		Nine months ended September 30, 2012 and 2011 and
		From December 11, 2007 (Inception) to September 30, 2012	4

	Notes to the Condensed Financial Statements		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	– Not Applicable		10

Item 4.	Controls and Procedures		11

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		11

Item 1A.	Risk Factors		11

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		11

Item 3.	Defaults Upon Senior Securities		12

Item 4.	Mine Safety Disclosures		12

Item 5.	Other Information		12

Item 6.	Exhibits		12

SIGNATURES			12

Item 1. Financial Statements

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

	September 30,
	2012			December 31,
	(Unaudited)			2011
ASSETS
Current assets:
Cash	$	253		$	1,581
Other receivable		8,698			4,631
Total current assets		8,951			6,212

Total assets	$	8,951		$	6,212


LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities	$	396,245		$	342,373
Accounts payable - related party		127,867			288,516
Notes payable		20,000			20,000
Line of credit		97,500			22,500
Convertible notes payable, net		304,250			305,518
Derivative liability		115,542			123,075
Accrued interest		156,730			100,841
Accrued interest - related party		-			192,596
Total current liabilities		1,218,134			1,395,419

Long-term note payable		-			3,500,000
Total liabilities		1,218,134			4,895,419

Commitments and Contingencies
Shareholders' deficit:
Common stock par value $.005, 1,000,000,000 shares authorized,
275,064,898 and 79,562,497 issued and outstanding, respectively		1,375,358			397,846
Additional paid-in-capital		1,722,927			(1,500,060	)
Deficit accumulated during the development stage		(4,307,468	)		(3,786,993	)
Total shareholders' deficit		(1,209,183	)		(4,889,207	)
Total liabilities and shareholders' deficit	$	8,951		$	6,212

(See accompanying notes to the financial statements)

BLUGRASS ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)

													December 11, 2007
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended			(Inception) to
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011			September 30, 2012

Operating expenses:
Professional fees	$	25,400		$	39,943		$	119,449		$	291,721		$	467,890
Impairment of oil and gas properties		-			-			-			-			1,984,383
General and administrative expenses		35,796			192,192			159,051			673,531			770,262
Total operating expenses		61,196			232,135			278,500			965,252			3,222,535

Other expense:
Loss on investment in Quad Energy		-			(10,000	)		-			(485,000	)		(500,000	)
Interest expense		(44,011	)		(54,286	)		(219,537	)		(93,456	)		(369,899	)
Interest expense - related party		-			(56,719	)		(22,438	)		(135,877	)		(215,034	)
Total other expense		(44,011	)		(121,005	)		(241,975	)		(714,333	)		(1,084,933	)
Net Loss	$	(105,207	)	$	(353,140	)	$	(520,475	)	$	(1,679,585	)	$	(4,307,468	)

Per share information:
Basic and diluted loss per common share	$	(0.000	)	$	(0.005	)	$	(0.003	)	$	(0.03	)

Weighted average shares outstanding		259,810,569			70,866,638			185,677,072			56,639,796

(See accompanying notes to the financial statements)

BLUGRASS ENERGY INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' DEFICIT
December 11, 2007 (Inception) through September 30, 2012

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


Balance at December 11, 2007 (Inception)		-	$	-	$	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	)
Conversion of debentures		93,491,818		467,459		3,555,672			-			4,023,131
Stock compensation expense		-		-		30,389			-			30,389
Net loss		-		-		-			(239,554	)		(239,554	)
Balances at March 31, 2012		173,054,315	$	865,305	$	2,086,001		$	(4,026,547	)	$	(1,075,241	)
Conversion of debentures		32,566,138		162,831		(123,010	)		-			39,821
Stock compensation expense		-		-		35,715			-			35,715
Net loss		-		-		-			(175,714	)		(175,714	)
Balances at June 30, 2012		205,620,453	$	1,028,136	$	1,998,706		$	(4,202,261	)	$	(1,175,419	)
Conversion of debentures		69,444,445		347,222		(311,494	)		-			35,728
Stock compensation expense		-		-		35,715			-			35,715
Net loss		-		-		-			(105,207	)		(105,207	)
Balances at September 30, 2012		275,064,898	$	1,375,358	$	1,722,927		$	(4,307,468	)	$	(1,209,183	)

(See accompanying notes to the financial statements)

BLUGRASS ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASHFLOWS
(Unaudited)

							December 11, 2007
	Nine Months Ended			Nine Months Ended			(Inception) to
	September 30, 2012			September 30, 2011			September 30, 2012

Cash flows used in operating activities:
Net Loss	$	(520,475	)	$	(1,679,585	)	$	(4,307,468	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Debt discount amortization		150,914			86,097			284,258
Loss on investment in Quad Energy		-			485,000			500,000
Impairment of oil and gas properties		-			-			1,984,383
Stock issued for services		-			36,600			36,600
Stock compensation		101,819			190,165			375,005
Changes in assets and liabilities:
Other receivable		(4,067	)		(39,811	)		(8,698	)
Accounts payable		44,674			263,873			40,513
Accounts payable - related party		(1,451	)		252,324			287,065
Accrued interest		122,258			4,061			223,099
Accrued interest - related party		-			135,876			192,596
Net cash used in operating activities		(106,328	)		(265,400	)		(392,647	)

Cash flows from financing activities:
Proceeds from issuance of short term notes		-			20,000			20,000
Proceeds from line of credit		75,000			-			97,500
Proceeds from convertible promissory notes		30,000			195,000			225,000
Proceeds from issuance of common stock and warrants		-			50,400			50,400
Net cash provided by financing activities		105,000			265,400			392,900

Net decrease in cash and cash equivalents		(1,328	)		-			253
Cash and cash equivalents at the beginning of the period		1,581			-			-
Cash and cash equivalents at the end of the period	$	253		$	-		$	253

Supplemental disclosure of cash flow information:
Cash paid for interest expense	$	-		$	-		$	-
Cash paid for income taxes	$	-		$	-		$	-

Non-cash activities:
Debt and interest converted to equity	$	4,098,680		$	33,800		$	4,179,472

(See accompanying notes to the financial statements)

BLUGRASS ENERGY INC.

(A Development Stage Company)

NOTES TO THE FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

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 recapitalization 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. As a result of the reverse merger recapitalization, Blugrass’ new management team has implemented a new business strategy (discussed in detail in the section on Management’s Discussion and Analysis below).

The Company is in the development stage. Its activities to date have been limited to capital formation, organization and development of its business plan. The Company has 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’ deficit and cash flows disclose activity since the date of the Company’s inception.

Basis of Presentation

The Financial Statements are unaudited. As permitted under the Securities and Exchange Commission (“SEC”) requirements for interim reporting, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. We believe that these financial statements include all necessary and recurring adjustments for the fair presentation of the interim period results. These financial statements should be read in conjunction with the Financial Statements and related notes included in our annual report on Form 10-K for the fiscal year ended December 31, 2011. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

Summary of Significant Accounting Policies

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 $8,698 and $4,631 as of September 30, 2012 and December 31, 2011, respectively. The balance of other receivable as of September 30, 2012 consisted of amounts representing business related expenses owed to the Company.

Going Concern

The Company’s financial statements for the nine-month period ended September 30, 2012 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 $520,475 for the nine-month period ended September 30, 2012, and an accumulated deficit during the development stage of $4,307,468 as of September 30, 2012. At September 30, 2012, the Company had a working capital deficit of $1,209,183 and the Company had no revenues from its activities during the nine-month period ended September 30, 2012.

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.

Notes Payable

In conjunction with the 2011 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. 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.

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 September 30, 2012, the Company had $97,500 outstanding under the Line of Credit. The amount is outstanding as of October 7, 2012, and is considered to be in default.

Convertible Promissory Notes

As of September 30, 2012, the Company had outstanding $304,250 of unsecured convertible commercial promissory notes (the “Convertible Promissory Notes”), net of $15,000 in debt discounts.

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 22% per annum. The principal balance and accrued interest under the April 2011 Convertible Promissory Note was due on January 12, 2012, and is in default. 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 65% 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. As of September 30, 2012, $75,000 of the principal amount was converted.

Convertible Promissory Notes - continued

During the nine months ended September 30, 2012, the note holder of the April 2011 Convertible Promissory Notes elected to convert $47,000 principal amount of the April 2011 Convertible Promissory Notes into 116,580,366 shares of common stock in the Company based on a varying conversion prices, which ranged from $0.00007 to $0.00035 per share.

As of September 30, 2012, the balance of the April 2011 Convertible Promissory Notes totaled $9,250, which represents the 150% default balance.

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 22% per annum. The principal balance and accrued interest under the May 2011 Convertible Promissory Note was due on February 23, 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 65% 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.

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% 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 65% 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% 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 65% 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 March 28, 2012, the Company issued a Convertible Promissory Note (the “March 2012 Convertible Promissory Note”) in the amount of $15,000. The balance of the March 2012 Convertible Promissory Note is payable in full on January 13, 2013. The March 2012 Convertible Promissory Note accrues interest at a rate of 8% per annum. Holders of the March 2012 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 March 28, 2012. The March 2012 Convertible Promissory Note is convertible at a per share price equal to 65% 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.

Convertible Promissory Notes - continued

On August 14, 2012, the Company issued a Convertible Promissory Note (the “August 2012 Convertible Promissory Note”) in the amount of $15,000. The balance of the August 2012 Convertible Promissory Note is payable in full on May 17, 2013. The March 2012 Convertible Promissory Note accrues interest at a rate of 8% per annum. Holders of the March 2012 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 March 28, 2012. The March 2012 Convertible Promissory Note is convertible at a per share price equal to 65% of the average of the lowest 3 closing bid prices of the Company’s common stock as listed on the Over-the-Counter Bulletin Board over the 10 trading days immediately prior to conversion. In the event of a default, the minimum amount due is 150% of outstanding principal and unpaid interest, which accrues interest at a rate of 22% per annum until paid or converted.

The Company determined that the conversion features in the April, May, July, August 2011, and March and August 2012 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 September 30, 2012 the derivative liability for the Convertible Promissory Notes recorded on the Company’s balance sheet, adjusted for the conversions noted earlier, totaled $115,543. During the period ended September 30, 2012 a charge to debt discount in the amount of $5,455 was expensed through interest expense. At September 30, 2012 the debt discount was $15,000. 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 September 30, 2012 Convertible Promissory Notes totaling $289,250 were in payment default and, accordingly, accrued interest at a rate of 18% to 22% per annum. During the nine months-ended September 30, 2012, convertible promissory note in the amount of $66,666 and accrued and unpaid interest in the amount of $12,734 were converted to 1,588,000 shares of common stock.

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

			Ending	Stated	Default			Effective
	Principal	Debt	Balance	Interest	Interest	Current		Interest
Date of Issuance	@ 9/30/12	Discount	@ 9/30/12	Rate	Rate	Rate		Rate
11/17/2008	50,000	-	50,000	6.0%	18.0%	18.0%	(1)	72.55%
1/29/2009	50,000	-	50,000	6.0%	18.0%	18.0%	(1)	88.00%
1/12/2011	9,250	-	9,250	8.0%	22.0%	8.0%	(1)	88.67%
2/23/2011	63,750	-	63,750	8.0%	22.0%	8.0%	(1)	88.67%
4/17/2011	52,500	-	52,500	8.0%	22.0%	8.0%	(1)	103.82%
5/15/2011	63,750	-	63,750	8.0%	22.0%	8.0%	(1)	103.82%
3/28/2012	15,000	4,091	10,909	8.0%		8.0%		89.82%
8/17/2012	15,000	10,909	4,091	8.0%		8.0%		89.82%
Total	319,250	15,000	304,250
(1) Currently in default

Fair Value of Instruments

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

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

Forward-Looking Statements

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

Business and Plan of Operations

General

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

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.

Results of Operations

For the Nine months Ended September 30, 2012 compared to the Nine months Ended September 30, 2011

We are still in our development stage and have no revenues to date. We incurred operating expenses of $278,500 and $965,252 for the nine-month periods ended September 30, 2012 and 2011, respectively. The decrease in operation expenses is the reduction of professional fees and general and administrative expenses during the current period compared to the same quarter in the prior year.

During the nine months ended September 30, 2012, we recognized a net loss of $520,475 compared to a net loss of $1,679,585 for the nine months ended September 30, 2011. The decrease was attributed to an overall decrease in operational expenses. In addition, the majority of the expenses in 2011 was the result of the January 24, 2011, asset purchase agreement (the “Asset Purchase Agreement”) with Quad Energy Corp. (“Quad Energy” or the “Buyer”) for the sale of 100% of the Company’s rights, title and interest to certain properties. At September 30, 2011, the value of the investment in Quad Energy had decreased and the Company recorded an unrealized loss (other expenses) on the statement of operations of $485,000 as the decrease in value was determined to be other than temporary.

For the Three months Ended September 30, 2012 compared to the Three months Ended September 30, 2011

We incurred operating expenses of $61,196 and $232,135 for the three-month periods ended September 30, 2012 and 2011, respectively. The decrease in operation expenses is the reduction of professional fees and general and administrative expenses during the current quarter compared to the same quarter in the prior year.

During the three months ended September 30, 2012, we recognized a net loss of $105,207 compared to a net loss of $353,140 for the three months ended September 30, 2011. The decrease was a result of decreases in operating expenses indicated above, partially offset by a loss on the Company’s investment in Quad Energy.

Liquidity and Capital Resources

At September 30, 2012, we had total assets of $8,951 consisting of cash and an other asset. At September 30, 2012, we had total current liabilities of $1,218,134 consisting of accounts payable totaling $524,112, accrued interest totaling $156,730, notes payable totaling $20,000, line of credit totaling $97,500, $304,250 convertible promissory notes outstanding, net of debt discount, and derivative liability of $115,542.

At December 31, 2011, we had total assets of $6,212 consisting of cash and an other asset. At December 31, 2011, we had total current liabilities of $1,395,419 consisting of accounts payable totaling $630,889, accrued interest totaling $293,437, notes payable totaling $20,000, line of credit totaling $22,500, $305,518 of convertible promissory notes outstanding, net of debt discount, and derivative liability of $123,075. At December 31, 2011, we had a long term note of $3,500,000, which was converted to common stock during the period ended March 31, 2012.

During the nine months ended September 30, 2012, we used cash of $106,328 in operations, and our source of cash inflows was from financing activities totaling $105,000.

During the nine months ended September 30, 2011, we used cash of $265,400, and our source of cash inflows was from financing activities totaling $265,400.

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

Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable

Item 4. Controls and Procedures

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-Q. 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-Q, 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.

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-Q. 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.

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-Q, our Disclosure Controls were not effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during quarter ended September 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

We are subject to various risks and uncertainties in the course of our business. In addition to the factors discussed elsewhere in this report, you should carefully consider the risks and uncertainties described under Item 1A. Risk Factors filed in our Report on Form 10-K for the year ended December 31, 2011. There have been no material changes from the risk factors previously disclosed in that Form 10-K.

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

On March 7, 2012, the Company issued an aggregate of 3,000,000 shares of its common stock to a provider of professional services to the Company, in lieu of the payment of cash for such services. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Company made this determination based on the provider’s long-standing business relationship with the Company and knowledge and experience in financial and business matters. Appropriate legends have been affixed to all shares of the Company’s common stock issued in the transaction.

On March 7, 2012, the Company issued an aggregate of 1,588,000 shares of its common stock to the holders of convertible promissory notes, upon conversion of all or part of the principal amount of such notes. The shares of common stock issued upon conversion were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Company made this determination based on the representations of each note holder that it is an “accredited investor,” as defined in Regulation D of the Securities Act.

On March 7, 2012, the Company issued an aggregate of 74,300,700 shares of its common stock to the holder of a note payable upon conversion of all or part of the principal amount of such notes. The issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The Company made this determination based on the provider’s long-standing business relationship with the Company and knowledge and experience in financial and business matters. Appropriate legends have been affixed to all shares of the Company’s common stock issued in the transaction.

Item 3. Defaults Upon Senior Securities.

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

Item 4. Mine Safety Disclosures.

Item 5. Other Information.

Item 6. Exhibits.

The following documents are filed as part of this report:

Exhibit 31.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

November 19, 2012

Blugrass Energy Inc. (Registrant)

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


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

NOVAMEX ENERGY INC. - FORM 10-Q - November 19, 2012

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NOVAMEX ENERGY INC. Reports