10-Q

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 March 31, 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)

(972) 404-9995

(Telephone Number) 

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

 Yes  [X]   No  [_]

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

Yes [X]     No [_]

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

Large accelerated filer [_]	Accelerated Filer [_]
Non-accelerated filer   [_]	Smaller reporting company [X]

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

Yes  [_]    No  [X]

There were 173,054,315 shares of Common Stock outstanding as of May 10, 2012.

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
			Page
	Balance Sheets – March 31, 2012 and December 31, 2011		1
	Statements of Operations -
		Three months ended March 31, 2012 and 2011 and
		From December 11, 2007 (Inception) to March 31, 2012	2
	Statements of Shareholders’ Deficit		3
	Statements of Cash Flows –
		Three months ended March 31, 2012 and 2011 and
		From December 11, 2007 (Inception) to March 31, 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		10
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

	March 31,
	2012			December 31,
	(Unaudited)			2011
ASSETS
Current assets:
Cash	$	-		$	1,581
Other receivable		8,178			4,631
Total current assets		8,178			6,212
Total assets	$	8,178		$	6,212
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities	$	359,846		$	342,373
Accounts payable - related party		127,667			288,516
Notes payable		20,000			20,000
Line of credit		97,500			22,500
Convertible notes payable, net		237,364			305,518
Derivative liability		116,348			123,075
Accrued interest		124,694			100,841
Accrued interest - related party		-			192,596
Total current liabilities		1,083,419			1,395,419
Long-term note payable		-			3,500,000
Total liabilities		1,083,419			4,895,419
Commitments and Contingencies
Shareholders' deficit:
Common stock par value $.005, 1,000,000,000 shares authorized,
173,054,315 and 79,562,497 issued and outstanding, respectively		865,305			397,846
Additional paid-in-capital		2,086,001			(1,500,060	)
Deficit accumulated during the development stage		(4,026,547	)		(3,786,993	)
Total shareholders' deficit		(1,075,241	)		(4,889,207	)
Total liabilities and shareholders' deficit	$	8,178		$	6,212

 (See accompanying notes to the financial statements)

1

BLUGRASS ENERGY INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

(Unaudited)

							December 11, 2007
	Three Months Ended			Three Months Ended			(Inception) to
	March 31, 2012			March 31, 2011			March 31, 2012
Operating expenses:
Professional fees	$	66,848		$	77,843		$	415,289
Impairment of oil and gas properties		-			-			1,984,383
General and administrative expenses		89,395			95,605			700,606
Total operating expenses		156,243			173,448			3,100,278
Other expense:
Loss on investment in Quad Energy		-			(325,000	)		(500,000	)
Interest expense		(60,872	)		(2,958	)		(211,234	)
Interest expense - related party		(22,439	)		(22,438	)		(215,035	)
Total other expense		(83,311	)		(350,396	)		(926,269	)
Net Loss		(239,554	)		(523,844	)		(4,026,547	)
Per share information:
Basic and diluted loss per common share	$	(0.002	)	$	(0.02	)
Weighted average shares outstanding		108,133,063			31,561,142

(See accompanying notes to the financial statements)

2

BLUGRASS ENERGY INC.

(A Development Stage Company)

STATEMENTS OF SHAREHOLDERS' DEFICIT

December 11, 2007 (Inception) through

March 31, 2012

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

(See accompanying notes to the financial statements)

3

BLUGRASS ENERGY INC.

(A Development Stage Company)

STATEMENTS OF CASHFLOWS

(Unaudited)

							December 11, 2007
	Three Months Ended			Three Months Ended			(Inception) to
	March 31, 2012			March 31, 2011			March 31, 2012
Cash flows from operating activities:
Net Loss	$	(239,554	)	$	(523,844	)	$	(4,026,547	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Debt discount amortization		24,285			-			157,629
Loss on investment in Quad Energy		-			325,000			500,000
Impairment of oil and gas properties		-			-			1,984,383
Stock issued for services		-			27,000			36,600
Stock compensation		30,389			24,123			303,575
Changes in assets and liabilities:
Other receivable		(3,547	)		(6,296	)		(8,178	)
Accounts payable		17,473			73,784			13,312
Accounts payable - related party		(10,849	)		-			277,667
Accrued interest		90,222			67,031			191,063
Accrued interest - related party		-			22,438			192,596
Net cash provided by (used in) operating activities		(91,581	)		9,236			(377,900	)
Cash flows from financing activities:
Proceeds from issuance of short term notes		-			-			20,000
Proceeds from line of credit		75,000			-			97,500
Proceeds from convertible promissory notes		15,000			-			210,000
Proceeds from issuance of common stock and warrants		-			-			50,400
Net cash provided by financing activities		90,000			-			377,900
Net increase (decrease) in cash and cash equivalents		(1,581	)		9,236			-
Cash and cash equivalents at the beginning of the period		1,581			-			-
Cash and cash equivalents at the end of the period	$	-		$	9,236		$	-
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	$	4,023,131		$	-		$	4,103,923

 (See accompanying notes to the financial statements)

4

BLUGRASS ENERGY INC.

(A Development Stage Company)

NOTES TO THE FINANCIAL STATEMENTS

MARCH 31, 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 months ended March 31, 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.

5

Other Receivable – There was an other receivable totaling $8,178 and $4,631 as of March 31, 2012 and December 31, 2011, respectively.  The balance of other receivable as of March 31, 2012 consisted of amounts representing business related expenses owed to the Company.

Going Concern

The Company’s financial statements for the three-month period ended March 31, 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 $239,554 for the three-month period ended March 31, 2012, and an accumulated deficit during the development stage of $4,026,547 as of March 31, 2012.  At March 31, 2012, the Company had a working capital deficit of $1,075,241 and the Company had no revenues from its activities during the three-month period ended March 31, 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

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%.

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 March 31, 2012, the Company had $97,500 outstanding under the Line of Credit.

Convertible Promissory Notes

As of March 31, 2012, the Company had outstanding $253,500 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 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.  As of March 31, 2012, $28,500 of the principal amount was converted. 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.

6

Convertible Promissory Notes - continued

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.

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 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.

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 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% 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.

7

Convertible Promissory Notes - continued

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.

The Company determined that the conversion features in the April, May, July, August 2011, and march 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 March 31, 2012 the derivative liability for the Convertible Promissory Notes recorded on the Company’s balance sheet, adjusted for the conversions noted earlier, totaled $116,348. During the period ended March 31, 2012 a charge to debt discount in the amount of $24,285 was expensed through interest expense. At March 31, 2012 the debt discount was $16,137. 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 March 31, 2012 Convertible Promissory Notes totaling $161,000 were in payment default and, accordingly, accrued interest at a rate of 18% to 22% per annum.  During the three months-ended March 31, 2012, convertible promissory note in the amount of $66,666 and accrued and unpaid interest in the amount of $12,734 were converted to 1,621,333 shares of common stock. For the three-month period ended March 31, 2011, the Company accrued interest related to the Convertible Promissory Notes totaling $59,462.

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	@ 3/31/12		Discount		@ 3/31/12		Rate		Rate		Rate				Rate
11/17/2008		50,000		-		50,000		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		18,500		-		18,500		8.0%		22.0%		8.0	%	(1)		74.67%
2/23/2011		42,500		-		42,500		8.0%		22.0%		8.0	%	(1)		74.67%
4/17/2011		35,000		-		35,000		8.0%				8.0	%			89.82%
5/15/2011		42,500		3,863		38,637		8.0%				8.0	%			89.82%
3/28/2012		15,000		12,273		2,727		8.0%				8.0	%			89.82%
Total		253,500		16,136		237,364
(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.

8

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 Three months Ended March 31, 2012 compared to the Three months Ended March 31, 2011

We are still in our development stage and have no revenues to date.  We incurred operating expenses of $156,243 and $173,448 for the three-month periods ended March 31, 2012 and 2011, respectively. The decrease in operation expenses is the result of professional fees and in general and administrative expenses during the current quarter compared to the same quarter in the prior year.

9

During the three months ended March 31, 2012, we recognized a net loss of $239,554 compared to a net loss of $523,844 for the three months ended March 31, 2011. The decrease was attributed to 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 March 31, 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 $325,000 as the decrease in value was determined to be other than temporary.

Liquidity and Capital Resources

At March 31, 2012, we had total assets of $8,178 consisting of an other asset. At March 31, 2012, we had total current liabilities of $1,083,419 consisting of accounts payable totaling $487,513, accrued interest totaling $124,694, notes payable totaling $20,000, line of credit totaling $97,500, $237,364 of convertible promissory notes outstanding, net of debt discount, and derivative liability of $116,348.

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 three months ended March 31, 2012, we used cash of $91,581 in operations, and our source of cash inflows was from financing activities totaling $90,000.

During the three months ended March 31, 2011, we generated cash of $9,236 in operations.

We have only one class of common stock.  

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.

10

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 the three months ended March 31, 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 1,621,333 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, 2011, 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.

11

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.

May 21, 2012

Blugrass Energy Inc. (Registrant)

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

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EX-31.1

Exhibit 31.1

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Abram Janz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Blugrass Energy Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of our annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Abram Janz

Abram Janz

Chief Executive and Accounting Officer

May 21, 2012

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Abram Janz, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Blugrass Energy Inc. on Form 10-Q for the quarterly period ended March 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Blugrass Energy Inc.

By:	/s/ Abram Janz
	Name:	Abram Janz
	Title:	Chief Executive and Accounting Officer

May 21, 2012

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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Summary of Significant Accounting Policies

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 $8,178 and $4,631 as of March 31, 2012 and December 31, 2011, respectively.  The balance of other receivable as of March 31, 2012 consisted of amounts representing business related expenses owed to the Company.

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Basis of Presentation

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Basis of Presentation

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 months ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

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Balance Sheets (USD $)	Mar. 31, 2012	Dec. 31, 2011
Current assets:
Cash		$ 1,581
Other receivable	8,178	4,631
Total current assets	8,178	6,212
Total assets	8,178	6,212
Current liabilities:
Accounts payable and accrued liabilities	359,846	342,373
Accounts payable - related party	127,667	288,516
Notes payable	20,000	20,000
Line of credit	97,500	22,500
Convertible notes payable, net	237,364	305,518
Derivative liability	116,348	123,075
Accrued interest	124,694	100,841
Accrued interest - related party		192,596
Total current liabilities	1,083,419	1,395,419
Long-term note payable		3,500,000
Total liabilities	1,083,419	4,895,419
Commitments and Contingencies
Shareholders' deficit:
Common stock par value $.005, 1,000,000,000 shares authorized, 173,054,315 and 79,562,497 issued and outstanding, respectively	865,305	397,846
Additional paid-in-capital	2,086,001	(1,500,060)
Deficit accumulated during the development stage	(4,026,547)	(3,786,993)
Total shareholders' deficit	(1,075,241)	(4,889,207)
Total liabilities and shareholders' deficit	$ 8,178	$ 6,212

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Statements of Cash Flows (USD $)	3 Months Ended		52 Months Ended
	Mar. 31, 2012	Mar. 31, 2011	Mar. 31, 2012
Cash flows from operating activities:
Net Loss	$ (239,554)	$ (523,844)	$ (4,026,547)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Debt discount amortization	24,285		157,629
Loss on investment in Quad Energy		325,000	500,000
Impairment of oil and gas properties			1,984,383
Stock issued for services		27,000	36,600
Stock compensation	30,389	24,123	303,575
Changes in assets and liabilities:
Other receivable	(3,547)	(6,296)	(8,178)
Accounts payable	17,473	73,784	13,312
Accounts payable - related party	(10,849)		277,667
Accrued interest	90,222	67,031	191,063
Accrued interest - related party		22,438	192,596
Net cash provided by (used in) operating activities	(91,581)	9,236	(377,900)
Cash flows from financing activities:
Proceeds from issuance of short term notes			20,000
Proceeds from line of credit	75,000		97,500
Proceeds from convertible promissory notes	15,000		210,000
Proceeds from issuance of common stock and warrants			50,400
Net cash provided by financing activities	90,000		377,900
Net increase (decrease) in cash and cash equivalents	(1,581)	9,236
Cash and cash equivalents at the beginning of the period	1,581
Cash and cash equivalents at the end of the period		9,236
Supplemental disclosure of cash flow information:
Cash paid for interest expense	0	0	0
Cash paid for income taxes	0	0	0
Non-cash activities:
Debt and interest converted to equity	$ 4,023,131		$ 4,103,923

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Organization - Nature of Operations

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Organization - Nature of Operations

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.

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Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011
Shareholders' equity (deficit):
Common stock, par value	$ 0.005	$ 0.005
Common stock, shares authorized	1,000,000,000	1,000,000,000
Common stock, shares issued	173,054,315	79,562,497
Common stock, shares outstanding	173,054,315	79,562,497

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Document and Entity Information	3 Months Ended
	Mar. 31, 2012	May 10, 2012
Document And Entity Information
Entity Registrant Name	Blugrass Energy, Inc.
Entity Central Index Key	0001365748
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		173,054,315
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2012

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Statements of Operations (USD $)	3 Months Ended		52 Months Ended
	Mar. 31, 2012	Mar. 31, 2011	Mar. 31, 2012
Operating expenses:
Professional fees	$ 66,848	$ 77,843	$ 415,289
Impairment of oil and gas properties			1,984,383
General and administrative expenses	89,395	95,605	700,606
Total operating expenses	156,243	173,448	3,100,278
Other expense:
Loss on investment in Quad Energy		(325,000)	(500,000)
Interest expense	(60,872)	(2,958)	(211,234)
Interest expense - related party	(22,439)	(22,438)	(215,035)
Total other expense	(83,311)	(350,396)	(926,269)
Net Loss	$ (239,554)	$ (523,844)	$ (4,026,547)
Per share information:
Basic and diluted loss per common share	$ (0.002)	$ (0.02)
Weighted average shares outstanding - basic	108,133,063	31,561,142
Weighted average shares outstanding - diluted	108,133,063	31,561,142

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Line of Credit

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Line of Credit

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 March 31, 2012, the Company had $97,500 outstanding under the Line of Credit.

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Notes Payable

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Notes Payable

Notes Payable

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%.

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.

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Convertible Promissory Notes

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Convertible Promissory Notes

Convertible Promissory Notes

As of March 31, 2012, the Company had outstanding $253,500 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 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.  As of March 31, 2012, $28,500 of the principal amount was converted. 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.

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.

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 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.

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 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% 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 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.

The Company determined that the conversion features in the April, May, July, August 2011, and march 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 March 31, 2012 the derivative liability for the Convertible Promissory Notes recorded on the Company’s balance sheet, adjusted for the conversions noted earlier, totaled $116,348. During the period ended March 31, 2012 a charge to debt discount in the amount of $24,285 was expensed through interest expense. At March 31, 2012 the debt discount was $16,137. 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 March 31, 2012 Convertible Promissory Notes totaling $161,000 were in payment default and, accordingly, accrued interest at a rate of 18% to 22% per annum.  During the three months-ended March 31, 2012, convertible promissory note in the amount of $66,666 and accrued and unpaid interest in the amount of $12,734 were converted to 1,621,333 shares of common stock. For the three-month period ended March 31, 2011, the Company accrued interest related to the Convertible Promissory Notes totaling $59,462.

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	@ 3/31/12		Discount		@ 3/31/12		Rate		Rate		Rate				Rate
11/17/2008		50,000		-		50,000		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		18,500		-		18,500		8.0%		22.0%		8.0	%	(1)		74.67%
2/23/2011		42,500		-		42,500		8.0%		22.0%		8.0	%	(1)		74.67%
4/17/2011		35,000		-		35,000		8.0%				8.0	%			89.82%
5/15/2011		42,500		3,863		38,637		8.0%				8.0	%			89.82%
3/28/2012		15,000		12,273		2,727		8.0%				8.0	%			89.82%
Total		253,500		16,136		237,364
(1) Currently in default

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Fair Value of Instruments

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Fair Value of Instruments

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.

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Statements of Shareholders' Deficit (USD $)	Common Stock	Additional Paid-in-Capital	Deficit Accumulated During Development Stage	Total
Balance at Dec. 11, 2007	$ 0	$ 1,984,383	$ 0	$ 1,984,383
Balance (in shares) at Dec. 11, 2007	0
Net loss			0	0
Balance at Dec. 31, 2010	0	1,984,383	0	1,984,383
Balance (in shares) at Dec. 31, 2010	0
Reverse Merger	349,092	(3,876,668)		(3,527,576)
Reverse Merger (in shares)	69,818,386
Conversion of debentures	43,334	37,459		80,793
Conversion of debentures (in shares)	8,660,111
Common stock issued for services	1,220	35,380		36,600
Common stock issued for services (in shares)	244,000
Common stock and warrants issued	4,200	46,200		50,400
Common stock and warrants issued (in shares)	840,000
Stock compensation expense		273,186		273,186
Net loss			(3,786,993)	(3,786,993)
Balance at Dec. 31, 2011	397,846	(1,500,060)	(3,786,993)	(4,889,207)
Balance (in shares) at Dec. 31, 2011	79,562,497
Conversion of debentures	467,459	3,555,672		4,023,131
Conversion of debentures (in shares)	93,491,818
Stock compensation expense		30,389		30,389
Net loss			(239,554)	(239,554)
Balance at Mar. 31, 2012	$ 865,305	$ 2,086,001	$ (4,026,547)	$ (1,075,241)
Balance (in shares) at Mar. 31, 2012	173,054,315

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Going Concern

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Going Concern

Going Concern

The Company’s financial statements for the three-month period ended March 31, 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 $239,554 for the three-month period ended March 31, 2012, and an accumulated deficit during the development stage of $4,026,547 as of March 31, 2012.  At March 31, 2012, the Company had a working capital deficit of $1,075,241 and the Company had no revenues from its activities during the three-month period ended March 31, 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.