UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)


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


For the
quarterly period ended January 31, 2009





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from _______ to _______





Commission
File Number:   333-141480





KENTUCKY
USA ENERGY, INC.


(Exact
name of small business issuer as specified in its charter)


Delaware
              20-5750488(State
      of incorporation)
              (IRS
      Employer Identification No.)


321
Somerset Road, Suite 1


London,
KY 40741


(Address
of principal executive offices)





(606)
878-5987


(Issuer’s
telephone number)





(Former
name, former address and former fiscal year, if changed since last
report)








Indicate
by check markwhether 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
o





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
One):


Large
      accelerated filer   o
            
            Accelerated
      filer   o
            
            Non-accelerated
      filer   o
            
            Smaller
      reporting company þ(Do
      not check if a smaller
              Reporting
      company)


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





There
were 36,607,092shares
of the issuer’s common stock outstanding as of March 23, 2009.







PART
I – FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS













2




KENTUCKY
USA ENERGY, INC.
 (Formerly
Las Rocas Mining Corp.)
 (AN
EXPLORATION STAGE COMPANY)


Condensed
Consolidated Balance Sheets





January
      31, 2009
                    
                    
                    October
      31, 2008ASSETS
                    
                    UnauditedCurrent
      AssetsCash
      and cash equivalents
                    
                    $
                    83,768
                    
                    
                    $
                    899,037Prepaid
      expenses
                    
                    
                    5,445
                    
                    
                    
                    15,613Total
      current assets
                    
                    
                    89,213
                    
                    
                    
                    914,650Other
      AssetsDeferred
      professional fees
                    
                    
                    -
                    
                    
                    
                    -Loan
      fees, net of accumulated amortization of $236,214 and
    $145,115
                    
                    
                    913,991
                    
                    
                    
                    1,005,090Investment
      in natural gas properties, using full cost method
                    
                    
                    4,651,443
                    
                    
                    
                    3,796,351Total
      other assets
                    
                    
                    5,565,434
                    
                    
                    
                    4,801,441Other
      property and equipment, net of accumulated depreciation of $15,959 and
      $7,830
                    
                    
                    314,301
                    
                    
                    
                    306,366Total
      assets
                    
                    $
                    5,968,948
                    
                    
                    $
                    6,022,457LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      LiabilitiesAccounts
      payable
                    
                    $
                    189,449
                    
                    
                    $
                    188,225Accrued
      interest
                    
                    
                    162,516
                    
                    
                    
                    81,928Accrued
      Liabilities
                    
                    
                    15,000
                    
                    
                    
                    -Accrued
      Stock based Compensation
                    
                    
                    419,100
                    
                    
                    
                    188,600Derivative
      liability - warrants
                    
                    
                    304,937
                    
                    
                    
                    263,425Notes
      payable, due within one year
                    
                    
                    3,150,000
                    
                    
                    
                    3,150,000Capital
      lease obligations, due within one year
                    
                    
                    83,268
                    
                    
                    
                    83,268Total
      current liabilities
                    
                    
                    4,324,270
                    
                    
                    
                    3,955,446Long-term
      DebtConvertible
      debt, net of discounts of $1,752,451 and $2,003,502
                    
                    
                    2,058,301
                    
                    
                    
                    1,807,250Notes
      payable, less amounts due within one year
                    
                    
                    -
                    
                    
                    
                    -Capital
      lease obligations, less amounts due within one year
                    
                    
                    187,532
                    
                    
                    
                    202,169Total
      long-term debt
                    
                    
                    2,245,833
                    
                    
                    
                    2,009,419Total
      liabilities
                    
                    
                    6,570,103
                    
                    
                    
                    5,964,865Stockholders'
      Equity (Deficit)Common
      stock, ($0.0001 par value; 300,000,000 sharesauthorized;
      36,194,592 and 18,000,000 shares issued and outstanding)
                    
                    
                    3,619
                    
                    
                    
                    3,619Additional
      paid-in capital
                    
                    
                    3,427,498
                    
                    
                    
                    3,427,498Deficit
      accumulated during exploration stage
                    
                    
                    (4,032,272
                    )
                    
                    
                    (3,373,525
                    )Total
      stockholders' equity (deficit)
                    
                    
                    (601,155
                    )
                    
                    
                    57,592Total
      liabilities and stockholders' equity (deficit)
                    
                    $
                    5,968,948
                    
                    
                    $
                    6,022,457
  The
      accompanying notes are an integral part of these financial
      statements.




3


KENTUCKY
USA ENERGY, INC.
 (Formerly
Las Rocas Mining Corp.)
 (AN
EXPLORATION STAGE COMPANY)


Condensed
Consolidated Statements of Operations





From
      Date ofThree
      Months
                        
                        
                        Three
      Months
                        
                        
                        InceptionEnded
                        
                        
                        Ended
                        
                        
                        (October
      5, 2007)January
      31, 2009
                        
                        
                        January
      31, 2008
                        
                        
                        to
      January 31, 2009Unaudited
                        
                        
                        Unaudited
                        
                        
                        (Unaudited)Revenues
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -General
      and Administrative ExpensesAmortization
      of loan fees
                        
                        
                        91,099
                        
                        
                        
                        
                        
                        
                        
                        236,214General
      and administrative
                        
                        
                        42,622
                        
                        
                        
                        7,550
                        
                        
                        
                        89,149Legal
      and accounting
                        
                        
                        384,605
                        
                        
                        
                        56,776
                        
                        
                        
                        1,062,822Loss
      from operations
                        
                        
                        (518,326
                        )
                        
                        
                        (64,326
                        )
                        
                        
                        (1,388,185
                        )Other
      Income (expense)Changes
      in fair value of derivative liability
                        
                        
                        (66,285
                        )
                        
                        
                        
                        
                        
                        
                        4,530,485Interest
      expense
                        
                        
                        (74,137
                        )
                        
                        
                        (22,630
                        )
                        
                        
                        (7,174,571
                        )Income
      (loss) before income taxes
                        
                        
                        (658,747
                        )
                        
                        
                        (86,956
                        )
                        
                        
                        (4,032,271
                        )Income
      taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      income (loss)
                        
                        $
                        (658,747
                        )
                        
                        $
                        (86,956
                        )
                        
                        $
                        (4,032,271
                        )Net
      income per shareBasic
      and diluted:Operations
                        
                        $
                        (0.02
                        )
                        
                        $
                        -
                        
                        
                        $
                        (0.17
                        )Total
                        
                        $
                        (0.02
                        )
                        
                        $
                        -
                        
                        
                        $
                        (0.17
                        )





The
accompanying notes are an integral part of these financial
statements.




4




KENTUCKY
USA ENERGY, INC.
 (Formerly
Las Rocas Mining Corp.)
 (AN
EXPLORATION STAGE COMPANY)
 Statement
of Changes in Stockholders’ Deficit
 For the
Period Ended January 31, 2009




DeficitAccumulated
                              
                              
                              TotalCommon
                              
                              
                              
                              
                              
                              Additional
                              
                              
                              During
                              
                              
                              Stockholders’Stock
                              
                              
                              Common
                              
                              
                              Paid
      -in
                              
                              
                              Exploration
                              
                              
                              EquityShares
                              
                              
                              Stock
                              
                              
                              Capital
                              
                              
                              Stage
                              
                              
                              (Deficit)Balance
      at October 31, 2007
                              
                              
                              18,000,000
                              
                              
                              
                              1,800
                              
                              
                              
                              200
                              
                              
                              
                              (7,700
                              )
                              
                              
                              (5,700
                              )May
      2008 issuance of 12,000,000 shares for shell acquisition
                              
                              
                              12,000,000
                              
                              
                              
                              1,200
                              
                              
                              
                              (1,000
                              )
                              
                              
                              -
                              
                              
                              
                              200May
      2008 application of services provided in connnectionwith
      recapitalization as a cost of the transaction
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (8,500,000
                              )
                              
                              
                              -
                              
                              
                              
                              (8,500,000
                              )May
      2008 issuance of 5,000,000 shares in connection withservices for
      recapitalization
                              
                              
                              5,000,000
                              
                              
                              
                              500
                              
                              
                              
                              8,499,500
                              
                              
                              
                              -
                              
                              
                              
                              8,500,000Issuance
      of stock in partial settlement of derivative liability -May
      2008
                              
                              
                              1,194,592
                              
                              
                              
                              119
                              
                              
                              
                              3,428,798
                              
                              
                              
                              -
                              
                              
                              
                              3,428,917Net
      loss for the year
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (3,365,825
                              )
                              
                              
                              (3,365,825
                              )Balance
      at October 31, 2008
                              
                              
                              36,194,592
                              
                              
                              
                              3,619
                              
                              
                              
                              3,427,498
                              
                              
                              
                              (3,373,525
                              )
                              
                              
                              57,592Net
      loss for the period
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (658,747
                              )
                              
                              
                              (658,747
                              )Balance
      at January 31, 2009
                              
                              
                              36,194,592
                              
                              
                              $
                              3,619
                              
                              
                              $
                              3,427,498
                              
                              
                              $
                              (4,032,272
                              )
                              
                              $
                              (601,155
                              )








The
accompanying notes are an integral part of these financial
statements.




5






KENTUCKY
USA ENERGY, INC.
 (Formerly
Las Rocas Mining Corp.)
 (AN
EXPLORATION STAGE COMPANY)


Condensed
Consolidated Statements of Cash Flows





Three
      Months
                      
                      
                      Three
      Months
                      
                      
                      From
      InceptionEnded
                      
                      
                      Ended
                      
                      
                      (October
      5, 2007) toJanuary
      31, 2009
                      
                      
                      January
      31, 2008
                      
                      
                      January
      31, 2009Unaudited
                      
                      
                      Unaudited
                      
                      
                      UnauditedNet
      loss
                      
                      $
                      (658,747
                      )
                      
                      $
                      (86,956
                      )
                      
                      $
                      (4,032,271
                      )Adjustments
      to reconcile net loss to net cashused
      in operating activities(Gains)
      losses on market valuation of derivative liabilities
                      
                      
                      66,284
                      
                      
                      
                      -
                      
                      
                      
                      (4,530,485
                      )Amortization
      charged to interest expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,997,062Depreciation
                      
                      
                      8,129
                      
                      
                      
                      -
                      
                      
                      
                      15,959Common
      stock issued for services
                      
                      
                      -
                      
                      
                      
                      53,536
                      
                      
                      
                      2,000Decrease
      (increase) in assets and increase (decrease) in
liabilitiesPrepaid
      expenses
                      
                      
                      10,170
                      
                      
                      
                      -
                      
                      
                      
                      44,595Accounts
      payable and accrued expenses
                      
                      
                      96,812
                      
                      
                      
                      (3,500
                      )
                      
                      
                      366,965Stock
      liability
                      
                      
                      230,500
                      
                      
                      
                      -
                      
                      
                      
                      419,100Total
      adjustments to reconcile net loss to net cashprovided
      used in operating activities
                      
                      
                      411,895
                      
                      
                      
                      50,036
                      
                      
                      
                      3,315,196Net
      cash flows from operating activities
                      
                      
                      (246,852
                      )
                      
                      
                      (36,920
                      )
                      
                      
                      (717,075
                      )Cash
      flows from investing activitiesPurchase
      of other property and equipment
                      
                      
                      (16,064
                      )
                      
                      
                      (5,000
                      )
                      
                      
                      (330,259
                      )Retainers
      to legal counsel
                      
                      
                      -
                      
                      
                      
                      (50,040
                      )
                      
                      
                      (50,040
                      )Purchases
      of natural gas leases
                      
                      
                      
                      
                      
                      
                      (5,500
                      )
                      
                      
                      -Investment
      in oil & gas properties
                      
                      
                      (537,716
                      )
                      
                      
                      -
                      
                      
                      
                      (3,589,453
                      )Net
      cash flows from investing activities(553,780
                      )
                      
                      
                      (60,540
                      )
                      
                      
                      (3,969,752
                      )Cash
      flows from financing activitiesProceeds
      from borrowings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,900,000Proceeds
      from borrowings under capital leases
                      
                      
                      -
                      
                      
                      
                      100,000
                      
                      
                      
                      307,394Loan
      fees incurred from borrowings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,150,205
                      )Repayments
      of long-term debt
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,250,000
                      )Repayments
      of capital lease obligation
                      
                      
                      (14,637
                      )
                      
                      
                      -
                      
                      
                      
                      (36,594
                      )Total
      cash flows from financing activities(14,637
                      )
                      
                      
                      100,000
                      
                      
                      
                      4,770,595Net
      (decrease) increase in cash(815,269
                      )
                      
                      
                      2,540
                      
                      
                      
                      83,768Cash
      and cash equivalents, beginning of period
                      
                      
                      899,037
                      
                      
                      
                      30,232
                      
                      
                      
                      -Cash
      and cash equivalents, end of period
                      
                      $
                      83,768
                      
                      
                      $
                      32,772
                      
                      
                      $
                      83,768Supplemental
      Disclosures of Cash Flow informationCash
      paid for interest
                      
                      $
                      50,833
                      
                      
                      $
                      13,370
                      
                      
                      $
                      169,645Cash
      paid for income taxes
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
  In
      non-cash transactions, $317,379 of interest amortization were capitalized
      for the three months ended January 31, 2009.





The
accompanying notes are an integral part of these financial
statements.






6


Kentucky
USA Energy, Inc.
 (An
Exploration Stage Company)
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)


(1)  Basis of
Presentation





The
accompanying unaudited condensed consolidated financial statements of Kentucky
USA Energy, Inc. (the Company) have been prepared in accordance with generally
accepted accounting principles for interim Financial
information and with the instructions to Form 10-Q and Item 210 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.  In the opinion of management, all adjustments considered
necessary for fair presentation have been included.  Operating results
for the three months ended January 31, 2009 are not necessarily indicative of
the results that may be expected for the year ended October 31,
2009.  The Company is still in the exploration stage, has recognized
no revenue to date, and therefore has recorded no income tax
expense.





(2)  Earnings per
Share





In
accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
“Earnings Per Share” (“SFAS 128”), Basic income per share is based on 36,194,592
weighted average shares outstanding for the quarter ended January 31,
2009.  Diluted earnings per common share are computed by diving income
available to common shareholders by the weighted average number of shares of
common stock outstanding during the period increased to include the number of
additional shares of common stock that would have been outstanding if the
dilutive potential shares of common stock had been issued.  Because
the Company has incurred losses from inception, all potentially dilutive
securities are anti-dilutive for all periods presented.





The
number of dilutive shares outstanding at January 31, 2009 is 310,001 and these
shares are related to options and warrants.





(3)  Recent
Accounting Pronouncements





In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement No. 109” (FIN 48),which clarifies the accounting for uncertainty in
tax positions taken or expected to be taken by the Company, including issues
relating to financial statement recognition and measurement.  FIN 48
requires companies to determine whether it is “more likely than not” that a tax
position will be sustained upon examination by the appropriate taxing
authorities before any part of the benefit can be recorded in the financial
statements.  It also provides guidance on the recognition, measurement
and classification of income tax uncertainties, along with any related interest
and penalties.  FIN 48 will also requires significant additional
disclosures.  This Interpretation is effective for fiscal years
beginning after December 15, 2006 for publicly traded companies.  The
Company has evaluated the impact of this Interpretation on
its  financial position and results of operations.  Adoption
of FIN 48 did not  have a material impact in the results of its
operations or financial position.  All of the Company’s tax years
since inception are open to IRS examination.





In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. The standard
provides guidance for using  value to measure assets and
liabilities.  It defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and expands
disclosures about fair value measurement.  Under the standard, fair
value refers to the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in
the market in which the reporting entity transacts. It clarifies the principle
that fair value should be based on the assumptions market participants would use
when pricing the asset or liability. In support of this principle, the standard
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007.




7


Kentucky
USA Energy, Inc.


(An
Exploration Stage Company)


Notes to
Condensed Consolidated Financial Statements


(Unaudited)







(3)  Recent
Accounting Pronouncements (continued)





The
Company continues to evaluate the impact the adoption of this statement could
have on its financial condition,
results of operations and cash flows and does not believe the standard will have
a material impact on the results of its operations or financial
position.





In
September 2006, the Securities and Exchange Commission staff published Staff
Accounting Bulletin SAB No. 108 (“SAB 108”), “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.” SAB 108 addresses quantifying the financial statement effects of
misstatements, specifically, how the effects of prior year uncorrected errors
must be considered in quantifying misstatements in the current year financial
statements.  SAB 108 is effective for fiscal years ending after
November 15, 2006.  The Company has adopted SAB 108 and it has not had
an impact on the Company’s financial statements.




In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities — as amended (“SFAS 159”). SFAS 159 permits
entities to elect to report eligible financial instruments at fair value subject
to conditions stated in the pronouncement including adoption of SFAS 157
discussed above. The purpose of SFAS 159 is to improve financial reporting by
mitigating volatility in earnings related to current reporting requirements. The
Company is considering the applicability of SFAS 159 and will determine if
adoption is appropriate. The effective date for SFAS 159 is for fiscal years
beginning after November 15, 2007.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
("SFAS 141(R)"), which improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
SFAS 141(R) requires acquisition-related costs and restructuring costs to
be recognized separately from the first annual reporting period beginning on or
after December 15, 2008.  The Company continues to evaluate
the  potential impact of this Interpretation on its financial position
and the results of its operations.





(4)  Natural Gas
Properties





The
following table sets forth information concerning costs related to the Company’s
natural gas property acquisitions, exploration and development
activities:





January
      31, 2008
                                                
                                                
                                                January
      31, 2008Property
      acquisitions:Proved
                                                
                                                
                                                -Unproved
                                                
                                                
                                                -Less
      proceeds from sales of properties
                                                
                                                
                                                -Development
      cost
                                                
                                                $
                                                855,092
                                                
                                                
                                                $
                                                5,500Total
                                                
                                                $
                                                855,092
                                                
                                                
                                                $
                                                5,500





As of
January 31, 2009, the Company was still in an exploratory stage and had not
begun any producing activities.







8


Kentucky
USA Energy, Inc.
 (An
Exploration Stage Company)
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)





(5)  Credit
Agreements





On May
29, 2008 the Company closed a $2,500,000 securities purchase agreement with a
private investor.





Under the
agreement, the Company has authorized a series of senior convertible notes of
the Company which are convertible into the Company’s common Stock, par value
$0.0001 per share. The note bears interest at 8% per year and has a maturity
date thirty-six months from closing.  Interest begins accruing on the
issuance date and is computed on the basis of a 360-day year with the first
interest payment due August 29, 2008 and the first principal installment due May
29, 2009.  The note is secured by a lien on substantially all of the
Company’s natural gas properties.  The note has no financial covenants
and the Company is in compliance with all non-financial
covenants.  The Company incurred closing costs of approximately
$651,000 which will be amortized over the term of the note.





On June
25, 2008 the Company closed a $10,000,000 senior credit facility with NSES 12,
LLC.





Under the
facility, the Company may borrow up to $10,000,000.  The Company’s
initial borrowing base was set at $2,500,000.  The initial loan under
the facility with NSES 12, LLC closed on June 25, 2008 in the principal amount
of $2.5 million, bearing interest at a 12%.  Interest only is payable
during the term of the loan and the principal balance of the loan is due
thirty-six months from closing.  Interest is to accrue starting on the
day the loan is funded, with the first interest payment due October 2008. The
facility is secured by a lien on substantially al of the Company’s natural gas
properties.  The facility has affirmative and negative covenants, with
which the Company is in compliance.  The loan proceeds were used for
the development of certain oil and gas properties.  The Company
incurred closing costs associated with the loan of approximately $499,000, which
will be amortized over the term of the loan.





(6) Derivative
Liabilities, Beneficial Conversion Feature, Convertible Debt, and
Warrants





As of January 31, 2009, the Company
recognized a derivative liability of $304,937 and convertible debt liability,
net of discounts of $1,777,223, of $2,058,301 pursuant to SFAS 133 “Accounting
for Derivative Instruments and Hedging Activities” (SFAS 133) relating to a
beneficial conversion feature embedded in the Company’s debt instrument entered
into on May 29, 2008. The related debt is a convertible 8% senior secured 36
month note dated May 29, 2008 with Institutional Investor.  Interest
only is payable quarterly. Principle repayments due in 24 equal payments
beginning with the 1st year anniversary.  This note is convertible
into 2,500,000 shares. The conversion feature allowed for the conversion of the
underlying debt into shares of the Company’s common Stock at a price of $1.50
per share when the market price of the Company’s  stock
was $2.80 per share. The existence of this discount is called a “beneficial
conversion feature.”





EITF
00-19 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (EITF 00-19) specifies
characteristics that financial instruments to be settled in a
Company’s  own stock must satisfy in order to be accounted for as
equity rather than debt under SFAS 133. Among other provisions, under the EITF,
instruments must be categorized as debt if, under terms of the instrument, the
Company might be required to issue a variable number of shares in satisfaction
of the conversion feature. Provisions of the May29 instrument allow net
settlement of the instrument upon exercise, resulting in the potential
settlement with a variable number of shares, and the settlement is based upon
the fixed cash value of the debt, known at issuance.





9


Kentucky
USA Energy, Inc.
 (An
Exploration Stage Company)
 Notes to
Condensed Consolidated Financial Statements
 (Unaudited)





(6) Derivative Liabilities,
Beneficial Conversion Feature, Convertible Debt, and Warrants
(continued)





Accordingly
the beneficial conversion feature was recorded at its intrinsic value of $1.98
per warrant, or $2,773,418, which was expensed, the attached debt of $2,500,000
having been previously discounted to zero in connection with warrants issued in
the same transaction and discussed below. Under provisions of SFAS 133 the
valuation of the beneficial conversion feature initially recorded as a liability
is reset at each reporting period to fair value with gain or loss recognized in
income. For the period ended January 31, 2009, the Company recognized a loss of
$24,772 on the revaluation of this liability to fair value, using the
Black-Scholes Formula with an expected term of approximately 2.5 years,
volatility of 60%, and a risk-free rate of interest of 4%, consistent with
valuations of warrants outstanding at January 31, 2009, as discussed
below.





The
Company recognized derivative liabilities related to detachable warrants issued
with the May 29 instrument and other debt financing in accordance with SFAS 150
“Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity.” Under that pronouncement, free-standing instruments
that may require the issuance of a variable number of equity shares must be
accounted for as a liability under circumstances similar to those enumerated in
EITF 00-19. The detachable warrants issued with the debt financings are
remeasured at each reporting date with the resulting gain or loss included in
income of the period.





In
connection with the Company’s warrants as discussed in Note 5, the Company
incurred initial derivative liabilities totaling $6,300,037 in May, 2008. To the
extent of proceeds received these liabilities were recorded as debt discount
with any excess expensed upon issuance. Upon early settlement of a loan, any
remaining discount is written off. As of January 31, 2009, the unamortized
balance of loan fees amounted to $913,991. The amount on these non-cash items
capitalized as interest expense during the three months ended January 31, 2009
was $317,379, including $226,279 in derivative items and $91,099 in amortization
of loan fees.





(7) Going
Concern





The
financial statements do not include any adjustments that could be required if
the Company were unable to refinance debt or continue as a going
concern.  The Company has incurred substantial losses, which have
strained its financial resources.  If substantial losses continue, or
the Company is unable to raise sufficient additional capital through debt and
equity offerings, liquidity problems will cause the Company to curtail
operations, liquidate or sell assets or entities, or pursue other actions that
could adversely affect future operations.  These factors have raised
doubt about the Company’s ability to continue as a going concern.





10





ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.





Statement Regarding Forward-Looking
Information





This
report contains forward-looking statements. All statements other than statements
of historical facts included in this Quarterly Report on Form 10-Q, including
without limitation, statements in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations regarding our financial position,
estimated working capital, business strategy, the plans and objectives of our
management for future operations and those statements preceded by, followed by
or that otherwise include the words “believe”, “expects”, “anticipates”,
“intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”,
“should”, or similar expressions or variations on such expressions are
forward-looking statements. We can give no assurances that the assumptions upon
which the forward-looking statements are based will prove to be correct. Because
forward-looking statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. There are a number of risks, uncertainties and other
important factors that could cause our actual results to differ materially from
the forward-looking statements, including, but not limited to, the availability
and pricing of additional capital to finance operations, including the drilling
of our initial gas wells, longer term drilling programs and additional leasehold
acquisitions, the viability of the shale gas fields in the Illinois Basin in
western Kentucky, our ability to build and maintain a successful operations
infrastructure and to effectively drill and develop producing wells, the
successful negotiation and execution of cost-effective third-party gas drilling
and distribution agreements, the continued commitment of drill rig operators and
future economic conditions and the volatility and decreases in energy
prices.




Except
as otherwise required by the federal securities laws, we disclaim any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this Quarterly Report on Form 10-Q to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is
based.





Background





Kentucky
USA Energy, Inc. (the “Company” or “we”) was incorporated in the State of
Delaware on September 29, 2006 under the name Las Rocas Mining Corp.  On
October 26, 2007, the Company changed its name to Kentucky USA Energy, Inc. to
facilitate the merger discussions with KY USA Energy, Inc. (“KY
USA”).  On May 2, 2008, the Company, KY Acquisition Corp., a
wholly-owned subsidiary of the Company (“Acquisition Sub”), and KY USA entered
into an Agreement and Plan of Merger and Reorganization (the “Merger
Agreement”), which closed on May 2, 2008.  Pursuant to the terms of
the Merger Agreement, Acquisition Sub merged with and into KY USA, which became
a wholly-owned subsidiary of the Company (the “Merger”).





11


KY USA was incorporated in the Commonwealth of Kentucky on
October 5, 2007 to acquire, explore and develop oil and gas resource properties,
with a primary focus initially on shale gas in the Illinois Basin in western
Kentucky. KY USA has secured a 75% net revenue interest in a leasehold in
Western Kentucky covering approximately 3,000 acres targeting gas extraction
from the New Albany Shale. We have identified approximately 40-50 drilling
locations on this leasehold.  Our net (75%) recoverable
“ proved
developed producing reserves1 ” a 2




Prior to
the Merger our fiscal year end was February 28 and the fiscal year end of KY USA
was October 31. Following published SEC accounting and financial reporting
interpretations and guidance and in connection with the Merger, we have changed
our fiscal year end to October 31 to match that of KY USA.   As a
result of this change, we are filing this quarterly report with the SEC for the
quarter ended July 31, 2008.




Following
the closing of the Offering (defined below), we began drilling activities at our
initial well locations previously identified.  We have continued these
drilling efforts using the net proceeds from our initial loan under the Credit
Facility (defined below).





Results of Operations for
the Three Month Periods Ended January 31, 2009 and 2008





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





All
productive and non-productive costs incurred in connection with the acquisitions
of, exploration for and development of our gas reserves are capitalized using
the full cost method of accounting.  These costs include lease
acquisitions, geological and geophysical work, and the costs of drilling,
completing and equipping our gas wells.  For the three month periods
ended January 31, 2009 and 2008, we incurred such total capitalized costs of
$1,115,260 and $5,500, respectively.  The increase from 2008 to 2009
was a result of our beginning to drill our first wells.




We
incurred general and administrative expenses of $42,622 and $7,550 for the three
month periods ended January 31, 2009 and 2008, respectively. These expenses
consisted of costs incurred in connection with the start-up and day to day
operation of our business.




Amortization
of loan fees for the three month period ended January 31, 2009 totaled
$91,099.  These costs are related to the Note and the
Loan.  We had no such costs for the three months ended January 31,
2008.




We
incurred professional expenses of $384,605 and $56,776 for the three month
periods ended January 31, 2009 and 2008, respectively. The increase in these
expenses primarily resulted from consulting agreements and annual SEC filing
requirements.









1.   According
to Securities and Exchange Commission (“SEC”) definitions, “proved developed
reserves” are those that are expected to be recovered from existing wells with
existing equipment and operating
methods.
 2.  According
to SEC definitions, “proved undeveloped reserves” are those that are expected to
be recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is
required.


12


Our
interest expense for the three
month periods ended January 31, 2009 and 2008, were $74,136 and $221,630,
respectively. This cost is attributable to interest due and paid on the Note and
on the Loan. During the three month period ended January 31, 2009, we recognized
a net loss on a derivative liability relating to the Note in the amount of
$66,284, due to a revaluation of the derivative liability to market at October
31, 2008.





We have
generated no revenues to date.  Our net operating loss from inception
through January 31, 2009 was $4,031,272.




Liquidity and Capital
Resources





Our cash
and cash equivalents balance as of January 31, 2009 was $83,768.




On
May 9, 2008, KY USA borrowed $100,000 from one individual as a bridge loan
to be used for working capital purposes. In addition, upon the closing of the
Merger, this lender received warrants to purchase 200,000 shares of our Common
Stock, such warrants having an initial exercise price of $1.00 per share and
expiring five years after issuance.





On May
29, 2008 we closed a private offering (the “Offering”) of an 8% senior secured
convertible note (the “Note”) and warrants (the “Warrants”) to purchase
2,500,000 shares of the Company’s common stock, $0.0001 par value per share (the
“Common Stock”), to one institutional investor (the “Investor”) for aggregate
gross proceeds of $2.5 million, as more fully described in our Form 8-K filed
with the SEC on June 4, 2008.  We have used the net proceeds of the
Offering of approximately $1,857,600 (after expenses of the Offering) to repay
bridge loans made to KY USA, to begin drilling at one or more of the five
locations that, as previously disclosed, we have identified for initial wells,
and for general working capital purposes.





On June
27, 2008, KY USA closed on a senior secured credit facility (the “Credit
Facility”) with NSES 12, LLC, a funding vehicle of New Stream Capital (the
"Lender"), pursuant to which KY USA may borrow up to $10,000,000 in the
aggregate, under certain conditions, as more fully described in our Form 8-K
filed with the SEC on July 1, 2008.  Under the Credit Facility, KY USA
borrowed $2,500,000 on June 27, 2008 (the "Initial Loan") and may
borrow up to an additional aggregate amount of $7,500,000 in installments
of a minimum of $2,500,000 each (each, an “Installment Loan”), solely at the
discretion of the Lender.  The proceeds of the Initial Loan amount,
net after expenses of the transaction, including a $200,000 credit facility fee
paid to the Lender at closing and a $200,000 consulting fee paid to one
consultant, have been used by KY USA for ongoing working capital
purposes, including the costs and expenses relating to the drilling of our
initial gas wells in the New Albany shale on KY USA's leasehold in western
Kentucky.





On
February 12, 2008, we received the first Installment Loan in an amount of $2.5
million.  To date, we have received $5,000,000 under the Credit
Facility which
requires that we comply with financial covenants relating to, among other
things, collateral and current ratio coverage. As of October 31, 2008, we were
not in compliance with the 1.0 to 1.0 current ratio requirement of the Credit
Agreement.  This breach of the current ration covenant contained in
the Credit Agreement constitutes an event of default under the Credit Agreement.
The breach would permit the Lender under the Credit Agreement to declare all
amounts borrowed thereunder to be immediately due and payable.  We
intend to request from the Lender a waiver of this current ratio covenant, but
we cannot assure you that we will be successful in obtaining such
waiver.  Additionally, even if we obtain a waiver from the Lender, we
may not be able to satisfy these or other covenants in the future or be able to
pursue our strategies within the constraints of these
covenants.





Including
the net proceeds from the Offering and the Credit Facility, we have sufficient
funds to conduct our operations for approximately the next six to nine
months.





13


If we are
not successful in generating sufficient liquidity from KY USA operations or in
raising sufficient capital resources on terms acceptable to us, our business,
results of operations, liquidity and financial condition could suffer
materially.





We
presently do not have any available credit, bank financing or other external
sources of liquidity, other than the net proceeds from the Offering and the New
Stream Credit Facility. Due to our brief history and historical operating
losses, our operations have not been a source of liquidity. We will need to
obtain additional capital in order to expand operations and become profitable.
In order to obtain capital, we may need to sell additional shares of our common
stock or borrow funds from private lenders. There can be no assurance that we
will be successful in obtaining additional funding in amounts or on terms
acceptable to us, if at all.





Critical Accounting
Policies





In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB
Statement No. 109” (FIN 48),  which clarifies the accounting for
uncertainty in tax positions taken or expected to be taken by the Company,
including issues relating to financial statement recognition and
measurement.  FIN 48 requires companies to determine whether it is
“more likely than not” that a tax position will be sustained upon examination by
the appropriate taxing authorities before any part of the benefit can be
recorded in the financial statements.  It also provides guidance on
the recognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties.  FIN 48 will also
require significant additional disclosures.  This Interpretation is
effective for fiscal years beginning after December 15, 2006 for publicly traded
companies.  The Company does not expect the interpretation to have a
material impact on the results of its operations or financial
position.





In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. The standard
provides guidance for using fair value to measure assets and liabilities. It
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and expands disclosures about fair
value measurement.Under the standard, fair
value refers to the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in
the market in which the reporting entity transacts. It clarifies the principle
that fair value should be based on the assumptions market participants would use
when pricing the asset or liability. In support of this principle, the standard
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy. Statement 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company does not believe the standard will have a
material impact on the results of its operations or financial
position.





In
September 2006, the Securities and Exchange Commission staff published
Staff Accounting Bulletin SAB No. 108 (“SAB 108”), "Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB 108 addresses quantifying the financial statement
effects of misstatements, specifically, how the effects of prior year
uncorrected errors must be considered in quantifying misstatements in the
current year financial statements. SAB 108 is effective for fiscal years ending
after November 15, 2006. The Company has adopted SAB 108 and it has not had an
impact on Company’s financial statements.





14


In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities — as amended (“SFAS 159”). SFAS 159 permits
entities to elect to report eligible financial instruments at fair value subject
to conditions stated in the pronouncement including adoption of SFAS 157
discussed above. The purpose of SFAS 159 is to improve financial reporting by
mitigating volatility in earnings related to current reporting requirements. The
Company is considering the applicability of SFAS 159 and will determine if
adoption is appropriate. The effective date for SFAS 159 is for fiscal years
beginning after November 15, 2007.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
("SFAS 141(R)"), which improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
SFAS 141(R) requires acquisition-related costs and restructuring costs to
be recognized separately from the acquisition. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The Company continues to evaluate the
potential impact of this Interpretation on its financial position and the
results of its operations.





Off-Balance Sheet
Arrangements





We have
no off-balance sheet arrangements.





ITEM
4T.  CONTROLS AND PROCEDURES





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we have conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as of the end of the period covered by this
report. Based on this evaluation, our principal executive officer and principal
financial officer concluded as of the evaluation date that, due to the
insufficiency of the depth and breadth of our accounting function, our
disclosure controls and procedures were not adequate and effective to ensure
that our management is alerted to material information required to be included
in our periodic filings with the SEC. Nevertheless, our management has
determined that all matters to be disclosed in this report have been fully and
accurately reported. We are in the process of improving our processes and
procedures to ensure full, accurate and timely disclosure in the current fiscal
year, with the expectation of establishing effective disclosure controls and
procedures as soon as reasonably practicable.





15




Additionally,
there were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the evaluation
date.








PART
II – OTHER INFORMATION





ITEM
6. EXHIBITS.





Exhibit
      No.
              
              Description31.1
              
              Certification
      of Principal Executive Officer pursuant to Section 302 the Sarbanes-Oxley
      Act of 200231.2
              
              Certification
      of Interim Principal Financial Officer pursuant to Section 302 the
      Sarbanes-Oxley Act of 200232.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*32.2
              
              Certification
      of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*

















____________________


* This
certification is being furnished and shall not be deemed “filed” with the SEC
for purposes of Section 18 of the Exchange Act, or otherwise subject to the
liability of that section, and shall not be deemed to be incorporated by
reference into any filing under the Securities Act or the Exchange Act, except
to the extent that the Registrant specifically incorporates it by
reference.








16





SIGNATURES





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





Kentucky
      USA Energy, Inc.Date:  March
      23, 2009
              By:
              /s/
      Steven D. EversoleName:
      Steven D. EversoleTitle:
      Principal Executive Officer


By:
                  /s/ Charles
      M. StiversName:
      Charles M. StiversTitle:
      Interim Principal Financial Officer






17