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 April 30, 2009
 
  ̈
                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
 ̈
 
 Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).Yes ̈No ̈
 
 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  ̈
              
              Accelerated
      filer  ̈
              
              Non-accelerated
      filer  ̈
              
              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  ̈ No
x
 There
were 36,607,092shares
of the issuer’s common stock outstanding as of June 15, 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
 April 30, 2009
                    
                    
                    October 31, 2008UnauditedASSETSCurrent
      AssetsCash
      and cash equivalents
                    
                    $
                    778,481
                    
                    
                    $
                    899,037Prepaid
      expenses
                    
                    
                    5,498
                    
                    
                    
                    15,613Total
      Current Assets
                    
                    
                    783,979
                    
                    
                    
                    914,650Other
      AssetsLoan
      fees, net of accumulated amortization of $472,428 and
    $145,115
                    
                    
                    822,892
                    
                    
                    
                    1,005,090Investment
      in natural gas properties, using full cost method
                    
                    
                    6,493,119
                    
                    
                    
                    3,796,351Total
      Other Assets
                    
                    
                    7,316,011
                    
                    
                    
                    4,801,441Other
      property and equipment, net of accumulated depreciation of $24,262 and
      $7,830
                    
                    
                    370,555
                    
                    
                    
                    306,366Total
      Assets
                    
                    $
                    8,470,545
                    
                    
                    $
                    6,022,457LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      LiabilitiesAccounts
      payable
                    
                    $
                    187,240
                    
                    
                    $
                    188,225Accrued
      interest
                    
                    
                    188,978
                    
                    
                    
                    81,928Accrued
      liabilities
                    
                    
                    15,000
                    
                    
                    
                    -Stock
      liability
                    
                    
                    645,600
                    
                    
                    
                    188,600Derivative
      liability - warrants
                    
                    
                    99,452
                    
                    
                    
                    263,425Notes
      payable
                    
                    
                    5,650,000
                    
                    
                    
                    3,150,000Capital
      lease obligations
                    
                    
                    83,268
                    
                    
                    
                    83,268Total
      Current Liabilities
                    
                    
                    6,869,538
                    
                    
                    
                    3,955,446Long-term
      DebtConvertible
      debt, net of discounts of $1,290,776 and $2,003,502
                    
                    
                    2,422,806
                    
                    
                    
                    1,807,250Capital
      lease obligations
                    
                    
                    158,256
                    
                    
                    
                    202,169Total
      Long-term Debt
                    
                    
                    2,581,062
                    
                    
                    
                    2,009,419Total
      Liabilities
                    
                    
                    9,450,600
                    
                    
                    
                    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
                    
                    
                    (4,411,172
                    )
                    
                    
                    (3,373,525
                    )Total
      Stockholders' Equity (Deficit)
                    
                    
                    (980,055
                    )
                    
                    
                    57,592Total
      Liabilities and Stockholders' equity (Deficit)
                    
                    $
                    8,470,545
                    
                    
                    $
                    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
                  
                  
                  Six Months
                  
                  
                  Six Months
                  
                  
                  InceptionEnded
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  (October 5, 2007)April 30, 2009
                  
                  
                  April 30, 2008
                  
                  
                  April 30, 2009
                  
                  
                  April 30, 2008
                  
                  
                  to April 30, 2009Unaudited
                  
                  
                  Unaudited
                  
                  
                  Unaudited
                  
                  
                  Unaudited
                  
                  
                  UnauditedRevenues
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -General
      and Administrative ExpensesAmortization
      of loan fees
                  
                  
                  91,099
                  
                  
                  
                  -
                  
                  
                  
                  182,198
                  
                  
                  
                  -
                  
                  
                  
                  327,313General
      and administrative
                  
                  
                  23,704
                  
                  
                  
                  -
                  
                  
                  
                  66,327
                  
                  
                  
                  7,550
                  
                  
                  
                  112,853Legal
      and accounting
                  
                  
                  386,355
                  
                  
                  
                  4,450
                  
                  
                  
                  770,960
                  
                  
                  
                  61,225
                  
                  
                  
                  1,449,178Loss
      from operations
                  
                  
                  (501,158
                  )
                  
                  
                  (4,450
                  )
                  
                  
                  (1,019,485
                  )
                  
                  
                  (68,775
                  )
                  
                  
                  (1,889,344
                  )Other
      Income (expense)Changes
      in fair value of derivative liability
                  
                  
                  327,427
                  
                  
                  
                  
                  
                  
                  
                  261,143
                  
                  
                  
                  -
                  
                  
                  
                  4,857,912Interest
      expense
                  
                  
                  (205,169
                  )
                  
                  
                  (20,382
                  )
                  
                  
                  (279,305
                  )
                  
                  
                  (43,013
                  )
                  
                  
                  (7,374,040
                  )Loss
      before income taxes
                  
                  
                  (378,900
                  )
                  
                  
                  (24,832
                  )
                  
                  
                  (1,037,647
                  )
                  
                  
                  (111,788
                  )
                  
                  
                  (4,405,472
                  )Income
      taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      income (loss)
                  
                  $
                  (378,900
                  )
                  
                  $
                  (24,832
                  )
                  
                  $
                  (1,037,647
                  )
                  
                  $
                  (111,788
                  )
                  
                  $
                  (4,405,472
                  )Loss
      per shareBasic
      and diluted:Operations
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.03
                  )Total
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.03
                  )
 
 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
 
 Deficit
                                      
                                      
                                      TotalCommon
                                      
                                      
                                      
                                      
                                      
                                      Additional
                                      
                                      
                                      Accumulated
                                      
                                      
                                      Stockholders’Stock
                                      
                                      
                                      Common
                                      
                                      
                                      Paid -in
                                      
                                      
                                      During 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 connectionwith
      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
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,037,647
                                      )
                                      
                                      
                                      (1,037,647
                                      )Balance
      at April 30, 2009
                                      
                                      
                                      36,194,592
                                      
                                      
                                      $
                                      3,619
                                      
                                      
                                      $
                                      3,427,498
                                      
                                      
                                      $
                                      (4,411,172
                                      )
                                      
                                      $
                                      (980,055
                                      )
 
 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
 From Date ofSix Months
                        
                        
                        Six Months
                        
                        
                        InceptionEnded
                        
                        
                        Ended
                        
                        
                        (October 5, 2007)April 30, 2009
                        
                        
                        April 30, 2008
                        
                        
                        to April 30, 2009Unaudited
                        
                        
                        Unaudited
                        
                        
                        UnauditedNet
      loss
                        
                        $
                        (1,037,647
                        )
                        
                        $
                        (111,788
                        )
                        
                        $
                        (4,411,171
                        )Adjustments
      to reconcile net loss to net cashused
      in operating activities(Gains)
      Losses on market valuation of derivative liabilities
                        
                        
                        (261,143
                        )
                        
                        
                        -
                        
                        
                        
                        (4,857,912
                        )Derivative
      valuation adjustments charged to expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,851,947Amortization
      charged to interest expense
                        
                        
                        182,198
                        
                        
                        
                        -
                        
                        
                        
                        327,313Depreciation
                        
                        
                        16,432
                        
                        
                        
                        -
                        
                        
                        
                        24,262Common
      stock issued for services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,000Decrease
      (increase) in assets and increase (decrease) in
liabilitiesPrepaid
      expenses
                        
                        
                        10,115
                        
                        
                        
                        (53,540
                        )
                        
                        
                        (5,500
                        )Accounts
      payable and accrued expenses
                        
                        
                        121,065
                        
                        
                        
                        59,034
                        
                        
                        
                        391,218Stock
      liability
                        
                        
                        457,000
                        
                        
                        
                        -
                        
                        
                        
                        645,600Total
      adjustments to reconcile net loss to net cashprovided
      used in operating activities
                        
                        
                        525,667
                        
                        
                        
                        5,494
                        
                        
                        
                        3,378,928Net
      cash flows from operating activities
                        
                        
                        (511,980
                        )
                        
                        
                        (106,294
                        )
                        
                        
                        (1,032,243
                        )Cash
      flows from investing activitiesPurchase
      of other property and equipment
                        
                        
                        (80,621
                        )
                        
                        
                        (5,000
                        )
                        
                        
                        (394,816
                        )Purchases
      of natural gas leases
                        
                        
                        -
                        
                        
                        
                        (5,500
                        )
                        
                        
                        -Investment
      in oil & gas properties
                        
                        
                        (2,696,768
                        )
                        
                        
                        (8,910
                        )
                        
                        
                        (5,748,505
                        )Net
      cash flows from investing activities
                        
                        
                        (2,777,389
                        )
                        
                        
                        (19,410
                        )
                        
                        
                        (6,143,321
                        )Cash
      flows from financing activitiesProceeds
      from borrowings
                        
                        
                        2,500,000
                        
                        
                        
                        -
                        
                        
                        
                        9,400,000Proceeds
      from borrowings under capital leases
                        
                        
                        -
                        
                        
                        
                        100,000
                        
                        
                        
                        307,394Loan
      fees incurred from borrowings
                        
                        
                        712,726
                        
                        
                        
                        -
                        
                        
                        
                        (437,479
                        )Repayments
      of long-term debt
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,250,000
                        )Repayments
      of capital lease obligation
                        
                        
                        (43,913
                        )
                        
                        
                        -
                        
                        
                        
                        (65,870
                        )Total
      cash flows from financing activities
                        
                        
                        3,168,813
                        
                        
                        
                        100,000
                        
                        
                        
                        7,954,045Net
      (decrease) increase in cash
                        
                        
                        (120,556
                        )
                        
                        
                        (25,704
                        )
                        
                        
                        778,481Cash
      and cash equivalents, beginning of period
                        
                        
                        899,037
                        
                        
                        
                        30,232
                        
                        
                        
                        -Cash
      and cash equivalents, end of period
                        
                        $
                        778,481
                        
                        
                        $
                        4,528
                        
                        
                        $
                        778,481Supplemental
      Disclosures of Cash Flow informationCash
      paid for interest
                        
                        $
                        215,833
                        
                        
                        $
                        165,000
                        
                        
                        $
                        375,261
 
 In
non-cash transactions, $744,614 of interest was capitalized for the year ended
October 31, 2008.
 
 The
accompanying notes are an integral part of these financial
statements.
  6
  KENTUCKY
USA ENERGY, INC.
 (Formerly
Las Rocas Mining Corp.)
 (AN
EXPLORATION STAGE COMPANY)
 NOTES TO
FINANCIAL STATEMENTS
 April 30,
2009
 
 (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 Article 10 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 six months
ended April 30, 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 April 30,
2009.  Diluted earnings per common share are computed by dividing
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 potentially dilutive shares outstanding at April 30, 2009 is 2,700,000
and these shares are related to options and warrants described in Note
6.
 
 (3)  Recent
Accounting Pronouncements
 
 In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No.165, ‘Subsequent Events’ (FASB 165). The
standard does not require significant changes regarding recognition or
disclosure of subsequent events, but does require disclosure of the date through
which subsequent events have been evaluated for disclosure and recognition. The
standard is effective for financial statements issued after June 15, 2009.
Management does not believe that the implementation of this standard will have a
significant impact on the financial statements of the Company.
 
 In April
2008, the FASB issued EITF 07-05, Determining whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-05”). EITF 07-05
provides guidance on determining what types of instruments or embedded features
in an instrument held by a reporting entity can be considered indexed to its own
stock for the purpose of evaluating the first criteria of the scope exception in
paragraph 11(a) of SFAS 133. EITF 07-05 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and early application
is not permitted. Management does not believe that the implementation of this
standard will have a significant impact on the financial statements of the
Company.
 
 In
March 2008, the FASB issued Statement No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB
No. 133” (“SFAS 161”). SFAS 161 requires additional disclosures about the
objectives for using derivative instruments and hedging activities, method of
accounting for such instruments under SFAS 133 and its related interpretations,
the effect of derivative instruments and related hedged items on financial
position, results of operations, and cash flows, and a tabular disclosure of the
fair values of derivative instruments and their gains and losses. The effective
date for SFAS 161 is November 15, 2008 for fiscal years and interim periods.
Management does not believe that the implementation of this standard will have a
significant impact on the financial statements of the Company.
  7
  KENTUCKY
USA ENERGY, INC.
 (Formerly
Las Rocas Mining Corp.)
 (AN
EXPLORATION STAGE COMPANY)
 NOTES TO
FINANCIAL STATEMENTS
 NOVEMBER
30, 2007
 
 (3)  Recent
Accounting Pronouncements (continued)
 
 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.  Management does not believe that the
implementation of this standard will have a significant impact on the financial
statements of the Company.
 
 (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:
 
 April 30, 2009
                      
                      
                      October 31, 2008Property
      acquisitions:Development
      cost
                      
                      $
                      6,493,119
                      
                      
                      $
                      3,796,391Total
                      
                      $
                      6,493,119
                      
                      
                      $
                      3,796,391
 
 As of
April 30, 2009, the Company was still in an exploratory stage and had not begun
any producing activities.
  (5)  Credit
Facilities
 
 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 senior convertible note which is
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 forty-eight 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,
2010.  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 are being 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 initial loan
under the facility with NSES 12, LLC closed on June 25, 2008 with an initial
borrowing base amount of $2,500,000, bearing interest of 12%. Interest is
payable quarterly during the term of the loan with the remaining principal
balance of the loan is due thirty-six months from closing.  Interest
began to accrue beginning on the day the loan was funded, with the first
interest payment due October 2008, with subsequent payments due quarterly
thereafter. The Company borrowed an additional $2,500,000 on February 10, 2009.
The facility is secured by a lien on substantially all 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
are being amortized over the term of the loan.
  8
  KENTUCKY
USA ENERGY, INC.
 (Formerly
Las Rocas Mining Corp.)
 (AN
EXPLORATION STAGE COMPANY)
 NOTES TO
FINANCIAL STATEMENTS
 NOVEMBER
30, 2007
 
 (6) Derivative Liabilities,
Beneficial Conversion Feature, Convertible Debt, and
Warrants
 
 For the
three months ended April 30, 2009, the Company recognized a derivative liability
of $327,427 and convertible debt liability, net of discounts of $1,290,776
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 48 month note dated May 29, 2008 with
Institutional Investor.  Interest only is payable quarterly. Principle
repayments due in 24 equal payments beginning with the 2nd 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 theCompany’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 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.
 
 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 three months ended April 30, 2009, the Company
recognized a gain of $327,427 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%.
 
 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 April 30, 2009, the unamortized balance
of loan fees amounted to $822,892.
 
 (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.  Additionally, at April 30, 2009 the
Company’s liabilities exceed its assets. 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. For these reasons
our auditors stated in their report on our audited financial statements for the
year ended October 31, 2008 that they have substantial doubt we will be able to
continue as a going concern.
  9
  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”).
  10
 
 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 recoverable “proved developed producing
reserves1” as of
October 31, 2008, are estimated at 1.825 billion cubic feet of gas (“Bcf”),
while “proved undeveloped primary reserves2” are estimated at 23.725
Bcf, for a total proved developed and undeveloped reserves of 25.550
Bcf.  This leasehold is directly adjacent to producing
wells.
 
 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.
  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 and Six Month Periods Ended April 30, 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 April 30, 2009 and 2008, we incurred such total capitalized costs of
$537,716 and $0, respectively.  For the six month periods ended April
30, 2009 and 2008, we incurred such total capitalized costs of $2,696,968 and
$8,910 respectively.  The increases from 2008 to 2009 were the result
of our beginning to drill our first wells.
  We
incurred general and administrative expenses of $501,158 and $4,450 for the
three month periods ended April 30, 2009 and 2008, respectively, and of
$1,019,485 and $68,775 for the six month periods ended April 30, 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 and six month periods ended April 30, 2009 totaled
$91,099 and $182,198 respectively.  These costs are related to the
Note and the Loan.  We had no such costs for the three and six month
periods ended April 30, 2008.
  We
incurred professional expenses of $384,605 and $56,776 for the three month
periods ended April 30, 2009 and 2008, respectively, and of $770,960 and $61,225
for the six month periods ended April 30, 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.
  11
  Our
interest expense for the three
month periods ended April 30, 2009 and 2008, were $205,169 and $20,382
respectively, and for the six
month periods ended April 30, 2009 and 2008, were $279,305 and $43,013
respectively. This cost is attributable to interest due and paid on the Note and
on the Loan. During the three and six month periods ended April 30, 2009, we
recognized a net gain on a derivative liability relating to the Note in the
amount of $327,427 and $261,143 respectively, 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 April 30, 2009 was $4,405,472.
  Liquidity and Capital
Resources
 
 Our cash
and cash equivalents balance as of April 30, 2009 was $778,481.
  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.
 
 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.
  12





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





The
Company prepares its Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America, which
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. Actual results could differ from those
estimates. The Company considers the following policies to be the most critical
in understanding the judgments that are involved in preparing the Company’s
financial statements and the uncertainties that could impact the Company’s
results of operations, financial condition and cash flows.





Full Cost Method of
Accounting





The Company follows the full cost
method of accounting for oil and gas property acquisition, exploration and
development activities. Under this method, all productive and non-productive
costs incurred in connection with the acquisition of, exploration for and
development of oil and gas reserves for each cost center are capitalized.
Capitalized costs include lease acquisitions, geological and geophysical work,
day rate rentals and the costs of drilling, completing and equipping oil and gas
wells. Costs, however, associated with production and general corporate
activities are expensed in the period incurred. Interest costs related to
unproved properties and properties under development are also capitalized to oil
and gas properties. Gains or losses are recognized only upon sales or
dispositions of significant amounts of oil and gas reserves representing an
entire cost center. Proceeds from all other sales or dispositions are treated as
reductions to capitalized costs. The capitalized oil and gas property, less
accumulated depreciation, depletion and amortization and related deferred income
taxes, if any, are generally limited to an amount (the ceiling limitation) equal
to the sum of: (a) the present value of estimated future net revenues computed
by applying current prices in effect as of the balance sheet date (with
consideration of price changes only to the extent provided by contractual
arrangements) to estimated future production of proved oil and gas reserves,
less estimated future expenditures (based on current costs) to be incurred in
developing and producing the reserves using a discount factor of 10% and
assuming continuation of existing economic conditions; and (b) the cost of
investments in unevaluated properties excluded from the costs being amortized.
No ceiling write-downs have been recorded to date.


13


Oil and Gas
Reserves





The Company’s proved gas reserves as of
October 31, 2008 were developed from information provided by Glenn Robinson –
Robinson Engineering. Projecting the effects of commodity prices on production,
and timing of development expenditures includes many factors beyond the
Company’s control. The future estimates of net cash flows from the Company’s
proved reserves and their present value are based upon various assumptions about
future production levels, prices, and costs that may prove to be incorrect over
time. Any significant variance from assumptions could result in the actual
future net cash flows being materially different from the
estimates.





Derivative
Instruments





We value
derivative instruments in accordance with the interpretative guidance of SFAS
No. 133 Accounting for
Derivative Instruments and Hedging Activities, EITF 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, Accounting Principles Board Opinion No. 14 Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants, EITF 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and EITF 00-27 Application of Issue No. 98-5 to
Certain Convertible  Instruments and associated pronouncements
related to the classification and measurement of warrants and instruments with
embedded conversion features. We make certain assumptions and estimates to value
our derivative liabilities. Factors affecting these liabilities and values
include changes in the stock price and other assumptions.





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.


14


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. We have not identified any significant deficiencies or material weaknesses
in our internal controls, and therefore there were no corrective actions
taken.





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.


15


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.





Date:  June
      19, 2009
                  Kentucky
      USA Energy, Inc.By:
                  /s/Steven
      D. EversoleName:
                  Steven
      D. EversoleTitle:
                  Principal
      Executive Officer





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




16