Jayhawk Energy 10Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2013.


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

For the transition period from to

Commission File Number: 000-53311

JayHawk Energy, Inc.

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

Colorado

20-0990109

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

611 E. Sherman Avenue, Coeur d’Alene, ID 83814

(Address of principal executive offices)

(208) 667-1328

(Issuer’s Telephone Number)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. x Yes o 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes o No

Indicate by check mark whether the registrant is a large accelerated file, 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.


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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of August 14, 2013, there were 76,875,841 shares of the issuer's $.001 par value common stock issued and outstanding.

JAYHAWK ENERGY, INC.

Quarterly Report on Form 10-Q for the

Quarterly Period Ended June 30, 2013

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

Item 4. Mining Safety Disclosures

Item 5. Other Information

Item 6. Exhibits

SIGNATURES


CONTENTS

FINANCIAL STATEMENTS (unaudited):	Page

Consolidated Balance Sheets	4

Consolidated Statements of Operations	5

Consolidated Statements of Cash Flows	6

Notes to Consolidated Financial Statements	7

JAYHAWK ENERGY, INC. AND SUBSIDIARY

BALANCE SHEETS


			June 30, 2013	September 30, 2012
			(unaudited)
ASSETS

	CURRENT ASSETS
		Cash and cash equivalents	$ 47,787	$ 74,496
		Trade accounts receivable, less allowance for doubtful accounts	58,695	132,454
		Other current assets	11,105	10,189
		TOTAL CURRENT ASSETS	117,587	217,139
	PROPERTY AND EQUIPMENT
		Unproved properties, net (NOTE 4)	295,569	380,371
		Proved properties, net (NOTE 5)	344,039	509,705
		Computers, office equipment, furniture and leasehold improvements, net	680	3,781
		NET PROPERTY AND EQUIPMENT	640,288	893,857
	OTHER LONG-TERM ASSETS (NOTE 6)		151,710	101,621
TOTAL ASSETS			$ 909,585	$ 1,212,617
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
	CURRENT LIABILITIES
		Accounts payable	$ 637,659	$ 587,228
		Due to other working and royalty interests	351,733	437,202
		Other payables, interest & taxes accrued	220,343	232,917
		Conversion option derivative (NOTE 8)	556,889	109,414
		Warrant derivative liability (NOTE 8)	103,880	58,257
		Convertible debenture (NOTE 7)	1,073,687	1,164,000
		TOTAL CURRENT LIABILITIES	2,944,191	2,589,018
	LONG TERM LIABILITIES
		Asset Retirement Obligation	201,523	187,463
		TOTAL LONG TERM LIABILITIES	201,523	187,463
	TOTAL LIABILITIES		3,145,714	2,776,481
	COMMITMENTS AND CONTINGENCIES (NOTE 12)		-	-
	STOCKHOLDERS' EQUITY (DEFICIT)
		Preferred Stock, $.001 par value; 10,000,0000 shares authorized, none issued and outstanding	-	-
		Common Stock, $.001 par value; 200,000,000 shares authorized; 76,875,841 and 60,759,178 shares issued and outstanding, respectively (NOTE 9)	76,876	60,759
		Additional paid-in capital	21,654,159	21,138,419
		Accumulated deficit	(23,967,164)	(22,763,042)
		TOTAL STOCKHOLDERS' EQUITY (DEFICIT)	(2,236,129)	(1,563,864)
	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$ 909,585	$ 1,212,617

The accompanying notes are an integral part of these financial statements

JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS


			Three months ended June 30,		Nine months ended June 30,
			2013	2012	2013	2012
REVENUE
	Oil sales		$ 109,328	$ 112,359	$ 263,154	$ 436,199
	Gas sales		-	-	-	3,612
		TOTAL GROSS REVENUE	109,328	112,359	263,154	439,811

OPERATING EXPENSE
	Production costs-North Dakota		19,065	39,085	98,568	199,184
	Production costs-Kansas		3,691	4,685	8,709	28,228
	Depreciation, depletion, amortization and asset impairment expense		77,746	112,299	205,527	441,151
	(Gain) on sales of leases and equipment		-	-	(90,721)	-
	Accretion of asset retirement obligation		4,687	4,260	14,060	12,781
	General and administrative		79,369	140,622	261,638	494,945
		TOTAL OPERATING EXPENSES	184,558	300,951	497,781	1,176,289

OPERATING LOSS			(75,230)	(188,592)	(234,627)	(736,478)

OTHER INCOME (EXPENSE)
	Interest and financing costs		(29,614)	(32,401)	(153,450)	(99,104)
	Loss on extinguishment and conversion of debt		(1,518,520)	-	(1,518,520)	(1,023,417)
	Gain on change in fair value of conversion option derivative		1,131,880	314,153	670,936	872,052
	Gain (Loss) on change in fair value of warrant derivative		113,685	(123,695)	52,433	163,336
	Amortization of discount on debentures		-	-	-	(144,814)
	Other income (expense)		(21,971)	-	(20,894)	-
		TOTAL OTHER INCOME (EXPENSE)	(324,540)	158,057	(969,495)	(231,947)

LOSS BEFORE INCOME TAX			(399,770)	(30,535)	(1,204,122)	(968,425)

Provision for income taxes			-	-	-	-

NET LOSS			$ (399,770)	$ (30,535)	$ (1,204,122)	$ (968,425)

Basic and diluted loss per share			$ (0.01)	Nil	$ (0.02)	$ (0.02)

Basic and diluted weighted average number shares outstanding			71,187,057	60,194,665	64,235,138	59,618,987

The accompanying notes are an integral part of these financial statements

JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS


				For the nine months ended June 30,
				2013	2012
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net Income			$ (1,204,122)	$ (968,425)
		Depreciation, depletion and amortization		205,527	441,151
		Accretion of asset retirement obligation		14,060	12,781
		Amortization of discount on debentures		-	144,814
		Loss on initial recording of derivative		59,200	-
		Loss on extinguishment and conversion of debt		1,518,520	1,023,417
		Gain on change in fair value of conversion option derivative		(670,936)	(872,052)
		Gain on change in fair value of warrant derivative		(52,433)	(163,336)
		Loss on settlement of litigation		21,971	-
		Common stock used in consideration of charitable contribution		-	5,000
		Common stock issued in lieu of interest		70,853	60,332
		Gain on sale of leases and equipment		(90,721)	-
		Stock based compensation		9,437	9,438
	Changes in assets and liabilities:
		Trade accounts receivable		73,759	5,230
		Other current assets and other long term assets		(51,005)	925
		Accounts payable		50,431	88,259
		Due to royalty and working interest holders		(85,469)	162,088
		Other payables, interest and taxes accrued		(34,544)	29,473
			Net cash provided used by operating activities	(165,472)	(20,905)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Proceeds from sales of leases and equipment			138,763	-
	Unproved oil and gas additions			-	(1,160)
			Net cash used by investing activities	138,763	(1,160)
CASH FLOWS FROM FINANCING ACTIVITIES:
			Net cash provided by financing activities	-	-
Net decrease in cash				(26,709)	(22,065)
CASH AT BEGINNING OF PERIOD				74,496	52,912
CASH AT END OF PERIOD				$ 47,787	$ 30,847
NON-CASH FINANCING AND INVESTING ACTIVITIES:
	Common stock issued for conversion of debentures			$ 90,313	$ 115,000

The accompanying notes are an integral part of these financial statements

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

JayHawk Energy, Inc. (the Company or JayHawk) and its wholly owned subsidiary, Jayhawk Gas Transportation Company, are engaged in the acquisition, exploration, development, production and sale of natural gas, crude oil and natural gas liquids primarily from conventional reservoirs within North America. The Company incorporated in Colorado on April 5, 2004 as Bella Trading Company, Inc. During the third quarter ending June 30, 2007, the Company changed management and entered the oil and gas business, and ceased all activity in retail jewelry. On June 21, 2007, the Company changed its name to JayHawk Energy, Inc. Since then, the Company has devoted its efforts principally to the raising of capital, organizational infrastructure development, the acquisition of oil and gas properties and exploration activities. To date, the Company has acquired three properties, the Uniontown in Kansas, the Crosby in North Dakota, and Girard in Kansas. The Company also formed a wholly owned subsidiary to transport natural gas in Kansas called JayHawk Gas Transportation Corporation.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the three and nine months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the full year ending September 30, 2013.

For further information, refer to the financial statements and footnotes thereto in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, JayHawk Gas Transportation Company, after elimination of the intercompany accounts and transactions.

Going Concern

As shown in the accompanying consolidated financial statements, the Company has incurred annual operating losses since inception. As of June 30, 2013, the Company has limited financial resources with which to achieve the objectives and obtain profitability and positive cash flows. As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $23,967,164 and net loss of $1,204,122 for the nine months ended June 30, 2013, and as of that date the Company's current liabilities exceeded its current assets by $2,826,604. Achievement of the Company's objectives will be dependent upon the ability to obtain additional financing, to locate profitable energy properties and generate revenue from current and planned business operations, and control costs. The Company plans to fund its future operations by joint venturing, obtaining additional financing from investors, and attaining additional commercial production. However, there is no assurance that the Company will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists. The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implications of associated bankruptcy costs should the Company be unable to continue as a going concern.

Joint Venture Operations

In instances where the Company’s oil and gas activities are conducted jointly with others, the Company’s accounts reflect only its proportionate interest in such activities.

Use of Estimates

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Significant areas requiring the use of management assumptions and estimates relate to asset impairments, asset retirement obligations, stock-based compensation, income taxes and derivatives. Actual results may differ from these estimates and assumptions which could have a material effect on the Company's reported financial position and results of operations.

Income or Loss Per Common Share

Basic earnings per share ("EPS") is computed as net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities.

The dilutive effect of convertible and outstanding securities at June 30, 2013 and 2012, would be as follows:


		June 30, 2013	June 30, 2012
Stock options		2,040,000	2,040,000
Convertible debt		37,528,700	23,279,993
Warrants		5,833,113	4,999,113
	Total Possible Dilution	45,401,813	30,319,106

At June 30, 2013 and 2012, respectively, the effect of the Company's outstanding options and common stock equivalents would have been anti-dilutive.

Revenue and Cost Recognition

The Company uses the sales method of accounting for oil and gas revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes the Company may be entitled to, based on the Company's individual interest in the property. Periodically, imbalances between production and nomination volumes can occur for various reasons. In cases where imbalances have occurred, a production imbalance receivable or liability will be recorded when determined. Costs associated with production are expensed in the period in which they are incurred.

Cash Equivalents

The Company considers all highly liquid instruments purchased with maturity of three months or less when acquired to be cash equivalents.

Property, Plant and Equipment

The Company follows the successful effort method of accounting for oil and gas property as promulgated in Accounting Standards Codification (ASC) Topic 932, "Extractive Activities – Oil and Gas". Under this method of accounting, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells, and successful exploratory drilling costs to locate proved reserves are capitalized. Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made shortly after drilling is completed. The determination is based on a process that relies on interpretations of available geologic, geophysics and engineering data. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. If an exploratory well requires a major capital expenditure before production can begin, the cost of drilling the exploratory well will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the well has found a sufficient quantity of reserves to

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

justify its completion as a producing well if the required capital expenditure is made and ii) drilling of the additional exploratory wells is under way or firmly planned for the near future. If drilling in the area is not under way or firmly planned, or if the well has not found a commercially producible quantity of reserves, the exploratory well is assumed to be impaired and its costs are charged to expense.

The Company calculates depletion, depreciation and amortization (DD&A) of capitalized cost of proved oil properties on a field-by-field basis using the units-of-production method based upon proved reserves. In computing DD&A the Company will take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage. When applicable, the Company will apply the provisions of ASC Topic 410, "Accounting for Asset Retirement Obligations", ("ASC 410") which provides guidance on accounting for dismantlement and abandonment cost.

Support equipment and other property, plant and equipment related to oil and gas production are depreciated on a straight-line basis over their estimated useful lives which range from 5 to 35 years. Property, plant and equipment unrelated to oil and gas producing activities is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 25 years.

The Company recognizes a gain or loss on sales or retirement of property, plant and equipment and includes the gain or loss in the results of operations.

Sales of Producing and Non-producing Property

The Company accounts for the sale of a partial interest in a proved property as normal retirement. The Company accounts for the sale of a partial interest in an unproved property as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained. The Company recognizes a gain or loss for all other sales of non-producing properties and include the gain or loss in the results of operations.

Fair Value Measures

ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC 820") requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1: Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2: Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quote prices for similar assets or liabilities in active markets; quoted prices for identical assets in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3: Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Derivative Instruments

The Company has financing arrangements that contain freestanding derivative instruments or hybrid instruments that contained embedded derivative features. In accordance with accounting principles generally accepted in the United States (“GAAP”), derivative instruments and hybrid instruments are recognized as either assets or liabilities in the Company’s balance sheet and are measured at fair value with gains or losses recognized in earnings depending on the nature of the derivative or hybrid instruments. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and recognized at fair value with changes in fair value recognized as either a gain or loss in earnings if they can be reliably measured. When the fair value of embedded derivative

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

features cannot be reliably measured, the Company measures and reports the entire hybrid instrument at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using a Black Scholes model, giving consideration to all of the rights and obligations of each instrument and precluding the use of “blockage” discounts or premiums in determining the fair value of a large block of financial instruments. Fair value under these conditions does not necessarily represent fair value determined using valuation standards that give consideration to blockage discounts and other factors that may be considered by market participants in establishing fair value.

Reclassifications

Certain reclassifications have been made to the 2012 financial statements in order to conform to the 2013 presentation. These reclassifications have no effect on net loss, total assets or accumulated deficit as previously reported.

New Accounting Pronouncements

From time to time, new accounting guidance is issued by the FASB that the Company adopts as of the specified effective date. If not discussed, management believe that the impact of recently issued standards, which are not yet effective, will not have a material impact on its financial statements upon adoption.

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, and reclamation bonds approximate fair value due to their limited time to maturity or ability to immediately convert them to cash in the normal course. The carrying values of convertible debentures is net of a discount and does not reflect fair value of similar instruments.

The table below sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2013 and September 30, 2012, respectively, and the fair value calculation input hierarchy that the Company has determined has applied to each asset and liability category.


		June 30, 2013	September 30, 2012	Input Hierarchy level
Assets:
	Cash and cash equivalents	$ 47,787	$ 74,496	Level 1
	Reclamation bonds	150,210	100,121	Level 1
Liabilities:
	Conversion option derivatives	$ 556,889	$ 109,414	Level 2
	Warrant derivative liability	103,880	58,257	Level 2

NOTE 4 - UNPROVED PROPERTIES AND IMPAIRMENT

The total of the Company's investment in unproved properties at June 30, 2013 and September 30, 2012, consists of the following capitalized costs respectively:


			June 30, 2013	September 30, 2012
UNPROVED AND DEVELOPED PROPERTIES
Kansas Girard Project
	Field equipment - Jayhawk Gas Transport Company		$ 2,605,871	$ 2,605,871
	Field equipment - Girard		579,027	587,091
	Capitalized drilling costs		662,899	662,899
		Subtotal	3,847,797	3,855,861
	Less impairments		(2,432,087)	(2,435,637)
	Less accumulated DD&A		(1,160,466)	(1,127,463)
Unproved and developed properties, net			$ 255,244	$ 292,761

UNPROVED AND UNDEVELOPED PROPERTIES
Kansas Girard Project			1,421,199	1,421,199

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013


	Less impairments	(839,363)	(839,363)
	Less accumulated amortization	(581,836)	(581,836)
Girard Project, net		-	-

North Dakota Project, net		40,325	87,610

Unproved and developed properties, net		$ 40,325	$ 87,610

TOTAL UNPROVED PROPERTIES		$ 295,569	$ 380,371

Impairment of Girard Project: In 2012, management made a review of its Kansas Girard project. Management's outlook for the U.S. natural gas prices indicated it is unlikely that sufficient U.S. demand for natural gas would materialize in the foreseeable future. Internal cash flow estimates prepared by management of the Company did not prove significant fair value exists in the properties. Therefore, the undeveloped and unproved Kansas natural gas properties and equipment have had impairment losses recorded, to the extent net book value exceeds estimated salvage value of such equipment. The Company also recognized impairment to its unproved and undeveloped properties in Girard, Kansas. Thus, the Company recognized impairment loss of $3,275,000 on the Girard project for the year ended September 30, 2012.

During the nine months ended June 30, 2013, the Company sold certain field equipment with a net book value of $756 for $38,000 and, after associated cost of sales and commissions, recognized a gain of $36,744 on the transaction.

During the nine months ended June 30, 2013, the Company sold certain leases of unproved oil and gas properties with a cost of $47,285 for $114,798 and, after associated cost of sales and commissions, recognized a gain of $53,977 on the transaction.

NOTE 5 - PROVED PROPERTIES AND IMPAIRMENT

Net capitalized costs are comprised of the following; detailed by property:


			June 30, 2013	September 30, 2012
Crosby, North Dakota Properties
	Proved reserves		$ 2,357,753	$ 2,357,753
	Field equipment		1,200,247	1,200,247
	Capitalized drilling costs		416,429	416,429
		Subtotal	3,974,429	3,974,429
	Less impairments		(1,092,302)	(1,092,302)
	Less accumulated DD&A		(2,538,088)	(2,372,422)
Total Proved Oil and Gas Properties			$ 344,039	$ 509,705

For the year ended September 30, 2012, the Company performed an analysis to determine whether the carrying amounts in its financial statements exceeded the net present value of the reserve estimates for the Crosby, North Dakota property. Management determined that the net value reflected in the financial statements did not exceed the net discounted present value of the reserves estimated by the independent reserve engineer.

NOTE 6 – OTHER LONG-TERM ASSETS

Other assets consist of various deposits and reclamation bonds. Detail is disclosed in the following table:


		June 30, 2013	September 30, 2012
Rental security deposit		$ 1,500	$ 1,500
Reclamation bonds		150,210	100,121
	TOTAL	$ 151,710	$ 101,621

NOTE 7 - CONVERTIBLE DEBENTURES

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

During the year ended September 30, 2010, the Company issued, pursuant to a securities purchase agreement, 10% convertible debentures with a face value of $1,500,000. All of the debentures had a two year maturity and were issued with attached common stock purchase warrants. The effective interest rate on the debentures was, and is, 10% per annum. The debentures were secured by all assets of the Company except those specifically excluded in the agreement which include all Kansas properties and related assets.

During the year ended September 30, 2011, the Company entered into a Securities Purchase Agreement with certain institutional investors to purchase $500,000 of Secured Convertible Debentures. The debentures provide for interest to be paid quarterly, at the rate of 10% per annum, and are due two years from the issuance date. The debentures are secured by all assets of the Company except those specifically excluded in the agreement which include all Kansas properties and related assets.

The debentures are convertible at any time after the original issue date into a number of shares of the registrant’s common stock, determined by dividing the amount to be converted by an initial conversion price of $0.18 per share. In addition to the debentures the purchasers were issued an aggregate of 2,833,113 common share purchase warrants, each having a term of 42 months, expiring April of 2014, and giving the purchasers the right to purchase the Company’s common shares at an initial exercise price of $0.18 per share. Subsequent to the initial issue date, the initial conversion price of $0.18 per share was amended to $0.12 per share based on provisions in the agreements related to equity issuances and issuance of additional convertible debentures during the year ended September 30, 2011.

The modified conversion price of $0.12 per share was amended on or about January 9, 2012, to $0.05 per share based on provisions in the agreements related to equity issuances of additional convertible shares,

The debentures all contain anti-dilution provisions which call for the debt conversion and warrant exercise prices be reduced based on future issues of debt or equity with more favorable provisions. Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting. See Note 8.

Based upon the fair values as of the original agreement dates of the December 2009 and April 2010 debentures, $1,500,000 was allocated to the common stock purchase warrants and the conversion features resulting in a discount on the debt. Giving effect to the amortization of the discount and the debenture currently being in default, the discount was fully amortized during the year ended September 30, 2012.

Based upon the fair values as of the original agreement dates of the October 2010 debentures, $500,000 was allocated to the common stock purchase warrants and the conversion features resulting in a discount on the debt. Giving effect to the amortization of the discount and the conversion of $115,000 in principal conversion and the debenture being in default, the discount was fully amortized during the year ended September 30, 2012.

In all three cases, the entire face amount of the debt issued was allocated to discount, and was amortized over the respective term of the debt.

On April 23, 2013, the Company entered into a Partial Reset of Conversion Price agreement (the “Partial Reset”) with certain institutional investors (the “Investors”) who are holders of convertible debentures of the Company. Under the terms of the Partial Reset, the Investors and the Company agreed to the following terms:

Investors have the right to convert, into common stock of the Company, up to twenty five percent (25%) of the principal amount outstanding, as of April 12, 2013, of each Debenture held by each Investor, at a Conversion Price equal to $0.01 per share;

Each Investor shall convert up to 25% of the amount of the outstanding principal amount, as of April 12, 2013, of each Debenture (the “Conversion Amount”), provided that such conversion will not cause the Investor to own more than 9.99% of the outstanding shares of the Company’s common stock. If such conversion would result in an Investor owning more than 9.99% of the outstanding shares of the Company’s common stock then each such Investor shall only convert so much of the Conversion Amount as would result in the Investor owning no more than 9.99% of the outstanding shares of the Company’s common stock. Each such Investor shall thereafter, as soon as practicably possible, continue to convert so much of the Conversion Amount as possible, without causing the Investor to beneficially own more than 9.99% of the outstanding shares of the Company’s common stock, until such time as each Investor has converted their full Conversion Amount;

The Maturity Dates of all outstanding Debentures shall be extended to December 31, 2013;

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

The Expiration Date of all of the remaining 2,000,000 outstanding share purchase warrants issued pursuant to the December 2009 and April 2010 Transactions shall be extended to July 21, 2014; and

The Expiration Date of all of the remaining 2,833,113 outstanding Warrants issued pursuant to the October 2010 Transaction, shall be extended to January 26, 2015.

On or about May 3, 2013, three (3) investors converted $90,313 in convertible debentures at $0.01 per share. Pursuant to these conversions, the Company issued 9,031,400 shares of its common stock. The Company also issued 7,085,263 shares of stock at $0.01 per share in payment of interest owed pursuant to the debentures.

An expense is recognized when convertible debt is converted to equity securities of the debtor to the extent that the fair value of the securities and other consideration transferred exceeds the fair value of securities issuable pursuant to the original conversion terms. Management made an assessment of the modified terms of the conversion and determined that the fair value of the 9,031,400 shares on the date of the issuance was $514,784 and exceeded the value of the shares issuable pursuant to the amended agreement of $451,566 by $63,218. This amount was charged to debt conversion expense and is included in Gain (Loss) on extinguishment on the Consolidated Statements of Operations.

NOTE 8 - DERIVATIVE LIABILITIES

As discussed in Note 7, the Company entered into three separate issuances of convertible debentures, dated December 14, 2009, April 23, 2010 and October 20, 2010, which contained provisions allowing holders of the debentures to convert outstanding debt to shares of the Company's common stock. The debentures contain anti-dilution provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions. Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting. As such, management has valued them at fair value at the date of issuance and bifurcated the option from the host instruments.

The debentures are convertible at any time after the original issue date into a number of shares of the Company’s common stock, determined by dividing the amount to be converted by conversion prices of $0.05 and $0.01 per share (See Note 7) at June 30, 2013. Additionally common share purchase warrants were issued, expiring 42 months from the original issue date and permit the holders two exercisable options. The warrants were exercisable by purchase of the Company’s common stock for cash, or alternatively, in a cashless exercise, the number of shares being determined in accordance with a predetermined formula based on the Company’s then current stock price.

Conversion option derivative

For the nine months ended June 30, 2013 and year ended September 30, 2012, the fair value of conversion options was estimated at the periods end and amendment date using the Black-Scholes option pricing model using the following weighted average assumptions and the associated revaluation range of assumptions on designated event dates, including end of quarter revaluations:


	June 30, 2013	September 30, 2012
Risk-free interest rate	0.05% to 0.11%	0.09% to 0.17%
Expected term	.25 to .50 years	.25 years to 1 year
Expected volatility	277.8% to 375.2%	140.3% to 248.3%
Fair value of conversion option derivative units	$.0127 to $0.047	$0.005

Below is detail of the change in conversion option liability balance for the three months ended June 30, 2013 and June 30, 2012, respectively.

Three months ended

June 30, 2013

June 30, 2012

Beginning balance

$ 570,358

$ 459,684

Change in value of conversion liability resulting

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013


from Partial Reset (Note 7)			1,542,882	(38,750)
Option units converted			(424,471)	-
Net change in fair value of conversion option liability			(1,131,880)	(115,152)	Ending balance
	$ 556,889	$ 305,782

Below is detail of the change in conversion option liability balance for the nine months ended June 30, 2013 and June 30, 2012, respectively.


		Nine months ended
		June 30, 2013	June 30, 2012

Beginning balance		$ 109,414	$ 286,498
	Change in value of conversion liability resulting from Partial Reset (Note 7)	1,542,882	763,718
	Option units converted	(424,471)	(71,383)
	Net change in fair value of conversion option liability	(670,936)	(673,051)
Ending balance		$ 556,889	$ 305,782


Conversion option units outstanding		37,528,700	23,279,993
	Weighted average fair value per unit	$ 0.0148	$ 0.0131
		$ 556,889	$ 305,782

Warrant derivative

At June 30, 2013 and the year ended September 30, 2012, the fair value of warrants was estimated using the Black-Scholes option pricing model using the following weighted average assumptions and the associated revaluation range of assumptions on designated event dates over the past two years:


	June 30, 2013	September 30, 2012
Risk-free interest rate	0.07% to 0.15%	0.11% to 0.33%
Expected term	6 months to 1 year	6 months to 2 years
Expected volatility	191.2% to 330.72%	148.0% to 244.3%
Per unit value of warrant derivative liability	$0.0202 to $0.0391	$0.012

As discussed in Note 10, during the first quarter, 1,000,000 warrants were issued to an investment banking advisor for services rendered. The warrants contained anti-dilution provisions which call for the warrant exercise price to be reduced based on future issues of debt or equity with more favorable provisions. Therefore, based on current guidance, the warrants were treated as derivatives. The warrants were valued at $59,200 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 0.81%, volatility of 158.4%, exercise price of $0.06, current market price of $0.06 per share and an expected life of 5 years. The warrants expire February 15, 2017.

Below is detail of the change in warrant derivative liability balance for three months ended June 30, 2013 and June 30, 2012, respectively.


		Three months ended
		June 30, 2013	June 30, 2012

Beginning balance		$ 178,709	$ 172,187
	Initial fair value of warrant derivative	-	-
	Revaluation of warrant derivatives resulting from Partial Reset (Note 7)	38,856	-

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013


	Net change in fair value of warrant derivative liability	(113,685)	(35,576)
Ending balance		$ 103,880	$ 136,611

Below is detail of the change in warrant derivative liability balance for the nine months ended June 30, 2013 and June 30, 2012, respectively.


		Nine months ended
		June 30, 2013	June 30, 2012

Beginning balance		$ 58,257	$ 299,947
	Initial fair value of warrant derivative	59,200
	Revaluation of warrant derivatives resulting from Partial Reset (Note 7)	38,856	159,271
	Net change in fair value of warrant derivative liability	(52,433)	(322,607)
Ending balance		$ 103,880	$ 136,611


Warrant shares outstanding		5,833,113	4,999,113
	Weighted average fair value per warrant	$ 0.0178	$ 0.0273
		$ 103,880	$ 136,611

NOTE 9 - COMMON STOCK

Nine months ended June 30, 2013

On May 3, 2013, the Company issued 7,085,263 shares of common stock in lieu of paying interest with cash, to holders of convertible debentures described in Note 7. The interest totaled $70,853 and was issued at $0.01 per share.

On May 3, 2013, the Company issued 9,031,400 shares of common stock to holders of 10% convertible debentures within the terms thereof referenced in Note 7 who elected to convert the principal amount of $90,313. The shares were all valued at $0.01 per share per the terms of the modification referenced in Note 7.

Fiscal Year End September 30, 2012

Per the terms of the convertible debentures (Note 7), holders of the debentures have the option to receive shares of common stock issued in lieu of cash for accrued interest at 10% per annum through the date of conversion. The table below details common shares issued for conversion of debentures and accrued interest during the year ended September 30, 2012:


Date	Debt Converted	Conversion price per share	Shares Issued	Accrued Interest	Fair Market Value per share	Shares Issued
October 4, 2011	$ -	$ -	-	$ 5,835	$ 0.07	82,660
October 20, 2011	60,000	$ 0.12	500,000	607	$ 0.07	9,141
November 29, 2011	55,000	$ 0.12	458,333	932	$ 0.08	12,183
February 16, 2012	-		-	25,643	$ 0.07	469,446
April 16, 2012	-		-	20,292	$ 0.05	400,545
July 11, 2012	-		-	20,292	$ 0.04	507,292
	$ 115,000		958,333	$ 73,601		1,481,267

NOTE 10 - BROKER AND SHARE PURCHASE WARRANTS

A summary of the Company's share purchase and broker warrants outstanding at June 30, 2013 is presented as follows:

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013


			Broker Warrants	Exercise Price		Share Purchase Warrants	Exercise Price

Balance outstanding, September 30, 2011			221,335	$ 0.12	¹	4,777,778	$ 0.12	¹
		Forfeited	-	-		-
		Exercised	-	-		-
		Granted	-	-		-
Balance outstanding, September 30, 2012			221,335	$ 0.05	¹	4,777,778	$ 0.05	¹
		Granted	-	-		-
		Exercised	(166,000)	$ 0.05		-
		Granted	1,000,000	$ 0.06		-
Balance outstanding, June 30, 2013			1,055,335	$ 0.05	²	4,777,778	$ 0.05	¹

¹	Provisions allow for a reduction in exercise price based on equity issuances subsequent to warrant issuance. See Note 8 and 9
²	Weighted average price

The exercise price and expiration dates of the broker and share purchase warrants as revised by the Partial Reset (Note 7) is presented as follows:


Holder		Warrants outstanding	Exercise Price	Expiration date

Share purchase warrants		2,000,000	$0.05	July 21, 2014
Share purchase warrants		2,777,778	$0.05	January 26, 2015
	Total share purchase warrants	4,777,778

Broker warrants		55,335	$0.05	January 26, 2015
Broker warrants		1,000,000	$0.06	February 15, 2017
	Total broker warrants	1,055,335

NOTE 11 - RELATED PARTY TRANSACTIONS

On December 1, 2011, the Company entered into a four year lease with Marlin Property Management, LLC, an entity owned by the spouse of the Company's President, CEO and member of the board of directors, for $2,500 per month for office space in Coeur d'Alene, Idaho, at market rate on terms acceptable to the Company. For the three months and nine months ended June 30, 2013 and 2012, $7,500 and $7,500, and $22,500 and $22,500, respectively, were due under the terms of the lease.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

On December 1, 2011, the Company entered into an office space lease, with a term of four years, at the fixed monthly rental amount of $2,500. Accordingly, the Company's commitment to make these lease payments for each successive year is $30,000.

The Company is obligated to pay royalties to holders of oil and natural gas interests in both North Dakota and Kansas operations. The

Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

Company also is obligated to pay working interest holders a pro-rata portion of revenue in oil operations net of shared operating expenses. The amounts are based on monthly oil and natural gas sales and are charged monthly net of oil and gas revenue and recognized as "Due to royalty and working interest holders" on the Company's balance sheet.

NOTE 13– SUBSEQUENT EVENTS

On March 7, 2012, Gross Capital, Inc. (“Gross”) filed suit against the Company (Civil Action No. 4:12-cv-00714) in the United States District Court for the Southern District of Texas, Houston Division (the “Gross Lawsuit”) alleging breach of provisions of two contracts entered into between the Company and Gross. The Gross lawsuit requested monetary relief in excess of $132,000 plus attorneys, fees, interest and costs. Prior to the filing of the Gross Lawsuit the Company had offered to settle the dispute for $42,000.

On July 16, 2013, the Company and Gross entered into a Mediated Settlement Agreement (the “Agreement”). Under the terms of the Agreement, the Company has agreed to pay a total of $60,000 (the “Settlement Amount”) in four monthly installments of $15,000 each. The first payment of the Settlement Amount is due July 19, 2013 with each additional payment due on the 19^th day of each successive month with the final payment being due October 19, 2013. Upon the full payment of the Settlement Amount, the Gross Lawsuit will be dismissed with prejudice.

As a result of the Settlement Agreement, at June 30, 2013 the Company recognized an additional charge of $21, 971 above the amount that had previously been accrued. This loss on litigation settlement was charged to other expense on the Consolidated Statement of Operations.

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

Results of Operations for the three months ended June 30, 2013 and 2012

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and supplemental information presented in our Annual Report for the period ending September 30, 2012, on Form 10-K, and the Forms 8-K and Forms 10-Q issued in the periods subsequent to September 30, 2012. Certain sections of Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting our business. These statements typically contain words such as "anticipates," "believes," "estimates," "expects," "plans," "probable," "should," "could," "would," or similar words indicating that future outcomes are uncertain. In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not all such factors, which could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Oil and Gas Properties

During the three months ended June 30, 2013, the Crosby area experienced adverse weather conditions which limited access to the Company’s wells. Mechanical difficulties and limited availability of oil field service companies also contributed to no production in the month of March and limited production in February.

Revenues –For the three months ending June 30, 2013 and 2012, revenues reported as JayHawk's net working interest were $109,328 and $112,359 respectively. The comparative volume of oil and gas delivered and the average prices received during each of the two respective three month periods of 2013 and 2012, are disclosed in the following table:


		Volumes		Average Prices		Gross Revenue
		2013	2012	2013	2012	2013	2012
Oil Sales (in barrels)		2,668	3,302	$ 75.24	$ 67.35	$ 200,718	$ 222,382
Gas Sales (in thousand cubic feet)		-	-	-	-	-	-
Total Gross Receipts						200,718	222,382
	Less:working & royalty interests					(89,286)	(99,083)
	Less:severance taxes					(2,104)	(10,940)
Net Revenues to JayHawk						$ 109,328	$ 112,359

Oil Revenues –As commented in Note 2 of the Notes to Consolidated Financial Statements above, the Company recognizes revenues only to the extent of its net working interest, which is the remainder after deduction of the outside working and royalty interests.

For the three month period ending June 30, 2013, JayHawk sold a gross 2,668 barrels (Bbls). Field prices (after delivery charges) fluctuated from a low of $69.93 to a high of $79.50 during the three month period ending June 30, 2013. This production was sold at average prices of $75.24/Bbl. During the comparable period ending June 30, 2012 the quarterly sales volumes were 3,302 Bbls. Field prices (after delivery charges) fluctuated from a low of $63.78 to a high of $69.79/Bbl. Average prices received per barrel of crude oil were $67.35 for the three months ending June 30, 2012.

Volumes of oil delivered during the three month period ending June 30, 2013 decreased by 634 barrels (-19%) over the same timeframe in 2012. The Company operated three of five wells in the three months ended June 30, 2013 for an aggregate of 173 production days compared to 282 days producing for the three months ended June 30, 2012.

The Company encountered mechanical issues on its Burner well which caused no production from that site for the three months ended June 30, 2013. The Kearney well was adversely affected by both mechanical and weather-related accessibility issues and produced no oil for the quarter. The Erickson well also encountered mechanical issues during the quarter and only produced 14 of 91 days available (15%). The Burner and Erickson wells have subsequently returned to production as of the date of this report. Barring unforeseen circumstances, managements expects production to increase during the fiscal quarter ending September 30, 2013 and, coupled with strong oil prices, anticipates a revenue increase in the fourth quarter. Management does not expect the Kearney well to produce in the near future due to ongoing access issues due to high water.

Gas Revenues – Prices received for gas production have improved. As such, the Company is preparing to resume production at its Kansas location in anticipation of natural gas prices continuing to strengthen.

The comparative volume of oil and gas delivered and the average prices received during each of the two respective nine month periods ended June 30, 2013 and 2012, are disclosed in the following table:


		Volumes		Average Prices		Gross Revenue
		2013	2012	2013	2012	2013	2012
Oil Sales (in barrels)		6,809	11,269	$ 72.36	$ 76.50	$ 492,709	$ 862,088
Gas Sales (in thousand cubic feet)		-	1,810	-	$ 3.16	-	5,718
Total Gross Receipts						492,709	867,806
	Less:working & royalty interests					(218,613)	(400,909)
	Less:severance taxes					(10,942)	(27,086)
Net Revenues to JayHawk						$ 263,154	$ 439,811

Production and Operating Expenses (Income) –Total operating expenses for the three months ended June 30, 2013 and 2012 were $184,558 and $300,951 respectively. The expenses are segregated as follows:


		Three months ended June 30, 2013				Three months ended June 30, 2012
		Crosby, ND	Girard, KS	G&A	Total	Total
Direct Regional Costs		$ 19,065	$ 3,691	$ -	$ 22,756	$ 43,770
Depreciation, depletion and amortization		53,712	23,170	864	77,746	112,299
(Gain) loss on sales of equipment		-	-	-		-
General and administrative		(1,308)	-	80,677	79,369	140,622
Accretion of asset retirement obligation		1,973	2,714	-	4,687	4,260
	Total	$ 73,442	$ 29,575	$ 81,541	$ 184,558	$ 300,951

Total production expenses for the North Dakota oil operations were $19,065 (17.4% of oil revenue) for the three months ended June 30, 2013 compared to $39,085 (34.8% of oil revenue) for the three months ended June 30, 2012. These expenses are 17.4% lower as a percentage of revenue than incurred in the comparative periods ending June 30, 2012.

Total operating expenses for the nine months ended June 30, 2013 and 2012 were $497,781 and $1,726,289 respectively. The expenses are segregated as follows:


		Nine months ended June 30, 2013				Nine months ended June 30, 2012
		Crosby, ND	Girard, KS	G&A	Total	Total
Direct Regional Costs		$ 98,568	$ 8,709	$ -	$ 107,277	$ 227,412
Depreciation, depletion and amortization		165,666	36,760	3,101	205,527	441,151
(Gain) loss on sales of equipment		(53,977)	(36,744)	-	(90,721)	-
General and administrative		-	-	261,638	261,638	494,945
Accretion of asset retirement obligation		5,918	8,142	-	14,060	12,781
	Total	$ 216,175	$ 16,867	$ 264,739	$ 497,781	$ 1,176,289

Production Expenses –include direct costs and expenses such as field labor, fuel, power, well repair and maintenance, and saltwater disposal. The direct production expenses are reported net of amounts charged to our non-operating partners for their working interest share of applicable costs and expenses.

General and Administrative Expenses –include the cost of head office administration and the salaries and wages paid senior management and administrative staff. A comparative analysis of the general and administrative expense for the three month period ending June 30, 2013 and 2012 is provided in the following table:


	Three months ended June 30,
	2013	2012

Compensation and payroll taxes	$ 28,861	$ 57,329
Stock option expense	3,146	3,146


Legal, professional and consulting fees		4,125	45,320
Audit and public company expense		12,930	6,803
Insurance		17,577	13,843
Office and other corporate general and administrative		12,729	14,181
	Total	$ 79,368	$ 140,622

Total general and administrative expense has decreased $61,254 (43.6%) during the three month period ending June 30, 2013 compared to the prior year. Compensation and payroll expense has decreased $28,468, attributable to consolidation of duties and restructuring of Company management. The Company’s Chief Financial Officer is currently maintaining the President and Chief Executive Officer roles on an interim basis. Legal, professional and consulting fees decreased $41,195 (90.9%) for the three months ended June 30, 2013 compared to the prior year.

All other general and administrative expense of $12,729 for the three months ended June 30, 2013, was a reduction of $1,452 from the same period ending June 30, 2012. Insurance expense increased $3,734 over the prior year due to rise in annual premium costs.

Management believes general and administrative expenses have stabilized and expects to maintain the current overhead structure for the foreseeable future.

The Company continues to aggressively explore opportunities to increase shareholder value by seeking merger candidates, joint venture partners or interested parties in sale or trade of business operations.

A comparative analysis of the general and administrative expense for the nine month period ending June 30, 2013 and 2012 is provided in the following table:


		Nine months ended June 30,
		2013	2012

Compensation and payroll taxes		$ 84,604	$ 164,318
Stock option expense		9,437	9,438
Legal, professional and consulting fees		18,488	96,207
Audit and public company expense		69,113	131,689
Insurance		45,121	40,761
Office and other corporate general and administrative		34,875	52,532
	Total	$ 261,638	$ 494,945

Other income (expense) – for the three month period ending June 30, 2013 and 2012, are detailed below. Interest expense, financing costs and the non-cash costs of debt conversion and derivatives are more fully discussed in Note 8 to the Notes to the Financial Statements.


		Three months ended June 30,
		2013	2012

Net interest and financing costs		$ (29,614)	$ (32,401)
Gain (loss) on extinguishment of debt		(1,518,520)	-
Gain (loss) on change in fair value of conversion option derivative		1,131,880	314,153
Gain (loss) on change in fair value of warrant derivative		113,685	(123,695)
Amortization of discount on debentures		-	-
Loss on settlement of litigation		(21,971)	-
All other miscellaneous income (expense)		-	-
	Total	$ (324,540)	$ 158,057

On or about May 3, 2013, the Company modified the terms of its debentures (Notes 7 and 8) and warrants (Note 8), changing the conversion and exercise price from $0.05 to $0.01 per share for up to 25% of the outstanding debenture balance. The gain on conversion option derivative of $1,131,880 and gain on change in fair value of warrant derivative of $113,685 was offset by a loss on extinguishment of debt of $1,518,520, for a net loss of $272,955.

A comparative analysis of other income (expense) for the nine month period ending June 30, 2013 and 2012 is provided in the following table:


		Nine months ended June 30,
		2013	2012

Net interest and financing costs		$ (153,450)	$ (99,104)
Gain (loss) on extinguishment of debt		(1,518,520)	(1,023,417)
Gain (loss) on change in fair value of conversion option derivative		670,936	872,052
Gain (loss) on change in fair value of warrant derivative		52,433	163,336
Amortization of discount on debentures		-	(144,814)
Loss on settlement of litigation		(21,971)
All other miscellaneous (income) & expense		1,077	-
	Total	$ (969,495)	$ (231,947)

Cash Flows, Liquidity and Capital Resources

As of June 30, 2013 current assets totaled $117,587 consisting of cash, $47,787, accounts receivable of $58,695 and prepaid insurance expense of $11,105. At the same time the Company's current liabilities were $2,944,191, of which $1,073,687 are debentures. With maturity of less than one year. Consequently, management has reclassified the debt to current liabilities. This working capital shortage of $2,804,633 impairs the Company's ability to continue operating as a going concern. Future success and independence will be dependent upon the Company's ability to obtain sufficient additional financing and upon achieving profitable future operations. At this time there is no assurance that the Company will be able to achieve these objectives. Management is aggressively seeking joint venture partners, merger, acquisition or other means of financing to grow the Company.

Net cash used by operating activitiestotaled $165,472 for the nine months ending June 30, 2013, compared to $20,905 used by operating activities for the six month period ending June 30, 2012.

Net cash provided by investing activities totaled $138,763 during the nine months ending June 30, 2013 as compared to ($1,160) in the same period ending June 30, 2012. The Company divested of lease holdings which it was unable to develop to production due to its present lack of available capital. The Company utilized proceeds for ongoing operations and reducing balances due to royalty and working interest holders.

Net cash used by financing activities totaled $0 during the nine months ending June 30, 2013 and June 30, 2012.

The net change in cash is the sum of cash used in operating activities and provided by investing and financing activities, or a net decrease of $26,709 which is an decrease in the Company's cash balance of $74,496 existing at September 30, 2012, to the cash balance at June 30, 2013 of $47,787.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have no investments, trading or non-trading, that would be sensitive to market risk.

Item 4. Controls and Procedures

(a)Evaluation of disclosure controls and procedures - We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon the evaluation of those controls and procedures performed as of June 30, 2013, the date of this report, our chief executive officer concluded that our disclosure controls and procedures were effective to allow timely decisions regarding required disclosure.

(b)Changes in internal controls – Our management, including the CEO and CFO, identified no change in our internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On March 7, 2012, Gross Capital, Inc. (“Gross”) filed suit against the Company (Civil Action No. 4:12-cv-00714) in the United States District Court for the Southern District of Texas, Houston Division (the “Gross Lawsuit”). Gross formerly provided the Company with investor relations and other consulting services. The Gross Lawsuit alleges the Company breached two separate contracts between Gross and JayHawk. The suit requests relief in the form of money damages, including attorneys’ fees and costs. On March 30, 2012 the Company filed its answer (defenses) to the original complaint, wherein it denied all claims, and filed counterclaims against Gross for breach of contract, fraud and fraud in the inducement. The Company also requested the Gross Lawsuit be transferred to be heard in the state of Idaho. On February 21, 2013 an order was entered in the U.S. District Court for the Southern District of Texas transferring the Gross Lawsuit to the United States District Court for the District of Idaho (the “Transfer Order”). Pursuant to the Transfer Order the Gross Lawsuit will now be heard in Idaho.

No director, officer or affiliate of JayHawk Energy, Inc., and no owner of record or beneficial owner of more than 5% of our securities or any associate of any such director, officer or security holder is a party adverse to JayHawk Energy, Inc. or has a material interest adverse to JayHawk Energy, Inc. in reference to pending litigation.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Form 10-K for the year ended September 30, 2012 which was filed with the SEC on January 9, 2013.

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

None.

Item 3. Defaults Upon Senior Securities

Item 4. Mining Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.1 Rule 13a - 14(a) / 15d - 14(a) Certification of CEO

32.1 Section 1350 Certification of CEO

101.INS* XBL Instance

101.SCH* XBRL Taxonomy Extension Schema

101.CAL* XBRL Taxnomy Extension Calculation

101.DEF* XBRL Taxonomy Extension Definition

101.LAB* XBRL Taxonomy Extension Label

101.PRE* XBRL Taxonomy Extension Presentation

SIGNATURES

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


	JayHawk Energy, Inc., a Colorado corporation

Date: August 15, 2013	By:	/s/ Kelly J. Stopher
		Kelly J. Stopher Principal Executive Officer, President and Chief Executive Officer

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Readability	8th grade Avg

Jayhawk Energy (JYHW) Inactive 10-Q2013 Q3 Quarterly report

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