Jayhawk Energy (JYHW) 10-Q 2009 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, 2009.

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.)

6240 E. Seltice Way, Suite C, Post Falls, Idaho 83854

(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 (§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).  xYes   oNo

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 06, 2009, there were 44,479,496 shares of the issuer's $.001 par value common stock issued and outstanding.

1

JAYHAWK ENERGY, INC.

Quarterly Report on Form 10-Q for the

Quarterly Period Ending June 30, 2009

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	3
Balance Sheets:
June 30, 2009 (Unaudited) and September 30, 2008 (Audited)	3
Statements of Operations:
Three and Nine Months Ended June 30, 2009 and 2008 (Unaudited)	4
Statements of Cash Flows:
Nine Months Ended June 30, 2009 and 2008 (Unaudited)	5
Notes to Unaudited Financial Statements:
June 30, 2009	6
Item 2. Management Discussion and Analysis	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
Item 4. Controls and Procedures	17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3. Defaults Upon Senior Securities	18
Item 4. Submission of Matters to a Vote of Security Holders	18
Item 5. Other Information	18
Item 6. Exhibits	18
Signatures	19

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 JAYHAWK ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

	As at June 30, 2009 (Unaudited)			As at September 30, 2008 (Audited)
Assets
Cash & cash equivalents	$	90,684		$	82,683
Trade accounts receivable, less allowance for doubtful accounts of $119,763
at June 30, 2009 and $95,810 at September 30, 2008 (Note 3)		301,078			413,862
Other current assets net of allowance for doubtful collections of $9,500		4,961			16,027
Total Current Assets		396,723			512,572
Plant, Property and Equipment
Unproved oil and gas properties, net of allowance for impairment of
of $1,474,000 at June 30, 2009 and September 30, 2008 and
accumulated amortization of $332,961 and $114,535, respectively (Note 4)		2,338,643			2,555,910
Proved and developed oil and gas properties net of accumulated depreciation,
depletion and amortization of $1,238,890 at June 30, 2009
and $613,159 at September 30, 2008 (Note 5)		6,383,912			6,991,043
Computers, office equipment, furniture and leasehold improvements, net of
accumulated depreciation of $10,309 at June 30, 2009 and $1,335 at
September 30, 2008.		34,603			32,365
Total Net Plant, Property and Equipment		8,757,158			9,579,318
Other Long-Term Assets		74,529			247,586
Total Assets	$	9,228,410		$	10,339,476
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	326,894		$	381,197
Working and royalty interests payable		123,605			106,003
Deferred compensation		30,000		─
Accrued Taxes, Interest & Other Liabilities		226,066			147,100
Convertible promissory note (Note 6)		767,204			472,038
Total current liabilities		1,473,769			1,106,338
Asset Retirement Obligation (Note 7)		137,643			128,040
Total Liabilities		1,611,412			1,234,378
Stockholders' Equity
Common Stock, $.001 par value; 200,000,000 shares authorized; shares issued
and outstanding 44,136,704 at June 30, 2009 and 42,810,929 at September 30, 2009 (Note 8).		44,137			42,812
Additional paid-in capital		12,741,401			12,400,782
Stock issuance obligation		-			47,559
Accumulated deficit		(5,168,540	)		(3,386,055	)
Total Stockholders' Equity		7,616,998			9,105,098
Total Liabilities and Equity	$	9,228,410		$	10,339,476

See Accompanying Notes to the Consolidated Financial Statements

3

JAYHAWK ENERGY, INC.

CONSOLIDATED STATEMENTS OF  OPERATIONS

And Comprehensive Loss (Unaudited)

	Three months ended						Nine months ended
	June 30,						June 30,
	2009			2008			2009			2008
Revenue
Oil Sales	$	144,257		$	430,022		$	295,214		$	688,579
Gas Sales		25,150		22,293				88,064		22,293
Total Net Revenues	$	169,407		$	452,315		$	383,278		$	710,872
Costs and Operating Expenses
Exploration and production expenses		87,978			272,494			287,514			373,296
Depreciation, depletion and amortization		340,371			333,892			853,132			483,145
General and administration expenses		131,745			509,067			481,646			858,437
Other (income) and expense		205,184			( 1,594	)		543,471			(9,253)
Total Costs and Operating Expenses		765,278			1,113,859			2,165,763			1,705,625
Loss from continuing operations before income tax expense	$	(595,871	)	$	( 661,544	)	$	(1,782,485	)	$	(994,753	)
			��
Income tax expense	─			─			─			─
Deferred tax benefit	─			─			─			─
Net loss and total comprehensive loss	$	(595,871	)	$	(661,544	)	$	(1,782,485	)	$	(994,753	)
Basic and diluted loss per share	$	(0.01	)	$	( 0.02	)	$	(0.04	)	$	(0.03	)
Basic and diluted weighted average shares outstanding		44,060,385			41,694,045			43,474,923			39,177,448

See Accompanying Notes to the Consolidated Financial Statements

4

JAYHAWK ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 For the Nine Months Ended June 30, 2009 and 2008

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations	$	(1,782,485	)	$	(994,753	)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation, depletion and amortization		853,132			483,145
Amortization of discount on convertible note payable		174,857			-
Accretion of convertible promissory note		295,166			-
Accretion in annual asset retirement obligation		9,603			-
Common stock issued in consideration for services		94,385			58,000
(Increase) decrease in accounts receivable		112,784			(129,866	)
(Increase) decrease in other current assets		11,066			(1,800	)
Increase (decrease) in accounts payable		(54,303	)		36,754
Increase (decrease) in accruals and other current liabilities		126,568			-
Net cash provided (used) by operating activities	$	(159,227	)	$	(548,520	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proved and unproved oil and gas property additions		(19,760	)		(1,202,974	)
Other property additions		(13,012	)		(4,286,193	)
Net cash used in investing activities	$	(32,772	)	$	(5,489,167	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock		200,000			5,899,901
Net cash provided by financing activities	$	200,000		$	5,899,901
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	8,001		$	(137,786	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		82,683			525,117
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	90,684		$	387,331
Supplemental Disclosure of Cash Flow and Non-cash Investing Activities
Income tax paid		-			-
Interest paid		-			-
Property and equipment purchased with common stock		-		$	3,069,141

See Accompanying Notes to the Consolidated Financial Statements

5

JAYHAWK ENERGY, INC.

Notes to Financial Statements

(Unaudited)

For the Period Ended June 30, 2009

Note 1 – Basis of Presentation

These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods reported.  All such adjustments are of a normal recurring nature unless disclosed otherwise.  JayHawk Energy, Inc. (the "Company") reports on operations using a fiscal year end of September 30.  This report on Form 10-Q is for the third quarter of the fiscal year to end September 30, 2009, the quarter ending June 30, 2009.  These consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission (SEC) and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements.  These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto, included in the Company’s Form 10-KSB for the year ended September 30, 2008 as filed with the SEC.  Interim operating results are not necessarily indicative of operating results for any future interim period or for the full year.

Note 2 - Summary of Significant Accounting Policies

Going Concern - To date  the Company has incurred operating losses.  As of June 30, 2009 we have limited financial resources with which to achieve our objectives.  Achieving profitability and positive cash flows will be dependent on our ability to obtain additional financing, to locate profitable reserve properties and generate revenue from our current and planned business operations, and control costs.  We plan to fund our future operations by joint venturing, obtaining additional financing from investors, and attaining additional commercial production.  However, there is no assurance that we will be able to achieve these objectives.

Basis of Consolidation – These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, JayHawk Gas Transportation Company, Inc.  All intercompany accounts and transactions have been eliminated.

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 - The preparation of financial statements in accordance with  U.S. GAAP 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.  Included in these estimates are assumptions about allowances for valuation of deferred tax assets, allowances for doubtful accounts, provisions for asset retirement obligations, depreciation, depletion, and amortization, as well as management’s impairment assessment on its oil and gas properties.  By their very nature, these estimates are subject to measurement uncertainty.  The effect on the financial statements of changes in these estimates, in future periods, could be significant. These estimates and assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

Loss per common share - Basic loss per share is calculated based on the weighted average number of common shares outstanding.  Diluted loss per share assumes exercise of stock options and warrants and conversion of convertible debt and preferred securities, provided the effect is not antidilutive.  As each of the two fiscal periods covered by these financial statements reflect net losses from operations, all of our warrants have an anti-dilutive effect on per common share amounts.

Revenue Recognition - Revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes we are entitled to, based on our individual interest in the property.  Revenues reflected in these financial statements are the Company's net working interest after deduction of amounts attributable to other working and royalty interest owners.  See note above, "Joint Venture Operations" and subsequent Management's Discussion and Analysis.

6

JAYHAWK ENERGY, INC.

Notes to Financial Statements

(Unaudited)

For the Period Ended June 30, 2009

Note 2 – Summary of Significant Accounting Policies (continued)

Accounts Receivable – When volumes of crude oil or gas are delivered to the purchaser we record a receivable based on the volumes delivered and field prices on the particular day of delivery.  Subsequently these amounts may be adjusted for various technical factors affecting volumes such as temperature, pressure and content of basic sediment and water.  When it becomes evident that amounts receivable become uncollectible we establish a valuation allowance and record a provision for bad debts in our statement of operations.  Our sales of crude oil and natural gas are delivered into a market with a very concentrated group of purchasers.  As more specifically detailed in Note 3, the  former purchaser of our crude filed for bankruptcy protection in July 2008.

Property, plant and equipment - The Company uses the successful-efforts method of accounting for oil and gas property as defined under Statement of Financial Accounting Standards (SFAS) No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies (“FAS 19”). Under this method of accounting, costs to acquire mineral interests in oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells, are capitalized.  Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs and costs of carrying and retaining unproved properties are expensed.

 We provide depletion  of the capitalized cost of proved oil and gas property on a field-by-field basis using the units-of-production method, based upon estimated proved reserves.  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.

In computing depreciation, depletion, and amortization (DD&A) we take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage. When applicable, we apply the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which provides guidance on accounting for dismantlement and abandonment cost.  Also, specifically see Note 7, Asset Retirement Obligation.

We review our long-lived assets for impairment at least annually or when events or changes in circumstances indicate that impairment may have occurred in accordance with SFAS 144.  In the impairment test we compare the expected undiscounted future net revenue on a field-by-field basis with the related net capitalized cost at the end of each period. Should the net capitalized cost exceed the undiscounted future net revenue of a property, we will write down the cost of the property to fair value, which we will determine using discounted future net revenue. We will provide an impairment allowance on a property-by-property basis when we determine that the unproved property will not be developed.  Also, specifically see Note 4, Unproved Properties and Impairment.

Share Based Payments – Periodically we compensate specific vendors of goods and services with shares of our common stock.  The fair value of the common shares issued for goods or services rendered by non-employees is measured based on the fair value of the goods or services received.

Income Taxes - Income taxes are determined using the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

7

JAYHAWK ENERGY, INC.

Notes to Financial Statements

(Unaudited)

For the Period Ended June 30, 2009

Note 2 - Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements - - The following new accounting standards have been issued, but have not yet been adopted by the Company:

On December 31, 2008, the SEC adopted a final rule that amends its oil and gas reporting requirements.  The revised rules change the way oil and gas companies report their reserves in the financial statements.  The rules are intended to reflect changes in the oil and gas industry since the original disclosures were adopted in 1978.  Definitions were updated to be consistent with Petroleum Resource Management System (PRMS).  Other key revisions include a change in pricing used to prepare reserve estimates, the inclusionof non-traditional resources in reserves, the allowance for use of new technologies indetermining reserves, optional disclosure of probable and possible reserves andsignificant new disclosures. The revised rules will be effective for our annual report onForm 10-K. for the fiscal year ending September 30, 2010.  The SEC is precluding application of the new rules in quarterly reports prior to the first annual report in which the revised disclosures are required and early adoption is not permitted. We are currently evaluating the effect the new rules will have on our financial reporting and anticipate that the following rule changes could have a significant impact on our results of operations as follows:

•   The price used in calculating reserves will change from a single-day closing price measured on the last day of the Company's Fiscal year to a 12-month average price, and will affect our depletion and ceiling test calculations.

•   Several reserve definitions have changed that could revise the types of reserves that will be included in our year-end reserve report.

•   Many of our financial reporting disclosures could change as a result of the new rules.

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS No. 168"), to establish the codification as the source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. All guidance contained in the codification carries an equal level of authority. SFAS No. 168 is effective for Financial statements issued for interim and annual periods ending after September 15, 2009 and will not have an effect on the Company's consolidated financial statements.

In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No. 46(R). This standard changes the consolidation analysis for variable interest entities. SFAS 167 is effective for fiscal years ending after November 15, 2009. We are currently assessing the impact, if any, that the adoption of SFAS 167 will have on our financial position, results of operations or cash flows.

8

JAYHAWK ENERGY, INC.

Notes to Financial Statements

(Unaudited)

For the Period Ended June 30, 2009

Note 3 - Trade Accounts Receivable

Trade accounts receivable represents those amounts the Company is owed for its' oil and gas production delivered during the months of June and July of 2008, and June of 2009, less an allowance for doubtful accounts.  Also included in the aggregate is an amount receivable from other working interests billed for their percentages of joint operating costs.  Specifically, it is detailed as follows at June 30, 2009 and September 30, 2008:

	June 30, 2009			September 30, 2008
Due for crude oil delivered in June & July - SemCrude	$	283,486		$	283,486
Less: Allowance for doubtful collections		(119,763	)		(95,810	)
Due for crude oil delivered		116,029			181,340
Due for natural gas delivered		7,123			19,356
Due from joint operating agreement working interests		14,203			25,490
	$	301,078		$	413,862

The previous purchaser of our North Dakota crude oil, SemCrude, took delivery of  the Company's June and July production and before compensating the Company filed a Chapter 11 bankruptcy proceeding.  Management believes that the Company will receive all the proceeds for the July sales but has established an allowance for 100% of the value of the June deliveries, equivalent to $119,763, charging bad debt expense for an equal amount.   Amounts receivable at June 30, 2009, for oil and natural gas deliveries were received in July 2009.

Note 4 – Unproved Properties and Impairment

The Company's total investment in unproved properties consists of the capitalized costs of property acquisitions made during the prior two fiscal years.  At June 30, 2009 and September 30, 2008, net Unproved Properties was the aggregate of the following:

Description	June 30, 2009			September 30, 2008
Land acquisition	$	4,145,604		$	4,144,445
Less: Accumulated amortization		(332,961	)		(114,535	)
Less: Allowance for impairment in value		(1,474,000	)		(1,474,000	)
Total Net Investment in Unproved Properties	$	2,338,643		$	2,555,910

Impairment of Uniontown Project:  In addition to amortizing the capitalized lease costs, the Company periodically reviews and assesses its' unproved properties to determine whether or not they have been impaired.  A property is considered impaired if it will not or cannot be developed.  At that time an allowance is established to revalue the capitalized cost and a provision of equal amount is provided as an operating expense.  Management made a review of the portfolio of leases acquired in the Uniontown transaction of July 2007 and decided based on geology and proximity to our pipeline, to permit approximately one-third of the original leases acquired to expire without renewal.  The Company's inability at September 30, 2008 to fund development of any acreage, justified the creation of an impairment valuation.  Management has estimated the allowance at two-thirds, 67 percent, of the original investment equaling $1,474,000.

9

JAYHAWK ENERGY, INC.

Notes to Financial Statements

(Unaudited)

For the Period Ended June 30, 2009

Note 5 – Proved and Developed Oil & Gas Properties

The capitalized cost, net of depreciation, depletion and amortization (DD&A) of the proved oil and gas properties was $6,383,912, at June 30, 2009, and $6,991,043 at September 30, 2008.  These net capitalized costs are comprised of the following; detailed by property:

	June 30, 2009			September 30, 2008
Candak, North Dakota Properties
Proved Reserves	$	2,357,752		$	2,357,752
Field Equipment		1,200,248			1,200,248
Less accumulated DD&A		(1,033,044	)		(538,042	)
Net Capitalized Costs		2,524,956			3,019,958
Girard, Kansas Properties
Field Equipment		918,727			634,705
Capitalized Drilling Costs		540,205			807,227
Less accumulated DD&A		(61,913	)		(18,076	)
Net Capitalized Costs		1,397,019			1,423,856
JayHawk Gas Transportation
Field Equipment		2,605,870			2,604,270
Less accumulated Depreciation		(143,933	)		(57,041	)
Net Capitalized Costs		2,461,937			2,547,229
Total Net Proved Oil & Gas Properties	$	6,383,912		$	6,991,043

Note 6 - Note Payable

On July 30, 2008 JayHawk signed a convertible promissory note in the amount of $800,000 for cash received of an equal amount.  The note had a one year maturity and bears an interest rate of 12 percent.  The interest is accrued monthly, but is not payable until maturity along with principal on July 30, 2009.  The holder of the note has the right at its sole discretion, to convert the outstanding principal balance and unpaid accrued interest to shares of the Company's common stock, at any time at the conversion price of $1.75.

In conjunction with the note the holder was granted 400,000 warrants, with an exercise price of $2.10 per share, to convert to shares of the Company's common stock.  In accordance with SFAS 133 we allocated the proceeds of the note between notes payable and stockholder's equity based on the respective fair values as of the agreement date.  The fair values were determined using the Black-Scholes option model.  Originally, the note payable portion was $472,038, the warrant and equity portion of $327,962, and $194,286 was charged to an unamortized discount on the note payable.   This discount of $194,286 has been ratably amortized over the life of the note.  One month of the discount, included in "Other Long-term Assets" remains to be charged to operations (amortized). During the nine months ending June 30, 2009, $295,166 has been charged to a non-cash expense and the note payable balance accreted back to $767,204, the balance at June 30, 2009.  Also see Note - 9, Subsequent Events.

10

JAYHAWK ENERGY, INC.

Notes to Financial Statements

(Unaudited)

For the Period Ended June 30, 2009

Note 7 - Asset Retirement Obligation

In the period in which an asset retirement obligation is incurred or becomes reasonably estimable, the Company  recognizes the fair value of the liability if there is a legal obligation to dismantle the asset and reclaim or remediate the property at the end of its useful life.  The Company has identified potential asset retirement obligations at the Girard, Kansas and Candak, North Dakota operating sites.  These retirement obligations are determined based on the estimated cost to comply with abandonment regulations established by the Kansas Corporation Commission and the State of North Dakota.  The Company's engineers have estimated the cost, in today's dollars, to comply with these regulations.  These estimates were projected out to the anticipated retirement date, 15 years from when placed in service, at an assumed annual inflation rate of 1.5 percent.   The anticipated future cost of remediation efforts in North Dakota and Kansas are $204,685 and $281,547, respectively.  These amounts were discounted back at an assumed interest rate of 10 percent, to arrive at a net present value of the obligation.  The asset retirement obligation at June 30, 2009 of $137,643, increased from the September 30, 2008 balance of $128,040 by the amount of this "accretion expense" for the  nine month  period, $9,603.

Note 8 - Common Stock

At June 30, 2009 the Company had 44,136,704 shares of its $0.001 par value Common Stock issued and outstanding.  This reflects the issuance of 1,325,775 shares since the prior fiscal year end when the issued and outstanding shares totaled 42,810,929.  The individual transactions aggregating the change in shares outstanding are detailed in the following commentary:

On October 31, 2008 the Company issued 25,000 shares of stock to a consultant in exchange for services provided.  The shares were valued at the fair market value of $0.67, on the date of the transaction.  This approximates the value of the services provided.

On January 12, 2009 the Company issued 74,575 shares of  its $0.001 par value Common Stock to Missouri Gas Partners.  Of this amount 22,225 shares represented the total "Stock Issuance Obligation" of $47,559 existing at December 31, 2008.  This represented the residual from the June 30, 2008 transaction, wherein the Company agreed to release 25 shares per acre as individual oil and gas mineral leases were renewed.  The remaining 52,350 shares were issued in recognition of the Company's obligation to issue 25 shares per acre for 2,094 acres in lieu of lease renewal.  These shares were valued at $0.51 per share, the fair market value of a share on the day the shares were issued.

Also on January 12, 2009, the Company issued a total of 51,000 shares to two individual consultants, in exchange for services provided.   These shares were all valued at $0.41 per share; the fair market value on the date of the transaction.  This approximates the value of the services provided.

On February 5, 2009 the Company completed a private placement of 1,000,000 of  its $.001 par value common shares.  The shares were issued to one private investor in consideration for $200,000  in cash, that was used as working capital.  The private placement was completed in reliance upon  that certain exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, which exemption is specified by the provisions of Section 4 of that Act.

On April 20, 2009 the Company issued 85,400 shares of  its $0.001 par value Common Stock to three vendors as compensation for services rendered.  These shares were valued at $0.20 per share; the fair market value on the date of the transaction for two of the vendors, and at $0.15 per share for the third.  This approximates the value of the services provided.

On May 20, 2009 the Company issued 40,000 shares of its $0.001 par value Common Stock to one vendor in lieu of cash payment for services provided.  These shares were valued at $0.20 per share; with the fair value of the aggregate issuance approximating the value of the services rendered.

11

JAYHAWK ENERGY, INC.

Notes to Financial Statements

(Unaudited)

For the Period Ended June 30, 2009

Note 8 – Common Stock (continued)

On June 04, 2009 the Company issued 49,800 shares of its $0.001 par value Common Stock to one vendor, in lieu of a cash payment, for services rendered.  These shares were valued at $0.15 per share.  The fair value of the aggregate issuance approximates the value of the services rendered.

Note 9 – Subsequent Events

On July 30, 2009 the Note Payable in the amount of $800,000 matured.  Both the principal and accrued interest in the amount of $96,000, the aggregate being $896,000, became due and payable on July 31, 2009.  Management is in the process of negotiating the roll-over of this amount.

On July 31, 2009 the Company issued 49,800 shares of  its $0.001 par value Common Stock to two vendors as compensation for services rendered.  These shares were valued at $0.20 per share; the fair market value on the date of the transaction for each of the vendors.

On August 04, 2009 the Company issued 203,625 shares to a vendor for settlement of past due obligations.  These shares were also valued at $0.20 per share to approximate the value of the services previously provided.

On August 07, 2009 the Company completed a signed letter agreement with DK True Energy Development Limited ("True Energy") which allows True Energy to earn up to an 85% working interest in JayHawk's Coal Bed Methane ("CBM") project in southeast Kansas (the Girard and Uniontown projects).  This interest will be earned by True Energy after paying the Company $500,000 and spending a minimum of $1,300,000 over a three year period.  This agreement is expected to be finalized by the end of August 2009.

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

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, 2008, on Form 10-KSB.  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.  For additional risk factors affecting our business see "Risks Related to Our Business," under Item 1. Description of Business in our Annual Report for the period ending September 30, 2008, filed on Form 10-KSB.

JayHawk Energy, Inc. and its wholly owned subsidiary JayHawk Gas Transportation Corporation, (herein referred to as the Company, JayHawk, we and our)  is 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 April 2004 as Bella Trading Company, Inc. and changed  management and entered the oil and gas business in June of 2007.  At that time we changed our name to JayHawk Energy Inc.  Since then, we have devoted our efforts principally to the raising of capital, organizational infrastructure development, the acquisition of oil and gas properties for the purpose of future extraction of resources, and production of oil and natural gas.  To date, we have acquired three main properties, the Uniontown in Kansas, the Candak in North Dakota, and Girard in Kansas.  We did not begin producing and selling oil until the second quarter of the previous fiscal year, the quarter ending March 31, 2008; nor did we produce and sell any natural gas until the third quarter ending June 30, 2008.

On January 16, 2008, JayHawk purchased the Candak properties from JED Oil (USA) Inc. a 65% working interest in 5 producing oil wells located in the Williston Basin of North Dakota, along with the right to develop the oil, gas and mineral resources on 15,500 acres of leases in this same area.  In consideration for these properties JayHawk paid JED Oil $3.5 million in cash.  Because of the significance of this acquisition, Securities and Exchange rules and regulations define operations of these five wells (the Candak properties) to be "predecessor operations and an acquired business".  As such, the Securities and Exchange Commission, through Article 8-04 of Regulation S-X, requires a complete set of audited financial statements of the acquired business operations to be provided for at least the two most recent fiscal years.

As a consequence of the previous operator being in bankruptcy proceedings and having limited staff, sufficient evidential material was unavailable to our external auditors to prepare complete financial statements reflecting the carved out operations of the five wells.  These would be required for the period from October 1, 2006 through September 30, 2007 and from October 1, 2007 through January 16, 2008, the date of the acquisition.  We did not have any previous relationship with the prior operator and there were no ongoing arrangements with the prior operator.  Failure to provide this information will preclude the Company from completing a registration statement with the Securities and Exchange Commission prior to having sufficient historical financial information on these operations for a two year  period.  This condition should be met with the completion of the fiscal year ending September 30, 2009.

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Results of Operations

Revenues - derived from oil sales delivered from our Candak, North Dakota properties are reported at our net working interest.  For the three month and nine month periods ending June 30, 2009, net revenues before production and severance taxes, were $144,257 and $295,214, respectively.  These net revenues compare to $430,022, and $688,579 for comparable periods end in 2008.  The unfavorable apparent decline in revenues is primarily attributable to declines in prices received for our crude oil.  Prices received during the quarter ending June 30, 2008 averaged $96.77 per barrel whereas during this quarter ending June 30, 2009 prices received averaged only $47.32.  This represents a 51 percent decline from the comparable period in 2008.  Additionally, all five wells where shut-in for 45 days during the months of January and February 2009, due to constraints of weather conditions, yet production declined only 87 barrels from the comparable 2008 three month period.

Revenues derived from the sale of gas produced and delivered from our Girard, Kansas properties for the three and nine months ending June 30, 2009 were $25,150 and $88,063, respectively.  The Company did not start selling gas until the quarter end June 30, 2008 and therefore the nine month figures are not comparable.  Gas prices paid for our Girard, Kansas production have continued to be volatile, fluctuating from a high of $4.67 received in January of 2009 to a low of $2.37 per mcf received in June 2009.  Our revenues, operating results and ability to grow in the future are highly dependent on the prices we receive for our oil and natural gas.

Operating Expenses - include direct production expensessuch as field labor, fuel, power, well repair and maintenance, saltwater disposal and severance taxes, depreciation, depletion and amortization and corporate general and administrative expenses and other income and expense.  The following two tables segregate all operating expenses by producing properties, and the corporate office, for the three and nine month periods ending June 30, 2009, respectively:

	Quarter End June 30, 2009								June 30, 2008
	Candak, N.D.		Girard, KS.		G&A		Total		Total
Direct production costs	$	51,189	$	36,789		-	$	87,978	$	272,494
Depreciation, depletion, and amortization		220,950		116,424		2,997		340,371		333,892
General and administrative expenses		-		-		131,745		131,745		509,067
Other net (income) and expense						205,184		205,184		(1,594	)
Totals	$	272,139	$	153,213	$	339,926	$	765,278	$	1,113,859

	For the Nine Months End June 30, 2009								June 30, 2008
	Candak, N.D.		Girard, KS.		G&A		Total		Total
Direct production costs	$	124,415	$	163,099		-	$	287,514	$	373,296
Depreciation, depletion, and amortization		495,004		349,154		8,974		853,132		483,145
General and administrative expenses		-		-		481,646		481,646		858,437
Other net (income) and expense						543,471		543,471		(9,253	)
Totals	$	619,419	$	512,253	$	1,034,091	$	2,165,763	$	1,705,625

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General and Administrative Expenses:

During this current three month period ending June 30, 2009, the Company has focused on reducing costs in all aspects of its business, particularly those associated with its general and administrative expenses.  General and administrative expenses incurred during the three and nine month periods ending June 30, 2009 and 2008, respectively is detailed as follows, evidencing the significant cost reductions:

	Periods End June 30, 2009				Periods End June 30, 2008
	Three Months		Nine Months		Three Months		Nine Months
Salaries, wages and compensation	$	34,500	$	190,775	$	136,873	$	346,862
Legal and audit fees		63,145		109,787		74,308		132,793
Other public company expenses		14,874		68,492		22,624		23,455
Insurance		6,704		20,751		29,289		49,082
All other general and administrative expenses		12,522		91,841		245,973		306,245
Total	$	131,745	$	481,646	$	509,067	$	858,437

Other Income and Expenses - for the three and nine month periods ending June 30, 2009, are detailed below.  For the comparable periods ending June 30, 2008, other income and expenses was comprised only of interest income of $1,594, for the three month period and $9,253 for the nine month period.

	Periods End June 30, 2009
	Three Months		Nine Months
Net interest (income) expense	$	24,095	$	72,959
Accretion of convertible note payable		98,389		295,166
Amortization of note discount		58,286		174,857
Accretion of asset retirement obligation		3,201		9,603
Net bad debt expense foregiveness (income)		21,213		( 9,114	)
Total	$	205,184	$	543,471

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Cash Flows, Liquidity and Capital Resources

As of June 30, 2009, our current assets totaled $396,724, consisting of cash,  $90,684, accounts receivable, $301,078, and prepaid expenses, $4,961.  At the same time, our current liabilities were $1,473,769.  Our main sources of liquidity are cash and internally generated cash flow from the sale of crude oil and natural gas.  As of June 30, 2009, we have limited financial resources with which to achieve our objectives, and obtain profitability and positive cash flows.

The net change in cash and cash equivalents is the sum of cash used by operating activities and in investing activities, and that provided by financing activities for a net total increase in cash of $8,001 for the nine months ending June 30, 2009.  This increased the cash balance from $82,683 existing at September 30, 2008 to the cash balance at June 30, 2009 of $90,684.

Net cash used by operating activities totaled $159,227 for the nine months ending June 30, 2009, compared to $548,520 used  in operating activities for the nine month period ending June 30, 2008.

Net cash used in investing activities totaled $32,772 in the nine months ending June 30, 2009 as compared to $5,489,167 used in the same period ending June 30, 2008.

Net cash provided by financing activities during the nine months ending June 30, 2009 was $200,000.  For the nine month period ending June 30, 2008, $5,899,901 was provided by financing activities.

As clearly demonstrated in this current quarter ending June 30, 2009, our revenue and operating cash flows, are highly dependent on the prices we receive for crude oil and natural gas.  A substantial decline in these prices will further reduce our operating results and cash flows, and will impact our rate of growth and the carrying values of our assets.  For the immediate future we plan to reduce our operating expenses, consolidate our properties, and fund our future operations by joint venturing, obtaining additional financing from investors, and attaining additional commercial production.  However, there is no assurance that we will be able to achieve these objectives.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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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 4T. 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 their evaluation of those controls and procedures performed as of June 30, 2009, the date of this report, our chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective.

(b) Changes in internal controls - There were no significant changes in our internal controls during this last fiscal quarter that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to Vote of Security Holders

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

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

31.2          Rule 13a - 14(a) / 15d - 14(a) Certification of CFO

32.1          Section 1350 Certification of CEO

32.2          Section 1350 Certification of CFO

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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 12, 2009	By:	/s/ Lindsay E. Gorrill
		Lindsay E. Gorrill Principal Executive Officer, President and a Director

Date: August 12, 2009	By:	/s/ Thomas G. Ryman
		Thomas G. Ryman Chief Financial Officer

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