Jayhawk Energy (JYHW) 10-Q 2010 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, 2010.

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 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 12, 2010, there were 48,980,326 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, 2010

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets:
June 30, 2010 (Unaudited) and September 30, 2009	3
Consolidated Statements of Operations:
Three Months and Nine Months Ended June 30, 2010 and 2009 (Unaudited)	4
Consolidated Statements of Cash Flows:
Nine Months Ended June 30, 2010 and 2009 (Unaudited)	5
Notes to Consolidated Unaudited Financial Statements:
June 30, 2010	6
Item 2. Management Discussion and Analysis	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	15
Item 4. Controls and Procedures	15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3. Defaults Upon Senior Securities	16
Item 4. Submission of Matters to a Vote of Security Holders	16
Item 5. Other Information	16
Item 6. Exhibits	16
Signatures	17

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

JAYHAWK ENERGY, INC.

Consolidated Balance Sheets

	June 30, 2010				September 30, 2009
Assets	Unaudited
Current Assets
Cash and cash equivalents		$	821,817		$	5,658
Trade accounts receivable, less allowance for doubtful accounts (Note 3)			90,494			293,507
Other Current Assets			6,879			2,544
Total Current Assets			919,190			301,709
Plant, Property and Equipment
Unproved oil and gas properties, net of allowance for impairment and
accumulated amortization (Note 4)			2,078,773			2,265,673
Proved and developed oil and gas properties net of accumulated
depreciation, depletion and amortization (Note 5)			7,282,237			6,256,238
Computers, office equipment, furniture and leasehold improvements,
net of accumulated depreciation			22,613			31,605
Total Net Plant, Property and Equipment			9,383,623			8,553,516
Other Long-Term Assets			56,900			55,100
Total Assets		$	10,359,713		$	8,910,325
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable		$	1,523,670		$	172,166
Working and royalty interests payable			128,440			107,905
Other payables and accrued costs			106,218			350,797
Convertible promissory notes maturing in less than 1 year (Note 6)			--			800,000
Total Current Liabilities			1,758,328			1,430,868
Commitments and Contingencies			--			--
Long-Term Liabilities (Note 7)			745,430			140,844
Total Liabilities			2,503,758			1,571,712
Stockholders' Equity
Preferred Stock, $.001 par value; 10,000,000 shares authorized, no shares
issued and outstanding			--			--
Common Stock; $0.001 par value; 200,000,000 shares authorized;
48,867,549 shares issued and outstanding at June 30, 2010, and
44,509,496 shares issued and outstanding at September 30, 2009 (Note 8)			48,868			44,509
Additional paid-in capital			16,822,284			12,821,792
Stock issuance obligation						136,000
Accumulated deficit		(	9,015,197	)	(	5,663,688	)
Total Stockholders' Equity			7,855,955			7,338,613
Total Liabilities and Stockholders' Equity		$	10,359,713		$	8,910,325

"See Accompanying Condensed Notes to the Interim 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,
	2010			2009			2010			2009
Revenue
Oil Sales	$	145,786		$	144,257		$	454,844		$	295,214
Gas Sales		13,837			25 ,150			56,504			88,064
Total Net Revenues		159,623			169,407			511,348			383,278
Costs and Operating Expenses
Production Costs – North Dakota		84,387			51,189			199,150			124,415
Production Costs – Kansas		7,472			36,789			23,417			163,099
Depreciation, Depletion and Amortization		217,396			340,371			740,191			853,132
General and Administration Expenses		286,225			131,745			721,388			481,646
Other (Income) and Expense		219,125			205,184			2,178,711			543,471
Total Costs and Operating Expenses		814,605			765,278			3,862,857			2,165,763
Loss from continuing operations before income tax expense		( 654,982	)		( 595,871	)		(3,351,509	)		(1,782,485	)
Income tax expense	─			─			─			─
Deferred tax benefit	─			─			─			─
Net loss	$	( 654,982	)	$	(595,871	)	$	(3,351,509	)	$	( 1,782,485	)
Basic and diluted loss per share	$	(0.01	)	$	( 0.01	)	$	(0.07	)	$	(0.04	)
Basic and diluted weighted average shares outstanding		48,853,421			44,060,385			47,026,085			43,474,923

See Accompanying Condensed Notes to the Interim Consolidated Financial Statements

4

JAYHAWK ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009

	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations	$	(3,351,509	)	$	(1,782,485	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation, depletion and amortization		740,190			853,152
Non-cash loss on write-off of Girard, Kansas assets		78,137
Amortization of discount on note payable		595,933			174,857
Accretion of convertible promissory note		--			295,166
Accretion in annual asset retirement obligation		10,563			9,603
Debt Conversion Expense		1,466,978			--
Common stock issued in lieu of interest		71,393			--
Common stock issued in consideration for services		28,570			94,385
(Increase) decrease in accounts receivable		203,014			112,784
(Increase) decrease in other current assets		(4,335	)		11,066
(Increase) decrease in long-term assets		(1,800	)		--
Increase (decrease) in accounts payable		1,351,504			( 54,303	)
Increase (decrease)  in accruals and other current liabilities		(224,044	)		( 126,568	)
Net cash used by operating activities		964,594			(159,227	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proved and unproved oil and gas property additions		(1,898,435	)		(19,760	)
Other property additions		--			(13,012	)
Sale of 42.5 percent interest in Girard gas properties		250,000			--
Net cash used in investing activities		(1,648,435	)		(32,772	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock		--			200,000
Proceeds from issuance of  10% convertible debentures		1,500,000			-
Net cash provided by financing activities		1,500,000			200,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		816,159			8,001
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		5,658			82,683
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	821,817		$	90,684
SUPPLEMENTAL DISCLOSURE of CASH FLOWS
Income tax paid		-			-
Interest paid	$	6,250			-

See Accompanying Condensed Notes to the Interim Consolidated Financial Statements

5

JAYHAWK ENERGY, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

For the Three and Nine Months ended June 30, 2010 and June 30, 2009

Note 1 – Organization and Description of Business

Nature of Operations – JayHawk Energy, Inc. (the Company, we, or JayHawk) and its wholly owned subsidiary 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.  We incorporated in Colorado on April 5, 2004 as Bella Trading Company, Inc.  During the second quarter ending June 30, 2007, we changed management and entered the oil and gas business, and ceased all activity in retail jewelry.  On June 21, 2007, we changed our name to JayHawk Energy, Inc.  Since then, we have devoted our efforts principally to the raising of capital, development of organizational infrastructure, and the acq uisition of oil and gas properties.  To date, we have acquired three main properties, the Uniontown in Kansas, the Crosby (formerly referred to as Candak properties) in North Dakota, and Girard in Kansas.  We also formed a wholly owned subsidiary to transport our natural gas in Kansas, called Jayhawk Gas Transportation Company.  This is the basis for which our financial statements are consolidated.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation – These consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission (the “SEC”) and do not include all of the information and disclosures required by accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements.  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 reports on operations using a fiscal year end of September 30.
60; This report on Form 10-Q is for the third quarter ending June 30, 2010, and comparable quarter ended June 30, 2009.  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-K for the year ended September 30, 2009, and interim reports on Forms 10-Q and 8-K 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.

Going Concern – The accompanying financial statements have been prepared assuming that the Company continues operating as a going concern.  As of June 30, 2010 our ability to continue as such is dependent upon our ability to obtain sufficient additional financing and upon achieving profitable future operations.  We plan to fund our future operations by raising additional capital in the public and private markets, drilling new wells and attaining additional commercial production, thereby increasing our operating income.  However, there is no assurance that we will be able to achieve these objectives.

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 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.  A change in accounting estimate is accounted for prospectively over the current and future years.

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 anti-dilutive.  As each of the two fiscal periods covered by these financial statements reflects net losses from operations, all of the warrants had an anti-dilutive effect on per common share amounts.

Revenue Recognition – We use 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 we are entitled to, based on our individual interest in the property.  In accordance with Accounting Standards Codification (ASC) Topic 605-45, 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, and severance and production taxes withheld prior to revenue distribution.  See note above, "Joint Venture Operations".

6

JAYHAWK ENERGY, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

For the Three and Nine Months Ended June 30, 2010 and June 30, 2009

Note 2 – Summary of Significant Accounting Policies (continued)

Property, plant and equipment - JayHawk follows the successful efforts 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, 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 calculate depletion, depreciation and amortization (DD&A) of capitalized cost of proved oil and gas property on a field-by-field basis using the units-of-production method based upon proved reserves. In computing DD&A we will take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage.  When applicable, we will apply the provisions of ASC Topic 410, Accounting for Asset Retirement Obligations, 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.

We review our long-lived assets for impairment annually or when events or changes in circumstances indicate that impairment may have occurred.  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 see specifically, Note 4).

Asset Retirement Obligation – We follow ASC topic 410, “Accounting for Asset Retirement Obligations”, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs will be capitalized as part of the carrying amount of the long-lived asset.  The carrying value of a property associated with the capitalization of an asset retirement cost will be included in proved oil and gas property in the balance sheets.  The future cash outflows for oil and gas property associated with settling the asset retirement obligations will be accrued in the balance sheets, and will b e excluded from ceiling test calculations.  The asset retirement obligation, consists of costs related to the plugging of wells and removal of facilities and equipment on its oil and gas properties, and is included in Long-term Liabilities (Note 6).

Income Taxes - The Company follows the guidance of ASC Topic 740, 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determ ined that it is more likely than not that some portion of the deferred tax asset will not be realized.

ASC Topic 740 recognizes that the ultimate deductibility of positions taken or expected to be taken on tax returns is often uncertain.  It provides guidance on when tax positions claimed by an entity can be recognized and guidance on the dollar amount at which those positions are recorded.  In order to recognize the benefits associated with a tax position taken the entity must conclude that the ultimate allowability of the deduction is more likely than not.  If the ultimate allowability of the tax position exceeds 50% (more likely than not), the benefit associated with the position is recognized at the largest dollar amount that has more than a 50% likelihood of being realized upon ultimate settlement.  Differences between tax positions taken in a tax return and recognized in accordance with the guidance will generally result in (1) an increase in income taxes currently payable or a reduction in an income tax refund receivable or (2) an increase in a deferred tax liability or a decrease in a deferred tax asset, or both (1) and (2).

7

JAYHAWK ENERGY, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

For the Three and Nine Months Ended June 30, 2010 and June 30, 2009

New Accounting Pronouncements – In December 2008, the Securities and Exchange Commission (SEC) released Final Rule, Modernization of Oil and Gas Reporting.  The new disclosure requirements include provisions that permit the use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve volumes.  The new requirements also will allow companies to disclose their probable reserves to investors.  In addition, the new disclosure requirements require companies to (a) report the independence and qualifications of its reserves engineer preparer; (b) file reports when a third party is relied upon to prepare reserve estimates or conducts a rese rve audit, and (c) report oil and gas reserves using an average price based upon the prior 12 month period rather than year-end prices.  The new disclosure requirements are effective for financial statements for fiscal years ending on or after December 31, 2009.

In January 2010, the FASB issued Accounting Standards Update No. 2010-03 “Extractive Activities – Oil and Gas, Accounting Standards Codification (ASC) Topic 932: Oil and Gas Reserve Estimation and Disclosures”.  The objective is to align the oil and gas reserve estimation and disclosure requirements of ASC Topic 932 with the requirements in the SEC final rule “Modernization of the Oil and Gas Reporting Requirements” described in the preceding paragraph.  This includes updating the reserve estimation requirements for changes in practice and technology that have occurred over the last several decades and expanding the disclosure requirements for equity method investments.  The amendments in this Update 2010-03 are effective for interim and annual periods end ing on or after December 31, 2009, and should be applied on a prospective basis.  The Company adopted this Update without a material effect on its results of operations and financial position.

8

JAYHAWK ENERGY, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

For the Three and Nine Months Ended June 30, 2010 and June 30, 2009

Note 3 - Trade Accounts Receivable

At June 30, 2010 trade accounts receivable represents those amounts the Company is owed for its oil and gas production delivered during the month of June 2010 and amounts due from other working interests for their respective percentages of joint operating costs and drilling costs.  At September 30, 2009, trade accounts receivable also included a net amount anticipated to be collected from the SemCrude bankruptcy.  On February 25, 2010 the Company received $224,183 in complete settlement of this litigation and the receivable and associated allowance were accordingly eliminated.  Specifically, trade accounts receivable are detailed as follows at June 30, 2010 and September 30, 2009:

		June 30, 2010		September 30, 2009
Due for crude oil delivered in June & July 2008 – SemCrude	$	--	$	283,486
Less: Allowance for doubtful collections				(119,763	)
Due for crude oil delivered in June 2010 and September 2009		57,522		109,074
Due for natural gas delivered in June 2010 and September 2009		8,986		5,954
Due from joint operating working interests		23,986		14,756
Total	$	90,494	$	293,507

Note 4 – Unproved Properties and Impairment

The total of JayHawk's investment in unproved properties at June 30, 2010 and September 30, 2009 consists of the following capitalized costs respectively:

	June 30, 2010			September 30, 2009
Kansas Uniontown Project	$	2,494,479		$	2,494,479
Less: Allowance for impairment		(1,474,000	)		(1,474,000	)
Less: Accumulated amortization		(236,354	)		(162,734	)
Net investment in Uniontown Project	$	784,125		$	857,745
Kansas Girard Project	$	1,652,284		$	1,651,125
Less: accumulated amortization		(388,486	)		(243,197	)
Net investment in Girard Project	$	1,263,798		$	1,407,928
Crosby Project Capitalized New Lease Costs	$	30,850		$	--
Total Unproved Oil and Gas Property	$	2,078,773		$	2,265,673

Impairment of Uniontown Project:  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.  The management has estimated the allowance at two-thirds, 67 percent, of the original investme nt equaling $1,474,000.

9

JAYHAWK ENERGY, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

For the Three and Six Months ended March 31, 2010 and March 31, 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 $7,282,237, at June 30, 2010, and $6,256,238 at September 30, 2009.  These net capitalized costs are comprised of the following; detailed by property:

	June 30, 2010			September 30, 2009
Crosby North Dakota Properties:
Proved Reserves	$	2,357,752		$	2,357,752
Field Equipment		1,224,581			1,200,248
Capitalized Drilling Costs		1,842,091
Less: Accumulated DD&A		(1,492,515	)		(1,117,265	)
Net Capitalized Costs	$	3,931,909		$	2,440,735
Girard, Kansas Properties:
Field Equipment	$	705,903		$	796,033
Capitalized Drilling Costs		662,899			662,899
Less: investment from Joint Venture Partner		(250,000	)		--
Less: accumulated DD&A		(114,555	)		(76,402	)
Net Capitalized Costs	$	1,004,247		$	1,382,530
JayHawk Gas Transportation
Field Equipment	$	2,605,870		$	2,605,870
Less: accumulated Depreciation		(259,789	)		(172,897	)
Net Capitalized Costs	$	2,346,081		$	2,432,973
Total Net Proved Oil & Gas Properties	$	7,282,237		$	6,256,238

Note 6 – Convertible Promissory Note

On July 30, 2008 JayHawk signed a convertible promissory note in the amount of $800,000 for cash received of an equal amount.  The original note provided for interest to be paid at the maturity date of July 30, 2009, computed at a rate of 12 percent per annum.  On July 30, 2009, the note was amended to extend the maturity date to July 30, 2010.  Under the amended agreement interest continued to be accrued and the holder was given the right to convert the outstanding principal balance and unpaid accrued interest to shares of the Company's common stock, at the conversion price of $1.75.

On February 25, 2010 the $800,000 principal of the note payable and currently accrued interest was converted to 1.6 million shares of the Company’s common stock.  Accounting Standards Codification (ASC) topic 470-20-40-16 requires expense to be 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 conversion and determined that the fair value of the 1.6 million shares on the date of issuance was $2,112,000 and exceeded the value of shares issuable pursuant to the amended agreement of $645,022, by $1,466,978.  This amount was charged to non-cash debt conversion expense.

10

JAYHAWK ENERGY, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

For the Three and Six Months Ended June 30, 2010 and June 30, 2009

Note 7 – Long-term Liabilities

Long-term liabilities at June 30, 2010 are comprised of an asset retirement obligation of $151,407, and convertible debentures of $1,497,000, net of discounts for the imputed fair value of common stock purchase warrants attached to the debentures and the imputed fair value of the conversion feature of the debentures.  At September 30, 2009 the only long-term liability was the asset retirement obligation reflected in the amount of $140,844.  The composition of long-term liabilities existing at June 30, 2010 and September 30, 2009, the previous fiscal year end, is reflected in the following table:

	June  30, 2010				September 30, 2009
Asset retirement obligation	$	151,407		$	140,844
Long-term notes (debentures) payable face value		1,497,000			--
Less: Unamortized discount(s)
Imputed fair value of common stock purchase warrants		(360,427	)		--
Imputed fair value of beneficial conversion feature		(542,550	)		--
Total long-term liabilities	$	745,430		$	140,844

During the nine months ending June 30, 2010 the Company issued 10 percent convertible debentures with a face value  of $1,500,000.  The first tranche of the total financing, with a face  value of $900,000, was issued during the first quarter end December 31, 2009.  In April of this current quarter additional debentures with a face value of $600,000 were issued.  All of the debentures have a two year maturity and were issued with attached common stock purchase warrants.

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 a conversion price of $0.30 per share.  Additionally, the attached common share purchase warrants, expire in 42 months from the original issue date and permit the holders two exercise options.  The warrants were exercisable by purchase of the Company’s common stock for cash at an exercise price of $0.45, or alternatively, in a cashless exercise, the number of shares being determined in accordance with a predetermined formula based upon the Company’s then current stock price.

During the second quarter ended March 31, 2010, the holders of the debentures and the common stock purchase warrants associated with the first $900,000 issuance, exercised warrants to acquire 2,111,388 shares of the Company’s common stock in two separate cashless exercises on January 6, and January 27.  All but 166,000, or 7.3 percent, of the common stock purchase warrants issued with the initial $900,000 tranche of the financings have now been exercised.  Warrants attached to the debentures issued in April 2010 ($600,000 face amount) total 2,000,000 and remain to be exercised at the election of the debenture holders at an exercise price of $0.45 per share.

In accordance with ASC Topic 470, the Company allocated the proceeds to the two elements (detachable warrants and convertible instrument) based upon their relative fair values of the debt instrument without the warrants and the warrants themselves at the time of issuance.  The fair value of the warrants was determined following the guidance of ASC Topic 718; using the Black-Scholes option model (using a risk free interest rate of .06 percent and volatility of 99.3 percent) with the value allocated to the warrants reflected in Stockholders’ Equity and a debt discount.  Based upon the respective fair values as of the original agreement dates, the total face value of the total debenture issuances, $1,500,000 was allocated to discounts associated with the common stock purchase warrants and the beneficial conversion features.  Giving effect to the monthly amortization of the discount, the exercise of all but 166,000 of the stock purchase  warrants  associated with the first $600,000 tranche, and the conversion of $3,000 in principal  conversion, $902,977 of discount remains to be amortized over the remaining life of the debentures.  This $902,977 consists of the remaining unamortized imputed fair value of the common stock purchase warrants of $360,427, and imputed fair value of the beneficial conversion feature of $542,550.  These amounts are and will continue to be amortized over the remaining life of the underlying convertible debentures.

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JAYHAWK ENERGY, INC.

Condensed Notes to Consolidated Financial Statements

(Unaudited)

For the Three and Six Months Ended June 30, 2010 and June 30, 2009

Note 8 - Common Stock

At March 31, 2010 the number of the Company’s common shares issued and outstanding was 48,824,883.  During the quarter end June 30, 2010 this number increased by 42,666 shares to 48,867,549.  The specific issuances of the shares of the common stock are detailed below:

On April 01, 2010 the Company issued 21,666 shares of its $0.001 par value common stock in lieu of paying interest, to one investor in the 10% convertible debentures, with cash.  The interest totaled $16,250 and was converted to shares at a price of $0.75 per common share.

On May 04, 2010 the Company issued 11,000 shares of its $0.001 par value common stock in lieu of paying cash for the rental of field equipment.   The value of the services was determined to be equivalent to the value of the shares issued at the closing stock price of that day, $0.47 per share, or $5,170.

On June 28, 2010 one of the holder’s of the 10% convertible debentures, in agreement with the terms thereof, elected to convert the principal amount of $3,000 to 10,000 shares.

Note 9 – Subsequent Events

On July 20, 2010, holders of the debentures were issued 112,777 shares of the Company’s common stock in lieu of interest due and payable, totaling $33,833 as of July 01, 2010.  The number of shares issued was computed in accordance with the terms of the debenture documents more fully described in Note 7 (Long-term Liabilities).

Subsequent events have been evaluated through August 10, 2009, the date that the consolidated financial statements were available to be issued.

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

Results of Operations for the three and six months ended June 30, 2010 and 2009

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, 2009, on Form 10-K, and the Forms 8-K and Forms 10-Q issued in the periods subsequent to September 30, 2009.  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 accordan ce 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 Revenues – As commented on in Note 2 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 and the deduction of severance and production taxes.

For the three and nine month periods ending June 30, 2010, JayHawk sold a gross 4,528 Bbls. and 14,301 Bbls., respectively.  This production was sold at average prices of $64.20/Bbl. and $63.56/Bbl.  During the comparable periods ending June 30, 2009 the quarterly and nine month sales volumes were 6,409 Bbls. and 14,060 Bbls., respectively.  Average prices received per barrel of crude oil were $47.76 for the three months end June 30, 2009 and $43.09 for the nine months ended June 30, 2009.  Gross receipts reconciled to JayHawk’ net working interest, or revenue recognized is reflected in the following table:

	Period End June 30, 2010						Period End June 30, 2009
	Three Months			Nine Months			Three Months			Nine Months
Gross receipts	$	290,695		$	908,993		$	306,110		$	605,914
Less:
Gross taxes		(14,218	)		(51,735	)		(34,444	)		(68,419	)
Distributed to working & royalty interests		(130,691	)		(402,414	)		(127,409	)		(242,281	)
JayHawk’s Recognized Gross Revenue	$	145,786		$	454,844		$	144,257		$	295,214

Gas Revenues – During the first quarter ending December 31, 2009 the Company entered into an agreement whereby 42.5 percent of the gas revenues generated from the Girard properties were assigned to a joint venture partner in exchange for $250,000.  Therefore, the net gas revenues accruing to the Company for the three and nine month periods ending June 30, 2010 are reported net of our joint venture partner’s interest.  The following table discloses comparable gross volumes produced (in mcfs), gross revenues, average daily production, volumes delivered for which paid, average price received, and net recognized revenue to the Company, for the comparable three month and nine month periods ending June 30, 2010 and 2009:

	Period End June 30, 2010				Period End June 30, 2009
	Three Months		Nine Months		Three Months		Nine Months
Gross volumes produced in mcfs		7,973		23,498		10,574		32,001
Average daily production in mcfs		88		86		116		117
Gross receipts	$	21,507	$	84,971	$	25,150	$	88,064
Volumes delivered for which paid		5,417		20,061		9,158		28,113
Average price per mcf  received	$	3.97	$	4.24	$	2.75	$	3.13
Recognized Gross (net of outside working interest)	$	13,837	$	56,504		n/a		n/a

Prices received for our gas production continue to be volatile.  During the three months ending June 30, 2010 they have fluctuated between a low of $3.66 per mcf. and a high of $4.40 per mcf.  During the comparable periods ending June 30, 2009 prices fluctuated between a low of $2.37 and a high of $3.71 per mcf.

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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.

Beginning in May 2010 the Company began to incur production expenses associated with the recently completed Knudson and Jenks wells.  Total production expenses for the North Dakota oil  operations were $84,387 and $199,150, for the three and nine months end June 30, 2010, respectively.  These expenses are approximately 60 percent greater than incurred in the comparative periods ending June 30, 2009.  This increase is primarily attributable to additional production expenses incurred subsequent to the recent completions of the Knudson and Jenks wells.  These wells are producing significant unanticipated volumes of water.  As JayHawk has a greater working interest percentage in these two wells (95 percent) the Company is absorbing a proportionately larger sha re of expenses on these wells than the others.    Also, the comparable nine month period during the 2009 period end, included several months of negligible production activities due to unfavorable weather conditions.

Relative to the Company’s Kansas natural gas activities, throughout both the three and nine month periods ending June 30, 2010, in accordance with the joint operating agreement, the joint venture partner has paid the majority of all costs associated with those operations.  This accounts for the reduction in production costs reflected between the comparable three and nine month periods ending June 30, 2010 and 2009.

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 and nine month periods ending June 30, 2010 and 2009 is provided in the following table:

	Period End June 30, 2010				Period End June 30, 2009
	Three Months		Nine Months		Three Months		Nine Months
Compensation & payroll taxes	$	104,680	$	293,317	$	34,500	$	190,775
Payments for uncompensated past services		65,697		65,697		--		--
Legal, professional and consulting fees		52,521		199,182		6,376		59,093
Audit and public company expense		27,160		82,949		71,643		135,186
Insurance		17,607		36,422		6,704		20,751
Office expense		2,606		6,994		702		3,153
All other corporate general & administrative		15,954		36,827		11,820		72,688
Total	$	286,225	$	721,388	$	131,745	$	481,646

On April 21, 2010 the Compensation Committee of the Company’s Board of Directors approved paying three employees the compensation they had previously sacrificed to help meet past obligations of the Company during prior fiscal periods.  The amounts  disbursed for this arrangement are reflected above as payments for uncompensated past services.  If the current payment schedule is maintained, this obligation should be fully liquidated by the end of the first quarter of the new fiscal year, December 31, 2010.  The amounts accrued monthly are approximately $21,900.

Other net (income) expense – for the three and nine month periods ending June 30, 2010 and 2009, are detailed below.  Interest expense, discount amortization, financing costs and the non-cash costs of debt conversion are more fully discussed in Note 7 to the Condensed Notes to the Financial Statements.

	Period End June 30, 2010				Period End June 30, 2009
	Three Months		Nine Months		Three Months		Nine Months
Net interest and financing costs	$	34,468		97,831	$	24,095	$	72,959
Debt conversion expense		--		1,466,978		--		--
Debenture discount amortization & expense		138,178		595,934		58,286		174.857
Accretion of convertible note payable		--		--		98,389		295,166
Accretion of asset retirement obligation		3,521		10,563		3,201		9,603
All other miscellaneous (income) & expense		42,958		7,405		21,213		(9,114	)
Total	$	219,125	$	2,178,711	$	205,184	$	543,471

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Cash Flows, Liquidity and Capital Resources

As of June 30, 2010 our current assets totaled $919,190 consisting of cash, $821,817, accounts receivable, $90,494, and prepaid expenses, 6,879.  At the same time our current liabilities were $1,758,328.  This working capital shortage impairs our ability to continue operating as a going concern.  Our future success and independence will be dependent upon our ability to obtain sufficient additional financing and upon achieving profitable future operations.  At this time there is no assurance that we will be able to achieve these objectives.

Net cash provided by operating activitiestotaled $964,591 for the nine months ending June 30, 2010, compared to $159,227 used in operating activities for the nine month period ending June 30, 2009.  During the nine month period end June 30, 2010 accounts payable increased by $1,351,504.

Net cash used in investing activities totaled $1,648,435 during the nine months ending June 30, 2010 as compared to $32,772 in the same period ending June 30, 2009.

Cash in the amount of $1,500,000 was provided by financing activities during the nine months ending June 30, 2010.  During the comparable period ending June 30,2009, $200,000 was provided by financing activities.  Also see Note 7, Long-term Liabilities, in the Condensed Notes to Consolidated Financial Statements.

The net change in cash and cash equivalents is the sum of cash provided by operating and financing activities and used in investing activities, or a net total of $816,159 which is the increase in the Company's cash balance of $5,658 existing at September 30, 2009, to the cash balance at June 30, 2010 of $821,817.  

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, 2010, 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, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s 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

32.1          Section 1350 Certification of CEO

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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 11, 2010	By:	/s/ Lindsay E. Gorrill
		Lindsay E. Gorrill
		Principal Executive Officer,
		President and a Director

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