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




2




PART I - FINANCIAL INFORMATIONItem 1. Financial StatementsJAYHAWK ENERGY, INC.Consolidated Balance Sheets  June 30, 2010

September 30, 2009Assets
UnauditedCurrent AssetsCash and cash equivalents

$
821,817


$
5,658Trade accounts receivable, less allowance for doubtful accounts (Note 3)


90,494



293,507Other Current Assets


6,879



2,544Total Current Assets


919,190



301,709Plant, Property and EquipmentUnproved oil and gas properties, net of allowance for impairment andaccumulated amortization (Note 4)


2,078,773



2,265,673Proved and developed oil and gas properties net of accumulateddepreciation, depletion and amortization (Note 5)


7,282,237



6,256,238Computers, office equipment, furniture and leasehold improvements,net of accumulated depreciation


22,613



31,605Total Net Plant, Property and Equipment


9,383,623



8,553,516Other Long-Term Assets


56,900



55,100Total Assets

$
10,359,713


$
8,910,325Liabilities and Stockholders' EquityCurrent LiabilitiesAccounts Payable

$
1,523,670


$
172,166Working and royalty interests payable


128,440



107,905Other payables and accrued costs


106,218



350,797Convertible promissory notes maturing in less than 1 year (Note 6)


--



800,000Total Current Liabilities


1,758,328



1,430,868Commitments and Contingencies


--



--Long-Term Liabilities (Note 7)


745,430



140,844Total Liabilities


2,503,758



1,571,712Stockholders' EquityPreferred Stock, $.001 par value; 10,000,000 shares authorized, no sharesissued and outstanding


--



--Common Stock; $0.001 par value; 200,000,000 shares authorized;48,867,549 shares issued and outstanding at June 30, 2010, and44,509,496 shares issued and outstanding at September 30, 2009 (Note 8)


48,868



44,509Additional paid-in capital


16,822,284



12,821,792Stock issuance obligation






136,000Accumulated deficit

(
9,015,197
)

(
5,663,688
)Total Stockholders' Equity


7,855,955



7,338,613Total 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 endedJune 30,


June 30,2010


2009


2010


2009RevenueOil Sales

$
145,786


$
144,257


$
454,844


$
295,214Gas Sales


13,837



25 ,150



56,504



88,064Total Net Revenues


159,623



169,407



511,348



383,278Costs and Operating ExpensesProduction Costs – North Dakota


84,387



51,189



199,150



124,415Production Costs – Kansas


7,472



36,789



23,417



163,099Depreciation, Depletion and Amortization


217,396



340,371



740,191



853,132General and Administration Expenses


286,225



131,745



721,388



481,646Other (Income) and Expense


219,125



205,184



2,178,711



543,471Total Costs and Operating Expenses


814,605



765,278



3,862,857



2,165,763Loss 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


2009CASH FLOWS FROM OPERATING ACTIVITIESNet 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



853,152Non-cash loss on write-off of Girard, Kansas assets


78,137Amortization of discount on note payable


595,933



174,857Accretion of convertible promissory note


--



295,166Accretion in annual asset retirement obligation


10,563



9,603Debt 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 ACTIVITIESProved 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 ACTIVITIESProceeds from the sale of common stock


--



200,000Proceeds from issuance of  10% convertible debentures


1,500,000



-Net cash provided by financing activities


1,500,000



200,000NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


816,159



8,001CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


5,658



82,683CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
821,817


$
90,684SUPPLEMENTAL DISCLOSURE of CASH FLOWSIncome 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 acquisition 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.  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 be 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 determined 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 reserve 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 ending 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,

2009Due for crude oil delivered in June & July 2008 – SemCrude

$
--


$
283,486Less: Allowance for doubtful collections






(119,763
)Due for crude oil delivered in June 2010 and September 2009


57,522



109,074Due for natural gas delivered in June 2010 and September 2009


8,986



5,954Due from joint operating working interests


23,986



14,756Total

$
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,

2009Kansas Uniontown Project

$
2,494,479


$
2,494,479Less: Allowance for impairment


(1,474,000
)


(1,474,000
)Less: Accumulated amortization


(236,354
)


(162,734
)Net investment in Uniontown Project

$
784,125


$
857,745Kansas Girard Project

$
1,652,284


$
1,651,125Less: accumulated amortization


(388,486
)


(243,197
)Net investment in Girard Project

$
1,263,798


$
1,407,928Crosby 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 investment 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,

2009Crosby North Dakota Properties:Proved Reserves

$
2,357,752


$
2,357,752Field Equipment


1,224,581



1,200,248Capitalized Drilling Costs


1,842,091Less: Accumulated DD&A


(1,492,515
)


(1,117,265
)Net Capitalized Costs

$
3,931,909


$
2,440,735Girard, Kansas Properties:Field Equipment

$
705,903


$
796,033Capitalized Drilling Costs


662,899



662,899Less: investment from Joint Venture Partner


(250,000
)


--Less: accumulated DD&A


(114,555
)


(76,402
)Net Capitalized Costs

$
1,004,247


$
1,382,530JayHawk Gas TransportationField Equipment

$
2,605,870


$
2,605,870Less: accumulated Depreciation


(259,789
)


(172,897
)Net Capitalized Costs

$
2,346,081


$
2,432,973Total 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,

2009Asset retirement obligation

$
151,407


$
140,844Long-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.





11




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.




12





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 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 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, 2009Three Months


Nine Months


Three Months


Nine MonthsGross receipts

$
290,695


$
908,993


$
306,110


$
605,914Less: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, 2009Three Months


Nine Months


Three Months


Nine MonthsGross volumes produced in mcfs


7,973



23,498



10,574



32,001Average daily production in mcfs


88



86



116



117Gross receipts

$
21,507


$
84,971


$
25,150


$
88,064Volumes delivered for which paid


5,417



20,061



9,158



28,113Average price per mcf  received

$
3.97


$
4.24


$
2.75


$
3.13Recognized 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.




13





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 share 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, 2009Three Months


Nine Months


Three Months


Nine MonthsCompensation & payroll taxes

$
104,680


$
293,317


$
34,500


$
190,775Payments for uncompensated past services


65,697



65,697



--



--Legal, professional and consulting fees


52,521



199,182



6,376



59,093Audit and public company expense


27,160



82,949



71,643



135,186Insurance


17,607



36,422



6,704



20,751Office expense


2,606



6,994



702



3,153All other corporate general & administrative


15,954



36,827



11,820



72,688Total

$
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, 2009Three Months


Nine Months


Three Months


Nine MonthsNet interest and financing costs

$
34,468



97,831


$
24,095


$
72,959Debt conversion expense


--



1,466,978



--



--Debenture discount amortization & expense


138,178



595,934



58,286



174.857Accretion of convertible note payable


--



--



98,389



295,166Accretion of asset retirement obligation


3,521



10,563



3,201



9,603All other miscellaneous (income) & expense


42,958



7,405



21,213



(9,114
)Total

$
219,125


$
2,178,711


$
205,184


$
543,471




14





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.




15




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




16




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 corporationDate August 11, 2010
By:
/s/ Lindsay E. GorrillLindsay E. GorrillPrincipal Executive Officer,President and a Director