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 March 31, 2016.

OR



|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|  |                                                                                          
|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)



|                                                               |                                     
|-------------------------------------------------------------- | ------------------------------------
|                                                               |                                     
|Nevada                                                         | 20-0990109                          
|(State or other jurisdiction
of incorporation or organization) | (I.R.S. Employer
Identification No.)



|                                        
|----------------------------------------
|                                        
|10119 W. Lariat Lane, Peoria AZ 85383   
|(Address of principal executive offices)



|                           
|---------------------------
|                           
|(425-442-0931)             
|(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.    xYes   o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).         xYes o No



Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



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



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



APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date.  As of September 30, 2016, there were 199,725,629 shares of the issuer's $.001 par value common stock issued and outstanding.











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[jayhawk10q2dec2316002.gif]

JAYHAWK ENERGY, INC.



Quarterly Report on Form 10-Q for the

Quarterly Period March 31, 2016



TABLE OF CONTENTS





















PART I  FINANCIAL INFORMATION

4



Item 1. Financial Statements.

4



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

22



Item 3. Quantitative and Qualitative Disclosures About Market Risk.

27



Item 4. Controls and Procedures.

27



PART II  OTHER INFORMATION

28



Item 1. Legal Proceedings.

28



Item 1A. Risk Factors.

28



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

28



Item 3.  Defaults Upon Senior Securities.

28



Item 4.  Mining Safety Disclosures.

29



Item 5.  Other Information.

29



Item 6.  Exhibits.

29





























2



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PART I  FINANCIAL INFORMATION

Item 1. Financial Statements.



|                                                                                                                         |                |              |                      |   |             
|------------------------------------------------------------------------------------------------------------------------ | -------------- | ------------ | -------------------- | - | ------------
|JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS                                                         
|                                                                                                                         | March 31, 2016 |              | September 30, 2015  
|ASSETS                                                                                                                   | (Unaudited)    |              | As revised (Note 18)
|CURRENT ASSETS                                                                                                           |                |              |                      |   |             
|Cash                                                                                                                     | $              | 255          |                      | $ | -           
|Other current assets                                                                                                     |                | -            |                      |   | 13,342      
|TOTAL CURRENT ASSETS                                                                                                     |                | 255          |                      |   | 13,342      
|PROPERTY AND EQUIPMENT                                                                                                   |                |              |                      |   |             
|Unproved properties, net (NOTE 4)                                                                                        |                | 176,669      |                      |   | 185,523     
|NET PROPERTY AND EQUIPMENT                                                                                               |                | 176,669      |                      |   | 185,523     
|RECLAMATION BONDS                                                                                                        |                | 150,502      |                      |   | 150,450     
|TOTAL ASSETS                                                                                                             | $              | 327,426      |                      | $ | 349,315     
|                                                                                                                         |                |              |                      |   |             
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                    |                |              |                      |   |             
|CURRENT LIABILITIES                                                                                                      |                |              |                      |   |             
|Accounts payable                                                                                                         | $              | 796,550      |                      | $ | 804,965     
|Due to working and royalty interests                                                                                     |                | -            |                      |   | 472,993     
|Accrued interest related party                                                                                           |                | 347,924      |                      |   | 251,579     
|Other payables, interest and taxes accrued                                                                               |                | 94,779       |                      |   | 89,014      
|Convertible line of credit related party (NOTE 7)                                                                        |                | 339,675      |                      |   | 170,285     
|Convertible debentures related party (NOTE 8)                                                                            |                | 470,439      |                      |   | 470,439     
|Current portion of promissory notes payable (NOTE 10)                                                                    |                | 102,587      |                      |   | 264,582     
|Current portion of promissory notes payable, related party (NOTE 10)                                                     |                | 27,893       |                      |   | 264,582     
|TOTAL CURRENT LIABILITIES                                                                                                |                | 2,179,847    |                      |   | 2,523,857   
|LONG TERM LIABILITIES                                                                                                    |                |              |                      |   |             
|Convertible debenture, net (NOTE 8)                                                                                      |                | 73,333       |                      |   | 53,333      
|Convertible debentures, related party, net (NOTE 8)                                                                      |                | 146,667      |                      |   | 106,667     
|Promissory notes payable (NOTE 10)                                                                                       |                | -            |                      |   | 42,293      
|Promissory note payable, related party (NOTE 10)                                                                         |                | 93,281       |                      |   | 110,781     
|Warrant derivative liability (NOTE 9)                                                                                    |                | 4,598        |                      |   | 4,861       
|Asset retirement obligation                                                                                              |                | 220,344      |                      |   | 245,792     
|TOTAL LONG TERM LIABILITIES                                                                                              |                | 538,223      |                      |   | 563,727     
|TOTAL LIABILITIES                                                                                                        |                | 2,718,070    |                      |   | 3,087,584   
|COMMITMENTS AND CONTINGENCIES (NOTE 16)                                                                                  |                |              |                      |   |             
|STOCKHOLDERS DEFICIT                                                                                                    |                |              |                      |   |             
|Preferred Stock, $.001 par value; 10,000,000 shares authorized, none issued and outstanding                              |                | -            |                      |   | -           
|Common Stock, $.001 par value; 200,000,000 shares authorized; 199,875,629 shares issued and outstanding (NOTE 12 and 18) |                | 199,876      |                      |   | 199,876     
|Additional paid in capital                                                                                               |                | 25,752,725   |                      |   | 24,801,020  
|Accumulated deficit                                                                                                      |                | (28,343,245) |                      |   | (27,739,165)
|TOTAL STOCKHOLDERS DEFICIT                                                                                              |                | (2,390,644)  |                      |   | (2,738,269) 
|TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT                                                                              | $              | 327,426      |                      | $ | 349,315     
|                                                                                                                         |                |              |                      |   |             



The accompanying notes are an integral part of these financial statements.







3



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|                                                                                      |  |                              |             |                            |   |            |  |      |             |  |   |           
|------------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | -------------------------- | - | ---------- |  | ---- | ----------- |  | - | ----------
|JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
|                                                                                      |  | Three months ended March 31, |             | Six months ended March 31,
|                                                                                      |  | 2016                         |             | 2015                       |   | 2016       |  | 2015
|REVENUE  Oil sales                                                                   |  | $                            | -           |                            | $ | 41,902     |  |      | -           |  | $ | 110,694   
|OPERATING EXPENSE                                                                     |  |                              |             |                            |   |            |  |      |             |  |   |           
|Production costs-oil                                                                  |  |                              | -           |                            |   | 73,346     |  |      | (643)       |  |   | 103,181   
|Production costs-natural gas                                                          |  |                              | 17,765      |                            |   | 2,977      |  |      | 33,159      |  |   | 7,104     
|Depreciation, depletion and amortization                                              |  |                              | 4,427       |                            |   | 31,631     |  |      | 8,854       |  |   | 62,900    
|Accretion of asset retirement obligation                                              |  |                              | 6,166       |                            |   | 4,016      |  |      | 12,332      |  |   | 8,032     
|North Dakota reclamation costs                                                        |  |                              | -           |                            |   | -          |  |      | -           |  |   | 2,306     
|General and administrative                                                            |  |                              | 62,822      |                            |   | 105,534    |  |      | 108,337     |  |   | 213,334   
|TOTAL OPERATING EXPENSES                                                              |  |                              | 91,180      |                            |   | 217,504    |  |      | 162,039     |  |   | 396,857   
|                                                                                      |  |                              |             |                            |   |            |  |      |             |  |   |           
|OPERATING LOSS                                                                        |  |                              | (91,180)    |                            |   | (175,602)  |  |      | (162,039)   |  |   | (286,163) 
|                                                                                      |  |                              |             |                            |   |            |  |      |             |  |   |           
|OTHER INCOME (EXPENSE)                                                                |  |                              |             |                            |   |            |  |      |             |  |   |           
|Interest expense                                                                      |  |                              | (7,109)     |                            |   | (71,351)   |  |      | (11,609)    |  |   | (108,836) 
|Interest expense, related parties                                                     |  |                              | (56,619)    |                            |   |            |  |      | (96,346)    |  |   |           
|Amortization of debt discount                                                         |  |                              | (30,000)    |                            |   | (30,000)   |  |      | (60,000)    |  |   | (60,000)  
|Loss on settlement of liabilities                                                     |  |                              | -           |                            |   | -          |  |      | (274,349)   |  |   | -         
|Gain (loss) on change in fair value of conversion option derivative                   |  |                              | -           |                            |   | (53,534)   |  |      | -           |  |   | 378,484   
|Gain (loss) on change in fair value of warrant derivative                             |  |                              | (2,299)     |                            |   | (1,329)    |  |      | 263         |  |   | 14,111    
|TOTAL OTHER INCOME (EXPENSE)                                                          |  |                              | (96,027)    |                            |   | (156,214)  |  |      | (442,041)   |  |   | 223,759   
|                                                                                      |  |                              |             |                            |   |            |  |      |             |  |   |           
|INCOME (LOSS) BEFORE INCOME TAX                                                       |  |                              | (187,207)   |                            |   | (331,816)  |  |      | (604,080)   |  |   | (62,404)  
|Provision for income taxes                                                            |  |                              | -           |                            |   | -          |  |      | -           |  |   | -         
|NET LOSS                                                                              |  | $                            | (187,207)   |                            | $ | (331,816)  |  | $    | (604,080)   |  | $ | (62,404)  
|Basic and diluted loss per share                                                      |  | $                            | (Nil)       |                            | $ | (Nil)      |  | $    | (Nil)       |  | $ | (Nil)     
|Basic and diluted weighted average number shares outstanding                          |  |                              | 199,875,629 |                            |   | 80,375,841 |  |      | 199,875,629 |  |   | 80,375,841
|                                                                                      |  |                              |             |                            |   |            |  |      |             |  |   |           
|                                                                                      |  |                              |             |                            |   |            |  |      |             |  |   |           





The accompanying notes are an integral part of these financial statements.







4



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|                                                                                      |                          |           |                |   |           
|------------------------------------------------------------------------------------- | ------------------------ | --------- | -------------- | - | ----------
|JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
|                                                                                      | For the six months ended
|                                                                                      | March 31, 2016           |           | March 31, 2015
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |                          |           |                |   |           
|Net loss                                                                              | $                        | (604,080) |                | $ | (62,404)  
|Adjustments to reconcile net loss to cash used by operating activities:               |                          |           |                |   |           
|Depreciation, depletion and amortization                                              |                          | 8,854     |                |   | 62,900    
|Accretion of asset retirement obligation                                              |                          | 12,332    |                |   | 8,032     
|Non-cash financing costs                                                              |                          | -         |                |   | 29,898    
|Amortization of debt discount                                                         |                          | 60,000    |                |   | 60,000    
|(Gain) loss on change in fair value of conversion option derivative                   |                          | -         |                |   | (378,484) 
|Gain on change in fair value of warrant derivative                                    |                          | (263)     |                |   | (14,111)  
|Loss on settlement of liabilities                                                     |                          | 274,349   |                |   | -         
|Change in operating assets and liabilities:                                           |                          |           |                |   |           
|Trade accounts receivable                                                             |                          | -         |                |   | 38,853    
|Prepaid expenses, and other current assets                                            |                          | 13,342    |                |   | 5,774     
|Accounts payable                                                                      |                          | (1,333)   |                |   | (77,300)  
|Asset retirement obligation for North Dakota reclamation                              |                          | (37,780)  |                |   | -         
|Due to working and royalty interest holders                                           |                          | -         |                |   | 28,531    
|Accrued interest, related party                                                       |                          | 105,790   |                |   | -         
|Other payables, interest and taxes accrued                                            |                          | 2,855     |                |   | 126,865   
|Net cash used by operating activities                                                 |                          | (165,934) |                |   | (171,446) 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |                          |           |                |   |           
|Reclamation bonds                                                                     |                          | (52)      |                |   | -         
|Net cash used by investing activities                                                 |                          | (52)      |                |   | -         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |                          |           |                |   |           
|Payments on promissory notes                                                          |                          | (3,149)   |                |   | (22,447)  
|Change in checks issued and payable                                                   |                          | -         |                |   | 16,794    
|Borrowings under convertible line of credit, related party                            |                          | 169,390   |                |   |           
|Net cash provided by financing activities                                             |                          | 166,241   |                |   | (5,653)   
|Net increase (decrease) in cash                                                       |                          | 255       |                |   | (177,099))
|CASH AT BEGINNING OF PERIOD                                                           |                          | -         |                |   | 177,260)  
|CASH AT END OF PERIOD                                                                 | $                        | 255       |                | $ | 161       
|                                                                                      |                          |           |                |   |           
|                                                                                      |                          |           |                |   |           
|NON-CASH FINANCING AND INVESTING ACTIVITIES:                                          |                          |           |                |   |           
|Due to working interest holders converted to promissory notes                         | $                        | -         |                |   | 175,425   
|Accounts payable converted to promissory notes                                        |                          | 10,393    |                |   | 34,162    
|Due to working interest and royalty holders assigned for warrants                     |                          | 471,668   |                |   | -         
|Promissory note assigned for warrants                                                 |                          | 198,229   |                |   | -         
|                                                                                      |                          |           |                |   |           
|                                                                                      |                          |           |                |   |           







The accompanying notes are an integral part of these financial statements.





5



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016













NOTE 1  ORGANIZATION AND DESCRIPTION OF BUSINESS



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



On September 1, 2015 the Company disposed of all of its interests, tangible or intangible, in and to the assets held or owned by the Company in the State of North Dakota. The disposition of the Companys North Dakota assets was completed through an asset assignment to a related party.



On October 8, 2015, the Company filed Articles of Domestication and corresponding Articles of Incorporation with the Secretary of State for the State of Nevada. Effective October 8, 2015, the Companys state of organization was moved from Colorado to Nevada. On October 22, 2015, the Company, in conjunction with its domestication to the State of Nevada, filed Articles of Dissolution in the State of Colorado.



The Company's strategy is to increase shareholder value through strategic acquisition and development of oil and gas properties, primarily in North America.



As of September 30, 2015, JayHawk Energy remains an early stage oil and gas exploration company. The Company's immediate business plan is to focus its efforts on identifying oil and gas assets for future acquisition and development.  The Company is actively focused on shifting to a liquids-rich development focus, primarily in established oil and gas producing regions of North America. The Company's main priority will be given to projects with near term cash flow potential and proven, producing oil and gas reserves. Future acquisition and development activities will be determined by the Company's ability to access sources of sufficient funding.



NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Companys management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the six months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2016.



For further information, refer to the financial statements and footnotes thereto in the Companys Annual Report on Form 10-K for the year ended September 30, 2015.



Principles of Consolidation



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



Going Concern



As shown in the accompanying consolidated financial statements, the Company has incurred operating losses since inception.  As of March 31, 2016, the Company has limited financial resources with which to achieve the objectives and obtain profitability and positive cash flows.  As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $28,343,245 and a net loss of $604,080 for the six months ended March 31, 2016, and as of that date the Company's current liabilities exceeded its current assets by $2,179,592.  Achievement of the Company's objectives will be dependent upon the ability to obtain additional financing, to locate profitable energy properties and generate revenue from current and planned business operations,



6



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016





and control costs.  The Company plans to fund its future operations by joint venturing, obtaining additional financing from investors, and/or lenders, and attaining additional commercial production.  However, there is no assurance that the Company will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists.  The financial statements do not include adjustments relating to the recoverability of recorded assets nor the settlement of liabilities  should the Company be unable to continue as a going concern.



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.  Significant areas requiring the use of management assumptions and estimates relate to asset impairments, asset retirement obligations, stock-based compensation, income taxes and derivatives.  Actual results may differ from these estimates and assumptions which could have a material effect on the Company's reported financial position and results of operations.



Income or Loss Per Common Share



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



The potential dilutive effect of convertible and outstanding securities as of March 31, 2016 and 2015 would be as follows:



|                           |                |           |                |  |            
|-------------------------- | -------------- | --------- | -------------- |  | -----------
|                           | March 31, 2016 |           | March 31, 2015
|Stock options              |                | 1,150,000 |                |  | 4,000,000  
|Convertible debt           |                |           |                |  | 110,028,675
|Convertible line of credit |                |           |                |  | -          
|Warrants                   |                |           |                |  | 1,000,000  
|TOTAL POSSIBLE DILUTION    |                |           |                |  | 115,028,675
|                           |                |           |                |  |            



At March 31, 2016 and 2015, the effect of the Company's outstanding options and common stock equivalents would have been anti-dilutive



Revenue and Cost Recognition



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



Cash Equivalents



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



Reclassifications



Certain reclassifications have been made to the 2015 financial statements in order to conform to the 2016 presentation.  These reclassifications have no effect on net loss, total assets or accumulated deficit as previously reported.   See Note 18 regarding revision of financial statements.



7



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







New Accounting Pronouncements



In August 2014, the FASB issued ASU No. 2014-15Presentation of Financial StatementsGoing Concern. The guidance requires an entitys management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). If conditions or events exist that raise substantial doubt about an entitys ability to continue as a going concern, the guidance requires disclosure in the financial statements. The guidance will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.  Early application is permitted.  The Company plans to adopt this standard effective October 1, 2017 and anticipates the adoption will have minimal impact on the financial statements because the Company currently discloses the information required.



NOTE 3  FAIR VALUE OF FINANCIAL INSTRUMENTS



The carrying values of cash and cash equivalents, reclamation bonds and promissory notes payable approximate fair value due to their limited time to maturity or ability to immediately convert them to cash in the normal course.  The approximate fair value of the convertible debentures and convertible line of credit based upon the number of shares into which the debentures are convertible is $2,353,478 using the current market price per share of stock at March 31, 2016.



The table below sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2016 and September 30, 2015, respectively, and the fair value calculation input hierarchy that the Company has determined has applied to each asset and liability category.



|                             |  |                |       |                    |   |                       |  |  |        
|---------------------------- |  | -------------- | ----- | ------------------ | - | --------------------- |  |  | -------
|                             |  | March 31, 2016 |       | September 30, 2015 |   | Input Hierarchy Level
|Assets:                      |  |                |       |                    |   |                       |  |  |        
|Cash                         |  | $              | 255   |                    | $ | -                     |  |  | Level 1
|Liabilities:                 |  |                |       |                    |   |                       |  |  |        
|Warrant derivative liability |  |                | 4,598 |                    |   | 4,861                 |  |  | Level 2
|                             |  |                |       |                    |   |                       |  |  |        



NOTE 4  UNPROVED PROPERTIES AND IMPAIRMENT



The total of the Company's investment in unproved properties and equipment at March 31, 2016 and 2015, consists of the following capitalized costs respectively:



|                                                          |                |             |                    |   |            
|--------------------------------------------------------- | -------------- | ----------- | ------------------ | - | -----------
|                                                          | March 31, 2016 |             | September 30, 2015
|Kansas Girard Project                                     |                |             |                    |   |            
|Field equipment  Jayhawk Gas Transport Company           | $              | 2,605,871   |                    | $ | 2,605,871  
|Field equipment  Girard                                  |                | 579,027     |                    |   | 579,027    
|Capitalized drilling costs                                |                | 684,696     |                    |   | 684,696    
|Subtotal                                                  |                | 3,869,594   |                    |   | 3,869,594  
|Less accumulated impairments                              |                | (2,432,086) |                    |   | (2,432,087)
|Less accumulated depreciation, depletion and amortization |                | (1,260,839) |                    |   | (1,251,984)
|TOTAL UNPROVED PROPERTIES                                 | $              | 176,669     |                    | $ | 185,523    
|                                                          |                |             |                    |   |            



The Companys Kansas properties are currently not producing.  Management intends to evaluate the prospects of returning to production during the subsequent fiscal year and determine the economic viability of the project thereafter.



8



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







NOTE 5  PROVED PROPERTIES AND IMPAIRMENT



During the year ended September 30, 2015, management scrapped certain capitalized drilling costs and equipment associated with the Jenks and Knudsen wells in Crosby, North Dakota.  The Company determined the costs associated with completing the necessary engineering, road improvements and purchase of additional equipment to construct a disposal well exceeded the future benefits of said well.  The Company has plugged both the Jenks and Knudsen well bores. The loss on write-off of $11,527 was charged to operations as Loss on leases and equipment.



Effective September 1, 2015, the Company entered into an Assignment, Bill of Sale and Conveyance (the Assignment) with Vast Holdings, LLC (Vast Holdings), a related party at September 30, 2015.  The Assignment sells and assigns to Vast Holdings, in consideration of ten dollars ($10.00), all of the Companys right, title, interest and estate, real or personal, movable or immovable, tangible or intangible, in and to the assets held or owned by the Company in the State of North Dakota, including but not limited to: oil, gas and/or mineral leases, fee mineral interests, leasehold estates, mineral interests, royalty interests, overriding royalty interests, reversionary interests, net profits interests, and other similar rights, estates and interests and other agreements, the oil, gas, and other hydrocarbons produced from or attributable to the assets and all units, wells, equipment, contracts, and records. Vast Holdings did not assume various liabilities associated with the North Dakota assets, including, but not limited to, working and royalty interests payable and liabilities associated with reclamation of the North Dakota properties.



Vast Holdings is a wholly owned subsidiary of Vast Exploration, LLC.  Vast Exploration is a controlling shareholder of the Company, the contract operator of the Companys oil and gas properties and an affiliate of Vast Petroleum Corp., an entity that entered into a joint development agreement for the Companys oil and gas operations in Kansas in May 2014.   The Assignment was made in lieu of foreclosure of certain Company debt obligations and the Company determined ten dollars was appropriate monetary consideration.



NOTE 6  RECLAMATION BONDS



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



|                        |                |         |                    |   |        
|----------------------- | -------------- | ------- | ------------------ | - | -------
|                        | March 31, 2016 |         | September 30, 2015
|Reclamation bonds       | $              | 150,502 |                    | $ | 150,450
|TOTAL RECLAMATION BONDS | $              | 150,502 |                    | $ | 150,450



NOTE 7  CONVERTIBLE LINE OF CREDIT RELATED PARTY



On June 30, 2015, the Company entered into a revolving credit loan agreement (Loan) with Vast Exploration, LLC (the Lender or Vast Exploration). The Loan permits the Company to borrow up to $100,000 with an interest rate equal to 1.5% per month of the unpaid principal balance on the loan. The Company is required to pay principal on demand or, if not sooner demanded, then on or before June 30, 2016.  The Company is required to pay interest on demand or, if not sooner demanded, then on the 1st day of each month, commencing August 1, 2015. After demand, interest on the outstanding balance of the Loan will accrue at a rate equal to 2% per month. Vast Exploration has the right, at any time after the date of the Loan, at its election, to convert all or part of the Loan into shares of fully paid and non-assessable shares of common stock of the Company at a conversion price of the lesser of 1) $0.005 per share or 2) 50% of the average of the three lowest trades during the twenty-five previous trading days preceding a conversion.



On August 6, 2015, the Company entered into a Line of Credit Modification Agreement with Vast Exploration (Modification Agreement).  The Modification Agreement adjusts the maximum principal balance that may be borrowed from $100,000 to $150,000.  At its sole discretion, Vast Exploration may increase the maximum principal balance beyond $150,000.



On September 25, 2015, the Company entered into a Second Line of Credit Modification Agreement with Vast Exploration (Second Modification Agreement).  The Second Modification Agreement amends the conversion price in the Loan to a non-variable conversion price of $0.005 per share of common stock. Advances related to reclamation of North Dakota properties (Note 16) may be converted at a non-variable conversion price of $0.0025 per share of common stock.



As of March 31, 2016, the Loan balance was $339,675. The balance of accrued interest on the Loan at March 31, 2016 was $42,487 and is included in accrued interest, related parties.  The balance of the Loan and accrued interest thereon was convertible to 152,864,772 shares of the Companys common stock based on the amended conversion price.



9



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







NOTE 8  CONVERTIBLE DEBENTURES



The Companys related party convertible debentures and accrued interest consist of the following:



|                                                                        |                |           |                    |   |            
|----------------------------------------------------------------------- | -------------- | --------- | ------------------ | - | -----------
|                                                                        | March 31, 2016 |           | September 30, 2015
|2010 Vast Exploration  18% default interest rate, currently in default | $              | 470,439   |                    | $ | 470,439    
|2014 Vast Exploration  10% interest, due on June 3, 2019               |                | 400,000   |                    |   | 400,000    
|Total principal                                                         |                | 870,439   |                    |   | 870,439    
|Unamortized discount                                                    |                | (253,333) |                    |   | (293,333)  
|Subtotal                                                                |                | 617,106   |                    |   | 577,106    
|Less current portion                                                    |                | (470,439) |                    |   | (470,439)  
|Long term portion                                                       | $              | 146,667   |                    | $ | 106,667    
|                                                                        |                |           |                    |   |            
|Accrued interest payable  related party                                | $              | 295,387   |                    | $ | 232,599    
|                                                                        |                |           |                    |   |            
|Number of shares of common stock into which the notes are convertible   |                |           |                    |   | 110,303,800
|                                                                        |                |           |                    |   |            



The Companys non-related party convertible debentures and accrued interest consist of the following:



|                                                                      |                |            |                    |   |           
|--------------------------------------------------------------------- | -------------- | ---------- | ------------------ | - | ----------
|                                                                      | March 31, 2016 |            | September 30, 2015
|Convertible debenture  10% interest due on June 3, 2019              | $              | 200,000    |                    | $ | 200,000   
|Unamortized discounts                                                 |                | (126,667)  |                    |   | (146,667) 
|Subtotal                                                              |                | 73,333     |                    |   | 53,333    
|Less current portion                                                  |                | -          |                    |   | -         
|Long term portion                                                     | $              | 73,333     |                    | $ | 53,333    
|                                                                      |                |            |                    |   |           
|Accrued interest payable                                              | $              | 37,041     |                    | $ | 27,014    
|                                                                      |                |            |                    |   |           
|Number of shares of common stock into which the notes are convertible |                | 23,704,110 |                    |   | 22,701,370



The non-related parties debentures are collateralized by all Company assets located in the State of  Kansas and all of the Companys rights in JayHawk Gas Transportation Corporation, a wholly owned subsidiary.



As of March 31, 2016, there remains a total of $380,000 of unamortized discount on the issuance of the 2014 convertible debentures.



At March 31, 2016, principal payments on the convertible debentures are due as follows:



|                             |               |         |                   |   |         |  |   |          
|---------------------------- | ------------- | ------- | ----------------- | - | ------- |  | - | ---------
|                             | Related party |         | Non-related party |   | Total  
|Year ending March 31, 2017   | $             | 470,439 |                   | $ | -       |  | $ | 470,439  
|Year ending March 31, 2018   |               | -       |                   |   | -       |  |   | -        
|Year ending March 31, 2019   |               | -       |                   |   | -       |  |   | -        
|Year ending March 31, 2020   |               | 400,000 |                   |   | 200,000 |  |   | 600,000  
|TOTAL CONVERTIBLE DEBENTURES | $             | 870,439 |                   | $ | 200,000 |  | $ | 1,070,439





10



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







NOTE 9  DERIVATIVE LIABILITIES



Conversion Options Derivative



The Company had convertible debentures which contained provisions allowing holders of the debentures to convert outstanding debt to shares of the Company's common stock (Note 8). The debentures contained anti-dilution provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions.  Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting.  As such, management valued them at fair value at the date of issuance.    During the year ended September 30, 2015, the Company entered into a modification agreement with the holders of the convertible debentures.  The modification agreement changed the conversion price to $0.01 per common share and also specifically eliminated provisions of the debentures requiring conversion derivative accounting.  The fair value of the derivative liability on that date of $1,244,472 was charged to additional paid-in capital.



Warrant Derivative



Stock purchase warrants were also issued with the convertible debentures (Note 8).   Provisions contained within these warrants require the warrants to be accounted for as derivatives.  At March 31, 2016 and September 30, 2015, respectively, the fair value of warrant derivative liability was estimated using the Black-Scholes option pricing model using the following weighted average assumptions:



|                                       |                |            |                    |   |           
|-------------------------------------- | -------------- | ---------- | ------------------ | - | ----------
|                                       | March 31, 2016 |            | September 30, 2015
|Stock price                            | $              | 0.0081     |                    | $ | 0.0076    
|Risk-free interest rate                |                | 0.59%      |                    |   | 0.56%     
|Expected term                          |                | 0.88 years |                    |   | 1.88 years
|Expected volatility                    |                | 279.70%    |                    |   | 274.3%    
|Fair value of warrant derivative units |                | $0.0046    |                    |   | $0.0106   



Below is detail of the change in warrant derivative liability balance for three months ended March 31, 2016 and 2015, respectively:



|                                                         |                              |       |      |   |       
|-------------------------------------------------------- | ---------------------------- | ----- | ---- | - | ------
|                                                         | Three months ended March 31,
|                                                         | 2016                         |       | 2015
|                                                         |                              |       |      |   |       
|Beginning balance                                        | $                            | 2,299 |      | $ | 9,257 
|Net change in fair value of warrant derivative liability |                              | 2,299 |      |   | 1,329 
|Ending balance                                           | $                            | 4,598 |      | $ | 10,586



Below is detail of the change in warrant derivative liability balance for six months ended March 31, 2016 and 2015, respectively:



|                                                         |                            |       |      |   |         
|-------------------------------------------------------- | -------------------------- | ----- | ---- | - | --------
|                                                         | Six months ended March 31,
|                                                         | 2016                       |       | 2015
|                                                         |                            |       |      |   |         
|Beginning balance                                        | $                          | 4,861 |      | $ | 24,697  
|Net change in fair value of warrant derivative liability |                            | (263) |      |   | (14,111)
|Ending balance                                           | $                          | 4,598 |      | $ | 10,586  



NOTE 10  PROMISSORY NOTES



On July 12, 2014, the Company entered into a promissory note for $46,642 with a working interest partner.  The Company was scheduled to make seven monthly payments in the amount of $2,500 and subsequently make ten monthly payments in the amount of $2,914.  At March 31, 2016, the balance due on the note was $31,642. The Company is currently in default on the terms of the promissory note.  The balance of $31,642 is included under Current portion of promissory notes payable at March 31, 2015.







11



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







On January 27, 2015, the Company entered into a promissory note for $189,790 with a working interest partner which included past due amounts of $175,425 and additional interest of $14,364 which was recognized as expense.  The Company was scheduled to make nineteen monthly payments in the amount of $9,542 and subsequently make one monthly payment in the amount of $19,016.  The note bore interest at 6% per annum.On November 3, 2015, the Company granted 39,645,872 Warrants to Vast Exploration, LLC and/or assigns pursuant to the Warrant Purchase Agreement (Note 14).  The Warrants were granted in consideration of Vast Explorations assumption of the January 27, 2015 Promissory Note, totaling approximately $198,229 balance on the promissory note at the date of assignment (Note 14).



On February 12, 2015, the Company entered into a promissory note for $49,696 with a vendor which included accounts payable of $34,162 and additional interest of $15,534 which was recognized as expense.  The Company was scheduled to make one payment of $5,000, thirty-eight monthly payments in the amount of $1,500 and subsequently make one monthly payments in the amount of $1,378.  The note bears interest at 8% per annum. The note is currently in default.  At March 31, 2016, the balance due on the note was $37,790 and is included under Current portion of promissory notes payable.



On August 28, 2015, the Company entered into a promissory note for $37,892 as settlement of payable to a service provider.  The Company is scheduled to make twenty-four monthly payments in the amount of $1,579.  The note is non-interest bearing.  At March 31, the balance due on the note was $33,155.  The promissory note is currently in default and the balance is included in Current portion of promissory notes payable at March 31, 2016.



The Companys non-related party promissory notes and accrued interest consist of the following:



|                                                                         |                |           |                    |   |          
|------------------------------------------------------------------------ | -------------- | --------- | ------------------ | - | ---------
|                                                                         | March 31, 2016 |           | September 30, 2015
|July 2014 working interest note  0% interest rate, currently in default | $              | 31,642    |                    | $ | 31,642   
|January 2015 working interest note  6% interest rate                    |                | -         |                    |   | 201,139  
|February 2015 vendor note  8% interest rate, currently in default       |                | 37,790    |                    |   | 37,790   
|August 2015 vendor note  0% interest rate                               |                | 33,155    |                    |   | 36,304   
|Total principal                                                          |                | 102,587   |                    |   | 306,875  
|Less current portion                                                     |                | (102,587) |                    |   | (264,582)
|Long term portion                                                        | $              | -         |                    | $ | 42,293   
|                                                                         |                |           |                    |   |          
|Accrued interest payable  promissory notes, non-related party           | $              | 1,516     |                    | $ | -        



On October 1, 2015, the Company entered into a separation agreement with an executive which included provisions referencing execution of a promissory note in consideration of accrued compensation at September 30, 2015 in the amount of $110,781.  The promissory note was subsequently executed on or about December 1, 2015. The former Company officer was appointed to the Board of Directors, therefore is classified as a related party. The note accrues interest at 5% per annum with monthly interest-only payments through September 30, 2016.  The Company is scheduled to make twenty-four monthly payments beginning no later than October 31, 2016.  In the event of default, the note bears interest at 18%.



On February 29, 2016, the Company entered into a promissory note with a member of the Companys board of directors, a related party, in consideration of the director paying a trade payable on behalf of the Company.  The promissory note was in the amount of $10,393 and accrues interest at 6% per annum.  The Company is scheduled to make thirty-six monthly payments of $250 beginning no later than March 31, 2016 and one payment of $2,602 on March 31, 2019.



|                                                                           |                |          |                    |   |  
|-------------------------------------------------------------------------- | -------------- | -------- | ------------------ | - | -
|                                                                           | March 31, 2016 |          | September 30, 2015
|October 1, 2015  5% interest rate, interest payments currently in default | $              | 110,781  |                    | $ | -
|February 29, 2016  6% interest rate                                       |                | 10,393   |                    |   | -
|Total principal                                                            |                | 121,174  |                    |   | -
|Less current portion                                                       |                | (27,695) |                    |   | -
|Long term portion                                                          | $              | 93,479   |                    | $ | -
|Accrued interest payable  promissory notes, related party                 | $              | 10,050   |                    | $ | -





12



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







At March 31, 2016, principal payments on these notes are due as follows:



|                           |               |         |                   |   |         |  |   |        
|-------------------------- | ------------- | ------- | ----------------- | - | ------- |  | - | -------
|                           | Related party |         | Non-related party |   | Total  
|Year ending March 31, 2017 |               | 27,695  |                   |   | 102,587 |  | $ | 130,282
|Year ending March 31, 2018 |               | 55,002  |                   |   |         |  |   | 55,002 
|Year ending March 31, 2019 |               | 38,279  |                   |   | -       |  |   | 38,279 
|TOTAL PROMISSORY NOTES     | $             | 121,174 |                   | $ | 102,587 |  | $ | 223,761



NOTE 11.  ASSET RETIREMENT OBLIGATIONS



The Company has identified asset retirement obligations at the Girard, Kansas and Crosby, 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, to comply with these regulations.  These estimates have been projected out to the anticipated retirement date 6 to 15 years in the future, at an assumed inflation rate of 1.5 percent.  These amounts were discounted back at an assumed interest rate of 10 percent, to arrive at a net present value of the obligation.



During the year ended September 30, 2015, with respect to its Kansas properties, the Company revised its estimate to include additional well bores not previously considered to be subject to remediation exposure for the Company.  The increase in present value liability was added to the Companys Asset Retirement Obligation Asset which shall be amortized over the remaining useful life of the Kansas asset.   The Company revised its estimate on the remaining Kansas Asset Retirement Obligation to $112,311 as of September 30, 2015.



The amount of the increase in the obligation is charged to accretion expense and for the three months ended March 31, 2016 and 2015, was computed to be $6,166 and $4,016, respectively.  The amount of the increase in the obligation is charged to accretion expense and for the six months ended March 31, 2016 and 2015, was computed to be $12,332 and $8,032, respectively.  The Company expended $37,780 of reclamation work related to asset retirement obligation in North Dakota during the six months ended March 31, 2016.



The Company conveyed ownership of all rights in its North Dakota properties to Vast Exploration, LLC (Note 5) but maintained responsibility for reclamation and asset retirement obligations on two well sites.  As of March 31, 2016, a pending complaint from the State of North Dakota remained in effect, and consequently, the Company could be held liable for additional remediation and asset retirement obligations on the Jenks and Knudsen leases (Note 16).



NOTE 12   COMMON STOCK



On April 30, 2015, Vast Exploration presented the Company with a written Notice of Conversion of four of the Convertible Debentures into the Company's common stock. Vast Exploration, LLC converted $828,211 of the principal balance and $359,287 of accrued interest of the debentures for a total conversion of $1,187,498.  The conversion price was $0.01 per share.  The Company issued 118,749,788 shares of its common stock.  As a result of the issuance, Vast Exploration became the majority shareholder of the Company.



On June 8, 2015, the Company issued 600,000 shares of its common stock with a fair value of $6,000 to certain directors of the Company and the former Chief Executive Officer in consideration for accrued board fees and accrued compensation of $284,750.  The Company obtained forbearance agreements with the parties and recognized a gain on settlement of liabilities of $300,190.



On September 30, 2015, the Company issued 150,000 shares of its common stock with a fair value of $1,500 to a related party in consideration for termination of a lease agreement and settlement of liabilities of $17,113.



There have been no new issuances of shares of common stock for the three months ended March 31, 2015.





13



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







NOTE 13  STOCK BASED COMPENSATION



The Companys board of directors approved a stock and option plan on August 11, 2009 (the Plan).  The purpose of the Plan is to provide employees and consultants of the Corporation and its Subsidiaries with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Corporation and its Subsidiaries, to join the interests of employees and consultants with the interests of the shareholders of the Corporation, and to facilitate attracting and retaining employees and consultants of exceptional ability.  The total number of shares available for grant under the terms of the Plan is 4,000,000.  The number of shares subject to the Plan and any outstanding awards will be adjusted appropriately by the Board of Directors if the Companys common stock is affected through a reorganization, merger, consolidation, recapitalization, restructuring, reclassification dividend (other than quarterly cash dividends) or other distribution, stock split, spin-off or sale of substantially all of the Companys assets.



The Company recognizes compensation expense straight-line over the vesting term.  Historically, the Company has issued new shares to satisfy exercises of stock options and the Company expects to issue new shares to satisfy any future exercises of stock options.



The following table reflects the summary of changes during the periods ended September 30, 2015 and March 31, 2016:



|                                                        |                                |  |                                           |        |                           |   |  
|------------------------------------------------------- | ------------------------------ |  | ----------------------------------------- | ------ | ------------------------- | - | -
|                                                        | Number of shares under options |  | Weighted Average Exercise Price Per Share |        | Aggregate Intrinsic Value
|Balance outstanding and exercisable, September 30, 2014 | 4,000,000                      |  | $                                         | 0.01   |                           | $ | -
|Issued                                                  | -                              |  |                                           | -      |                           |   | -
|Exercised                                               | -                              |  |                                           | -      |                           |   | -
|Forfeited                                               | (600,000)                      |  |                                           | (0.01) |                           |   | -
|Balance outstanding and exercisable, September 30, 2015 | 3,400,000                      |  | $                                         | 0.01   |                           | $ | -
|Issued                                                  | -                              |  |                                           | -      |                           |   | -
|Exercised                                               | -                              |  |                                           | -      |                           |   | -
|Forfeited                                               | (2,250,000)                    |  |                                           | (0.01) |                           |   | -
|Balance outstanding and exercisable, March 31, 2016     | 1,150,000                      |  | $                                         | 0.01   |                           | $ | -



At March 31, 2016, all 1,150,000 options outstanding are fully vested and exercisable at $0.01 per share and have a weighted average remaining term of 2.53 years.  During the six months ended March 31, 2016, 2,250,000 held by two former members of the Companys Board of Directors were forfeited as a result of their resignations from the Board.



As of March 31, 2016, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. The Company recognized no compensation cost related to options vested during the three and six months ended March 31, 2016 and 2015, respectively.



NOTE 14  WARRANTS



On April 17, 2015 the Company granted, to four institutional investors, warrants to purchase up to an aggregate of 15,000,000 shares of the Companys common stock in consideration of the investors waiving the Companys prior defaults under the Convertible Debentures.  In addition to transactions discussed in Notes 5, 7, 10 and 8, the Warrants give the holders thereof the right to purchase common stock of the Company at the purchase price of $0.001 per share and expire on March 17, 2020. The fair value of the warrants issued was $167,441 was charged to financing costs.



Warrants Issued in Exchange for Settlement of Liabilities by Related Party



On September 25, 2015, the Company executed a Warrant Purchase Agreement pursuant to which the Company plans to issue and sell securities.  The terms of the Purchase Agreement allow a purchaser to receive a credit for its subscription for securities if the purchaser assumes certain accrued and/or contingent liabilities of the Company. The exercise price for the securities is $0.0050 per share for securities issued in exchange for the satisfaction of an assumed debt. The exercise price for the securities is $0.0025 per share for securities issued in exchange for the satisfaction of any assumed North Dakota reclamation liability. The securities are subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the



14



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016





Companys common stock that occur after the date of the Purchase Agreement. Each purchaser is required to deliver to the Company, prior to the issuance of securities, the following: (a) immediately available funds sufficient to satisfy or otherwise terminate a given liability; or (b) a receipt of funds and release of claims executed by a creditor of the Company, or other evidence, in a form satisfactory to the Company in its sole discretion, of the satisfaction of an assumed debt or North Dakota reclamation liability by the purchaser.



On October 8, 2015, the Company granted 94,333,678 Warrants to Vast Exploration, LLC pursuant to the Warrant Purchase Agreement.   The Warrants were granted in consideration of Vast Explorations assumption of certain Company liabilities totaling approximately $471,668.  The warrants may be exercised any time after October 8, 2015 until the close of business on October 7, 2020 for$0.005 per share.  The fair value of the warrants issued was $702,511 based on Black Scholes inputs of: Volatility  268.7%, Risk-free rate  1.5%, Estimated life  5 years, Stock price - $0.0075, Exercise Price - $0.005.  The fair value of the warrants issued was $702,511 at the date of issuance.  The Company recognized a loss on the settlement of liabilities in the amount of $230,843.  See Note 17.



On November 3, 2015, the Company granted 39,645,872 Warrants to Vast Exploration, LLC and/or assigns pursuant to the Warrant Purchase Agreement.  The Warrants were granted in consideration of Vast Explorations elimination of certain Company liabilities totaling approximately $198,229.  The warrants may be exercised any time after November 3, 2015 until the close of business on November 3, 2020 for $0.005 per share.The fair value of the warrants issued was $249,194 at the date of issuance.  The Company recognized a loss on the settlement of liabilities in the amount of $50,965.  See Note 17.



A summary of activity of the Company's share purchase and broker warrants outstanding at March 31, 2016 is presented as follows:



|                                        |                 |  |   |                                 |  |                         |  |                                 |       
|--------------------------------------- | --------------- |  | - | ------------------------------- |  | ----------------------- |  | ------------------------------- | ------
|                                        | Broker Warrants |  |   | Weighted Average Exercise Price |  | Share Purchase Warrants |  | Weighted Average Exercise Price
|Balance outstanding, September 30, 2014 | 1,000,000       |  | $ | 0.06                            |  | 2,777,778               |  | $                               | 0.05  
|Forfeited or expired                    | -               |  |   |                                 |  | (2,777,778)             |  |                                 | (0.05)
|Exercised                               | -               |  |   | -                               |  | -                       |  |                                 | -     
|Granted                                 | -               |  |   | -                               |  | 15,000,000              |  |                                 | 0.001 
|Balance outstanding, September 30, 2015 | 1,000,000       |  | $ | 0.06                            |  | 15,000,000              |  | $                               | 0.001 
|Forfeited or expired                    | -               |  |   |                                 |  | (2,777,778)             |  |                                 | (0.05)
|Exercised                               | -               |  |   | -                               |  | -                       |  |                                 | -     
|Granted                                 | -               |  |   | -                               |  | 133,979,550             |  |                                 | 0.005 
|Balance outstanding, March 31, 2016     | 1,000,000       |  | $ | 0.06                            |  | 148,979,550             |  | $                               | 0.005 



The following table reflects the composition of the Companys outstanding warrants as of March 31, 2016:



|                                    |  |                    |  |                |     |                   |  |                        |    
|----------------------------------- |  | ------------------ |  | -------------- | --- | ----------------- |  | ---------------------- | ---
|Issuance date                       |  | Number of warrants |  | Exercise price |     | Expiration date   |  | Remaining life (years)
|February 15, 2012                   |  | 1,000,000          |  | $0.06          |     | February 15, 2017 |  | 0.88                   |    
|April 16, 2015                      |  | 15,000,000         |  | $0.001         |     | March 17, 2020    |  | 3.96                   |    
|October 8, 2015                     |  | 94,333,678         |  | $0.005         |     | October 8, 2020   |  | 4.52                   |    
|November 3, 2015                    |  | 39,645,872         |  | $0.005         |     | November 3, 2020  |  | 4.60                   |    
|Balance outstanding, March 31, 2016 |  | 149,979,550        |  | $0.005         | (a) |                   |  | 4.46                   | (a)

(a) Weighted average



15



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







NOTE 15  RELATED PARTY TRANSACTIONS



In addition to transactions discussed in Notes 5, 7, 8 and 10, on or about December 1, 2011, the Company entered into a four-year lease with Marlin Property Management, LLC, an entity owned by the spouse of the Company's former President/CEO and member of the board of directors.  Under the terms of the lease the Company is required to pay $2,500 per month for office space in Coeur d'Alene, Idaho.  For the three months ended March 31, 2016 and 2015, the Company paid $Nil and $5,000 respectively to the then-related party. For the six months ended March 31, 2016 and 2015, the Company paid $Nil and $12,500, respectively.  The balance due to the related party including common area expenses as of March 31, 2016 and September 30, 2015 was $Nil because the lease was terminated.



On April 17, 2015, the Board of Directors appointed the Chief Executive Officer and Manager of Vast Exploration, LLC as a director of the Company to fill a vacancy on the Board and in connection with Vast Exploration, LLCs acquisition of certain Convertible Debentures from institutional investors (Note 8).  The Chief Executive Officer and Manager of Vast Exploration, LLC was appointed as the Chairman of the Board of Directors of the Company.



On July 8, 2015, the Company executed a Contract Operating Agreement (the Operating Agreement) with Vast Exploration, effective as of January 1, 2015. Under the terms of the Operating Agreement, Vast Exploration became the operator of record for all of the Companys properties and is responsible for the operation of the Companys oil and gas properties, which includes handling routine operations, major operations, reporting services and other miscellaneous services. The Company paid Vast Exploration a monthly fee for services in the amount of $20,000. The Company remained responsible for all fees, expenses and taxes related to its properties and has agreed to reimburse Vast Exploration for any fees, expenses or taxes advanced on the Companys behalf. The Company has the right to audit the books, records and invoices maintained by Vast Exploration in its operation of the Company properties. The term of the Operating Agreement is two years from the effective date. The Operating Agreement automatically renewed for successive one year terms until the Company or Vast Exploration provide notice of non-renewal. The Operating Agreement includes mutual indemnities and waivers of consequential and punitive damages. The Operating Agreement also includes release and hold harmless provisions for the exclusive benefit of Vast Exploration. Finally, the Operating Agreement consents to and ratifies any operational services Vast Exploration has provided to the Company prior to the date the Operating Agreement was executed.  Vast Exploration billed the Company $160,000 for the year ended September 30, 2015 which was charged to production expense and subsequently billed to working interest partners for their pro-rata share of the expense.  The North Dakota portion of the  Operating Agreement terminated on or about August 31, 2015 with the conveyance of the asset to Vast Exploration, LLC.



Vast Exploration is a controlling shareholder of the Company, the contract operator of the Companys oil and gas properties and an affiliate of Vast Petroleum Corp.  an entity that entered into a joint development agreement for the Companys oil and gas operations in Kansas in May 2014. Vast Petroleum Corp. was not a party to the Agreements. The Chairman of the Board of Directors for the Company, is the individual who possesses voting and dispositive authority on behalf of Vast Exploration. Acting in his capacity of Chairman of the Board of the Company, he recused himself from voting on the approval of the Contract Operating Agreement, which was subsequently approved by the remaining members of the Companys Board of Directors.



For the six months ended March 31, 2016, Vast Exploration, LLC billed the Company $30,000, the balance of which is included in Convertible Line of Credit, related party and was charged to production expense  natural gas.



NOTE 16  COMMITMENTS AND CONTINGENCIES



On August 1, 2013, the North Dakota Industrial Commission (NDIC) submitted an administrative complaint to the State of North Dakota related to plugging and remediation of the Companys Jenks #1 and Knudsen #1 wells in Crosby, ND. On February 18, 2014, the Company entered into a Consent Agreement with the State of North Dakota whereby the Company was required to finish reclamation work, by June 30, 2014, on the two waste water storage pits adjacent to the Jenks #1 and Knudsen #1 wells respectively.  The Consent Agreement required the Company to plug the production zone of the Jenks #1 well. Once plugging was completed, the Company could then apply for a permit to convert the Jenks #1 well into a salt water disposal well.  As a part of the Consent Agreement the Company agreed to pay a civil penalty of no less than $105,000, consisting of $25,000 due and payable upon execution of the Consent Agreement and a $16,000 installment payment per month for five successive months thereafter.  If the Company failed to comply with the terms of the Consent Agreement, the Company would be subject to penalties of up to an additional $420,000 (over and above the $105,000 penalty agreed to in the Consent Agreement). The Company made the initial $25,000 payment and subsequently made each monthly payment with the final installment of $16,000 paid to the State of North Dakota on June 26, 2014.  The Company made the final installment payment of $16,000 to the State of North Dakota on June 26, 2014.  As of September 30, 2014, the Company had completed substantially all reclamation work and has paid all fines assessed.





16



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016





On July 10, 2014, the Company completed reclamation work on both the Jenks #1 and Knudsen #1 waste water storage pits.  Although reclamation work was to have been completed by June 30, 2014, unseasonably heavy rains which saturated the soil and limited safe access to the site by heavy equipment delayed scheduled reclamation until such time as ground conditions improved. The Company also completed plugging of the production zone on the Jenks #1 well and set a balance plug on the Knudsen #1 well bore.  Due to JayHawks failure to timely submit a cost estimate for the final plugging, abandonment and reclamation of the Jenks #1 well and site, the NDIC, on January 28, 2015, pursuant to Commission Order No. 25588 ordered JayHawk to file a $120,000 bond covering the Jenks #1. The bond was a plugging and reclamation bond.  On May 9, 2015, the Company received a copy of a Summons and Complaint filed by the State of North Dakota and the NDIC in the Northwest Judicial District Court of North Dakota alleging JayHawk had violated N.D.C.C. Chapter 38-08 by failing to post the $120,000 plugging and reclamation bond pursuant to Commission Order No. 25588. N.D.C.C. § 38-08-16 provides that anyone who violates a provision of N.D.C.C. Chapter 38-08, or any rule or regulation of the Commission is subject to a penalty of up to $12,500 for each offense, and each days violation is a separate offense. The Complaints prayer for relief requested that JayHawk be ordered to deposit $120,000 with the Bank of North Dakota to satisfy the Commissions requirement for the plugging and reclamation bond on the Jenks #1 well. The NDIC also requested that JayHawk pay a fine of $12,500 per day beginning February 4, 2015, for failure to provide a plugging and reclamation bond on the Jenks #1. The Company subsequently met with the NDIC, which resulted in the NDIC staying the litigation subject to JayHawks immediate plugging, abandonment and reclamation of the Jenks #1. In September of 2015 the Company completed final plugging and abandonment of the Jenks #1 and completed a partial reclamation of the well and site.



On February 12, 2015, the Company entered into a settlement agreement with the Staff of the Corporation Commission of the State of Kansas with respect to a Penalty Order served by the Company for failure to comply with certain portions of the Kansas Administrative Regulations.  The Company was found in violation of failure to plug, return to service or temporarily abandon 71 wells and assessed a $7,100 penalty, of which $3,100 was payable immediately, a $2,000 payment due by April 1, 2015 and the final $2,000 payment by May 1, 2015.  The Company has subsequently submitted 71 temporary abandonment applications, of which 71 applications were approved.  The Company has up to one year to plug the wells, return them to service or file additional temporary abandonment applications.



NOTE 17  GAIN (LOSS) ON SETTLEMENT OF LIABILITIES



On October 8, 2015, the Company granted 94,333,678 Warrants to Vast Exploration, LLC, pursuant to the Warrant Purchase Agreement.   The Warrants were granted in consideration of Vast Explorations assumption of certain Company liabilities totaling approximately $471,668.The fair value of the warrants issued was $702,511 at the date of issuance.  The Company recognized a loss on the settlement of liabilities in the amount of $230,843.



On November 3, 2015, the Company granted 39,645,872 Warrants to Vast Exploration, LLC, pursuant to the Warrant Purchase Agreement.  The Warrants were granted in consideration of Vast Explorations elimination of certain Company liabilities totaling approximately $198,229.The fair value of the warrants issued was $249,194 at the date of issuance.  The Company recognized a loss on the settlement of liabilities in the amount of $50,965.



On December 11, 2015, the Company recognized a gain on settlement of liabilities with a vendor in the amount of $7,459.



Total loss on settlement of liabilities for the three months ended March 31, 2016 was $Nil.  Total loss on the settlement for the six months ended March 31, 2016 was $274,349.



17



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







NOTE 18  REVISION OF FINANCIAL STATEMENT



The Company has revised the September 30, 2015 consolidated financial statements to reverse the impact of a reverse stock split.  Subsequent to issuance of the aforementioned financial statement, the Company decided to rescind the 100:1 reverse stock split that had previously approved by the majority shareholder.  The consolidated balance sheet as of September 30, 2015, presented in these interim financial statements reflect the common stock and additional paid in capital subsequent to the recension of the reverse stock split.   Disclosures pertaining to per share and shares of common stock have also been revised to reflect the recension.  The previously issued financial statements have been revised as follows:



|                                            |  |   |                        |  |   |           |  |   |             
|------------------------------------------- |  | - | ---------------------- |  | - | --------- |  | - | ------------
|Balance Sheet at September 30, 2015         |  |   | As Previously Reported |  |   | Revision  |  |   | As Revised  
|Total assets                                |  | $ | 349,315                |  | $ | -         |  | $ | 349,315     
|Total liabilities                           |  | $ | 3,087,584              |  |   | -         |  | $ | 3,087,584   
|Shareholders deficit                       |  |   |                        |  |   |           |  |   |             
|Common stock                                |  |   | 1,999                  |  |   | 197,877   |  |   | 199,876     
|Additional paid in Capital                  |  |   | 24,998,897             |  |   | (197,877) |  |   | 24,801,020  
|Accumulated deficit                         |  |   | (27,739,165)           |  |   | -         |  |   | (27,739,165)
|Total shareholders deficit                 |  |   | (2,738,269)            |  |   | -         |  |   | (2,738,269) 
|Total liabilities and shareholders deficit |  | $ | 349,315                |  | $ | -         |  | $ | 349,315     



NOTE 19  SUBSEQUENT EVENTS



On June 30, 2016, Vast Exploration, LLC gave notice to the Company that the $150,000 Revolving Line of Credit Note (Line of Credit) entered into between the parties on June 30, 2015 would not be renewed past the maturity date of the Line of Credit and that the final date for determining the principal and interest owed to Vast Exploration on the Line of Credit would be June 30, 2016. The balance on the Line of Credit was $339,675 as of March 31, 2016.  The balance on the Line of Credit at June 30, 2016 was $380,014.



On February 2, 2011, the Industrial Commission of the State of North Dakota filed a complaint against the Company for violating North Dakota Administrative Code Section (NDAC) 43-02-03-19 by failing to reclaim wells within a reasonable time, not more than one year from the date a well is plugged, NDAC Section 43-02-03-17 by failing to have the required signs posted on site, NDAC 43-02-03-45 for failing to equip each flare with an automatic ignitor or a continuous burning pilot, and NDAC 43-02-05-49 by failing to properly seal oil tanks in the following wells in Divide County, North Dakota: Knudsen 1, Jenks 1, Arla Knudsen 1-28H and Landstrom 3-33H. In the complaint, the Commission requested JayHawk pay $100,000 in fines and pay $485 in costs and expenses incurred by the Commission. In lieu of a formal hearing on the complaint, the parties agreed to resolve all matters in the complaint. The complaint was dismissed without prejudice on August 29, 2016.



On September 1, 2016, the Company entered into a Limited Liability Company Member Interest Purchase and Sale Agreement (LLC Purchase Agreement) with Vast Exploration, LLC, a related party. Pursuant to the terms of the LLC Purchase Agreement, Vast Exploration sold 100% of its membership interests in Vast Operations, LLC, a Nevada limited liability company, to the Company as-is and in consideration for $10.00 and the Companys indirect assumption of approximately $100,000 of Vast Operations, LLCs liabilities. As a result of the purchase, Vast Operations, LLC became a wholly-owned subsidiary of JayHawk. Additionally, the Company indirectly acquired the contractual obligation to operate certain oil and gas assets in the state of North Dakota.



On September 1, 2016, the Company entered into a Limited Liability Company Member Interest Purchase and Sale Agreement (LLC Purchase Agreement) with Vast Exploration, LLC, a related party. Pursuant to the terms of the LLC Purchase Agreement, Vast Exploration sold 100% of its membership interests in Vast Holdings, LLC, a Nevada limited liability company, to the Company as-is and in consideration for $10.00 and the Companys assumption of approximately $600,000 of Vast Holdings, LLCs liabilities. As a result of the purchase, Vast Holdings, LLC became a wholly-owned subsidiary of the Company.  Additionally, the Company indirectly acquired certain oil and gas assets in the state of North Dakota.





18



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016







On September 1, 2016, the Company entered into a Limited Liability Company Member Interest Purchase and Sale Agreement (LLC Purchase Agreement) with Vast Exploration, LLC, a related party.  Pursuant to the terms of the Stock Purchase Agreement, Vast Exploration sold 100% of Vast Funding Corp., a Nevada corporation, evidenced by 100,000,000 shares of common stock to the Company as-is and in consideration for $10.00 and the indirect assumption of approximately $550,000 in Vast Funding Corp.s liabilities. As a result of the purchase, Vast Funding Corp. became a wholly-owned subsidiary of the Company. Additionally, the Company indirectly acquired a funding vehicle for proving up certain oil and gas assets indirectly acquired through the acquisition of Vast Holdings, LLC.



On September 20, 2016, the Company issued Convertible Promissory Notes to entities controlled by three affiliates of Vast Exploration, LLC, a related party,  for services to the Company. The Convertible Promissory Notes have an aggregate principal balance of $19,500 with an interest rate of 5% per annum and a term of two years, maturing on September 20, 2018.  The Convertible Promissory Notes 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 $0.0065 per share, or an aggregate of 3,000,000 shares.  Upon the occurrence of a corporate re-organizational or re-capitalization event, the Convertible Promissory Notes shall automatically convert into shares of the Companys common stock.



On September 20, 2016, the Company issued a Convertible Promissory Note to an entity controlled by a related party in consideration for a reduction in amounts owed to the related party for legal services previously rendered to the Company. The Convertible Promissory Note has a principal balance of $6,500 with an interest rate of 5% per annum and a term of two years, maturing on September 20, 2018.  The Convertible Promissory Note is 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 $0.0065 per share, or an aggregate of 1,000,000 shares.  Upon the occurrence of a corporate re-organizational or re-capitalization event, the Convertible Promissory Note shall automatically convert into shares of the Companys common stock.



On October 1, 2016, Vast Exploration, LLC gave advanced written notice to the Company of its intent to terminate that certain Contract Operating Agreement made effective between the parties on January 1, 2016.



On November 11, 2016, the Company entered into a Settlement Agreement with a director of the Company.  The purpose of the Settlement Agreement was to come to a resolution regarding certain outstanding dollar and equity amounts owed to the director for wages, consulting services rendered and change of control provisions related to his employment contract and to maintain an amicable working relationship moving forward. The Company agreed to provide the director with the following consideration:



The Company will execute a convertible promissory note with a face value of $177,173.49 US to The director and/or assigns; the note will have a term of four (4) years and an interest rate of null (0%) and includes certain interest penalties in the event a default occurs and is secured by a pledge of 350,000 shares of the Companys common stock (Note).   The Note is convertible into shares of the Companys common stock at a rate equal to the lesser of: (a) the conversion rate provided to a plurality of investors in the Companys first round of financing wherein the Company raises at least $300,000 following the completion of its contemplated 100:1 reverse split of its securities, or (b) the closing price on the first day of trading immediately following the Companys 100:1 reverse split. The Note has an effective date of December 20, 2016 (Effective Replacement Note Date).



Upon the occurrence of the Company having raised at least three million dollars ($3,000,000) in the aggregate through the sale of debt or equity securities of the Company, the director will have the option to have the remaining balance of the Note paid in full.   In the event JayHawk Energy, Inc. makes a disposition of substantially all of its assets (including those held in subsidiaries) the holder of the Note shall have the option to foreclose on the stock pledge described above.



The director will be granted 100,000 common stock purchase warrants (Warrants) in four (4) tranches. The Warrants will have a term of five (5) years and shall convert at $0.01 per common share. The Warrants will include a cashless exercise provision. The director will be granted twenty-five thousand (25,000) Warrants upon filing of JayHawk Energy, Inc.s Form 10-Q for the first fiscal quarter ended December 31, 2015. The director will be granted twenty-five thousand (25,000) Warrants upon filing of JayHawk Energy, Inc.s Form 10-Q for the second fiscal quarter ended March 31, 2016. The director will be granted twenty-five thousand (25,000) Warrants upon filing of JayHawk Energy, Inc.s Form 10-Q for the third fiscal quarter ended June 30, 2016. The director will be granted twenty-five thousand (25,000) Warrants upon filing of JayHawk Energy, Inc.s Form 10-K for the fiscal year ended September 30, 2016.





19



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JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016





The Company and the director may agree to adjust the amounts described above to effect the spirit of the Settlement Agreement.



On December 9, 2016, the Company and the director agreed to modify the Settlement Agreement.   The modification eliminated certain penalty provisions related to milestones and added an additional scope of work for additional consideration.









20



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



Results of Operations



Revenues:For the three months ending March 31, 2016 and 2015, revenues reported as JayHawk's net working interest were $Nil and $41,902 respectively.  The comparative volume of oil and gas delivered and the average prices received during each of the two respective three month periods of 2016 and 2015, are disclosed in the following table:



|                                    |         |  |               |  |               |  |      |       |      |   |      |  |   |         
|----------------------------------- | ------- |  | ------------- |  | ------------- |  | ---- | ----- | ---- | - | ---- |  | - | --------
|                                    | Volumes |  | Average Price |  | Gross Revenue
|                                    | 2016    |  | 2015          |  | 2016          |  | 2015 |       | 2016 |   | 2015
|Oil sales (in barrels)              | -       |  | 2,653         |  | -             |  | $    | 30.69 |      | $ | -    |  | $ | 81,425  
|Gas sales (in thousand cubic feet)  | -       |  | -             |  | -             |  |      | -     |      |   | -    |  |   | -       
|Total gross receipts                |         |  |               |  |               |  |      |       |      |   | -    |  |   | 81,425  
|Less: working and royalty interests |         |  |               |  |               |  |      |       |      |   | -    |  |   | (37,648)
|Less: severance taxes               |         |  |               |  |               |  |      |       |      |   | -    |  |   | (1,875) 
|Net revenues to Jayhawk             |         |  |               |  |               |  |      |       |      | $ | -    |  | $ | 41,902  



For the six months ending March 31, 2016 and 2015, revenues reported as JayHawk's net working interest were $Nil and $110,694 respectively.  The comparative volume of oil and gas delivered and the average prices received during each of the two respective six month periods ended March 31, 2016 and 2015, are disclosed in the following table:



|                                    |         |  |               |  |               |  |      |       |      |   |      |  |   |         
|----------------------------------- | ------- |  | ------------- |  | ------------- |  | ---- | ----- | ---- | - | ---- |  | - | --------
|                                    | Volumes |  | Average Price |  | Gross Revenue
|                                    | 2016    |  | 2015          |  | 2016          |  | 2015 |       | 2016 |   | 2015
|Oil sales (in barrels)              | -       |  | 5,314         |  | -             |  | $    | 40.53 |      | $ | -    |  | $ | 215,390 
|Gas sales (in thousand cubic feet)  | -       |  | -             |  | -             |  |      | -     |      |   | -    |  |   | -       
|Total gross receipts                |         |  |               |  |               |  |      |       |      |   | -    |  |   | 215,390 
|Less: working and royalty interests |         |  |               |  |               |  |      |       |      |   | -    |  |   | (99,710)
|Less: severance taxes               |         |  |               |  |               |  |      |       |      |   | -    |  |   | (4,986) 
|Net revenues to Jayhawk             |         |  |               |  |               |  |      |       |      | $ | -    |  | $ | 110,694 



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



No oil was sold during the three and six months ended March 31, 2016.  For the three month period ending March 31, 2015, JayHawk sold a gross 2,653 barrels (Bbls).  For the six months ended March 31, 2015, JayHawk sold 5,314 barrels (Bbls).   This production was sold at average prices of $40.53/Bbl.  Volume of oil delivered during the three month period ending March 31, 2016 decreased by 2,653 barrels over the same timeframe in 2015.  Volumes of oil delivered during the six month period ending March 31, 2016 decreased by 5,314 barrels over the same timeframe in 2015.



The decrease in gross revenues is wholly attributable to the Company's conveyance of the Crosby, North Dakota wells to Vast Exploration, LLC, a related party.  The Company divested of its oil wells on September 1, 2015.



Gas Revenues:Revenues derived from gas sales for the three months ended March 31, 2016 and 2015 were $Nil and $Nil, respectively. The Company suspended production in 2013 with the intent of re-starting operations in Kansas in anticipation of increased natural gas prices at some point in the future. The Company did not produce natural gas during the fiscal year ended September 30, 2015, due to low natural gas prices and significant costs associated with upgrading the meters at its Bourbon County tap head.  The average price received for the six- month period ending March 31, 2016 was $0.00 per mcf.  The average price received for the six-month period ending March 31, 2015 was $0.00 per mcf.   The Company will determine in fiscal year end September 30, 2017 whether its Kansas - Girard Project remains economically viable under current market conditions.



Exploration Expenses:  There were no exploration expenses incurred during the three and six months ended March 31, 2016 or 2015.



Operating Expenses:Production expenses are comprised of field labor, maintenance, chemicals, fuel, and salt water disposal, less amounts charged other working interests in the particular wells.





21



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The expenses associated with the Companys North Dakota oil operations changed from $98,238 for the three months ending March 31 2015 to $2,802 for the three months ended March 31, 2016, a decrease of $126,324.



Total operating expenses for the three months ended March 31, 2016 and 2015 were $91,180 and $217,504, respectively.  The expenses are segregated as follows:



|                                          |                                   |       |                                   |   |        |  |       |        |  |   |        |  |   |        
|----------------------------------------- | --------------------------------- | ----- | --------------------------------- | - | ------ |  | ----- | ------ |  | - | ------ |  | - | -------
|                                          | Three months ended March 31, 2016 |       | Three months ended March 31, 2015
|                                          | Crosby, ND                        |       | Girard, KS                        |   | G&A    |  | Total |       
|Direct regional costs                     | $                                 | -     |                                   | $ | 17,765 |  | $     | -      |  | $ | 17,765 |  |   | 76,323 
|Loss on leases and equipment              |                                   | -     |                                   |   | -      |  |       | -      |  |   | -      |  |   | -      
|Depreciation, depletion and amortization  |                                   | -     |                                   |   | 4,427  |  |       | -      |  |   | 4,427  |  |   | 31,631 
|General and administrative                |                                   | -     |                                   |   | -      |  |       | 62,822 |  |   | 62,822 |  |   | 105,534
|North Dakota reclamation costs            |                                   | -     |                                   |   | -      |  |       | -      |  |   | -      |  |   | -      
|Accretion of asset retirement obligations |                                   | 2,802 |                                   |   | 3,364  |  |       | -      |  |   | 6,166  |  |   | 4,016  
|                                          | $                                 | 2,802 |                                   | $ | 25,556 |  | $     | 62,822 |  | $ | 91,180 |  | $ | 217,504



North Dakota operating expenses for the six months ended March 31, 2016 and 2015 were $9,388 and $44,314, respectively.  The expenses are segregated as follows:



|                                          |                                 |       |                                 |   |        |  |       |         |  |   |         |  |   |        
|----------------------------------------- | ------------------------------- | ----- | ------------------------------- | - | ------ |  | ----- | ------- |  | - | ------- |  | - | -------
|                                          | Six months ended March 31, 2016 |       | Six months ended March 31, 2015
|                                          | Crosby, ND                      |       | Girard, KS                      |   | G&A    |  | Total |        
|Direct regional costs                     | $                               | (643) |                                 | $ | 33,159 |  | $     | -       |  | $ | 32,516  |  |   | 110,285
|Loss on leases and equipment              |                                 | -     |                                 |   | -      |  |       | -       |  |   | -       |  |   | -      
|Depreciation, depletion and amortization  |                                 | 4,427 |                                 |   | 4,427  |  |       | -       |  |   | 8,854   |  |   | 62,900 
|General and administrative                |                                 | -     |                                 |   | -      |  |       | 108,337 |  |   | 108,337 |  |   | 213,334
|North Dakota reclamation costs            |                                 | -     |                                 |   | -      |  |       | -       |  |   | -       |  |   | 2,306  
|Accretion of asset retirement obligations |                                 | 5,604 |                                 |   | 6,728  |  |       | -       |  |   | 12,332  |  |   | 8,032  
|                                          | $                               | 9,388 |                                 | $ | 44,314 |  | $     | 108,337 |  | $ | 162,039 |  | $ | 396,857



General and Administrative Expenses:  General and administrative expenses decreased 40.5% or $42,712 to $62,822 for the three months ended March 31, 2016 from $105,534 for the comparable period ended March 31 2015.



|                                            |                             |        |      |   |          |  |                |          |  |         
|------------------------------------------- | --------------------------- | ------ | ---- | - | -------- |  | -------------- | -------- |  | --------
|                                            | Three months ended March 31 |        |      |   |         
|                                            | 2016                        |        | 2015 |   | $ Change |  | Percent change
|                                            |                             |        |      |   |          |  |                |          |  |         
|Compensation and payroll taxes              | $                           | 15,000 |      | $ | 19,219   |  | $              | (4,219)  |  | (22.0%) 
|Directors fees                              |                             | -      |      |   | 13,500   |  |                | (13,500) |  | (100.0%)
|Legal, professional and consulting          |                             | 13,308 |      |   | 16,639   |  |                | (3,331)  |  | (20.0%) 
|Audit and public company expense            |                             | 21,307 |      |   | 21,927   |  |                | (620)    |  | (2.8%)  
|Insurance                                   |                             | 12,989 |      |   | 18,224   |  |                | (5,235)  |  | (28.7%) 
|Office and other general and administrative |                             | 218    |      |   | 16,025   |  |                | (15,807) |  | (98.6%) 
|Total                                       | $                           | 62,822 |      | $ | 105,534  |  | $              | (42,712) |  | (40.5%) 







22



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Compensation and payroll taxes decreased $4,219 over the comparable period ending March 31, 2015.  Company management took no salary during the three months ended March 31, 2016, and all compensation related expenses were non-cash accruals.



Audit fees and public company expense increased for the three months ended March 31, 2016 by $620 over the comparable three months ended March 31 2015, primarily as a result of professional fees incurred in various corporate transactions throughout the fiscal period.  Legal, professional and consulting fees decreased $3,331for the three months ended March 31, 2016 compared to the three months ended March 31 2015.



Office and other general and administrative expenses decreased 98.6% or $15,807 to $218 for the three months ended March 31, 2016 from $16,025 for the comparable period ended March 31, 2015.



General and Administrative Expenses:  General and administrative expenses decreased 49.2% or $104,997 to $108,337 for the six months ended March 31, 2016 from $213,334 for the comparable period ended March 31 2015.



|                                            |                            |         |      |   |          |  |                |           |  |         
|------------------------------------------- | -------------------------- | ------- | ---- | - | -------- |  | -------------- | --------- |  | --------
|                                            | Six months ended March 31, |         |      |   |         
|                                            | 2016                       |         | 2015 |   | $ Change |  | Percent change
|                                            |                            |         |      |   |          |  |                |           |  |         
|Compensation and payroll taxes              | $                          | 24,000  |      | $ | 41,826   |  | $              | (17,826)  |  | (42.6%) 
|Directors fees                              |                            | -       |      |   | 26,500   |  |                | (26,500)  |  | (100.0%)
|Legal, professional and consulting          |                            | 29,485  |      |   | 18,468   |  |                | 11,017    |  | 59.7%   
|Audit and public company expense            |                            | 30,058  |      |   | 62,078   |  |                | (32,020)  |  | (51.6%) 
|Insurance                                   |                            | 24,371  |      |   | 36,449   |  |                | (12,078)  |  | (33.1%) 
|Office and other general and administrative |                            | 423     |      |   | 28,013   |  |                | (27,590)  |  | (98.5%) 
|Total                                       | $                          | 108,337 |      | $ | 213,334  |  | $              | (104,997) |  | (49.2%) 



Compensation and payroll taxes decreased $17,826 over the comparable six month period ending March 31, 2015.  Company management took no salary during the nine months ended March 31, 2016, and all compensation related expenses were non-cash accruals.



Audit fees and public company expense decreased for the six months ended March 31, 2016 by $32,020 over the comparable six months ended March 31 2015, primarily as a result of professional fees incurred in various corporate transactions throughout the fiscal period in 2015.  Legal, professional and consulting fees increased $11,017 for the six months ended March 31, 2016 compared to the six months ended March 31 2015.



Office and other general and administrative expenses decreased 98.5% or $27,590 to $423 for the nine months ended March 31, 2016 from $28,013 for the comparable period ended March 31, 2015.  The Company did not maintain or pay rent on a physical office space during 2016.



Other Income (Expense): Detail of the aggregate of this classification for the three months ended March 31, 2016 and 2015, respectively, is disclosed in the following table:



|                                                                    |                              |          |      |   |           |  |                |          |  |         
|------------------------------------------------------------------- | ---------------------------- | -------- | ---- | - | --------- |  | -------------- | -------- |  | --------
|                                                                    | Three months ended March 31, |          |      |   |          
|                                                                    | 2016                         |          | 2015 |   | $ Change  |  | Percent change
|                                                                    |                              |          |      |   |           |  |                |          |  |         
|Net interest and financing costs                                    | $                            | (7,109)  |      | $ | (71,351)  |  | $              | 64,242   |  | (90.0%) 
|Net interest, related party                                         |                              | (56,619) |      |   | -         |  |                | (56,619) |  | N/A     
|Amortization of debt discount                                       |                              | (30,000) |      |   | (30,000)  |  |                | -        |  | 0.0%    
|Gain (loss) on change in fair value of conversion option derivative |                              | -        |      |   | (53,534)  |  |                | 53,534   |  | (100.0%)
|Gain on change in fair value of warrant derivative                  |                              | (2,299)  |      |   | (1,329)   |  |                | (970)    |  | 73.0%   
|Total                                                               | $                            | (96,027) |      | $ | (156,214) |  | $              | 60,187   |  | (74.8%) 





23



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Total interest expense decreased $7,623 during the three months ended March 31, 2016 compared to the three months ended March 31 2015.  Additionally, interest expense is reported net of interest income, of which there was a minimal amount reported in the current year as a result of limited excess cash availability for investment.



The Company had no conversion option derivative for the three months ended March 31, 2016 and, consequently, the associated expense decreased by $53,534 compared to the three months ended March 31, 2015.



Detail of the aggregate of this classification for the six months ended March 31, 2016 and 2015, respectively, is disclosed in the following table:



|                                                             |                            |           |      |   |           |  |                |           |  |         
|------------------------------------------------------------ | -------------------------- | --------- | ---- | - | --------- |  | -------------- | --------- |  | --------
|                                                             | Six months ended March 31, |           |      |   |          
|                                                             | 2016                       |           | 2015 |   | $ Change  |  | Percent change
|                                                             |                            |           |      |   |           |  |                |           |  |         
|Net interest and financing costs                             | $                          | (11,609)  |      | $ | (108,836) |  | $              | 97,227    |  | (89.3%) 
|Net interest, related party                                  |                            | (96,346)  |      |   | -         |  |                | (96,346)  |  |         
|Amortization of debt discount                                |                            | (60,000)  |      |   | (60,000)  |  |                | -         |  | 0.0%    
|Loss on settlement of liabilities                            |                            | (274,349) |      |   | -         |  |                | (274,349) |  | -       
|Gain on change in fair value of conversion option derivative |                            | -         |      |   | 378,484   |  |                | (378,484) |  | (100.0%)
|Gain on change in fair value of warrant derivative           |                            | 263       |      |   | 14,111    |  |                | (13,848)  |  | (98.1%) 
|Total                                                        | $                          | (442,041) |      | $ | 223,759   |  | $              | (665,800) |  | (297.6%)



Total interest expense decreased $881 during the six months ended March 31, 2016 compared to the six months ended March 31 2015.  Additionally, interest expense is reported net of interest income, of which there was a minimal amount reported in the current year as a result of limited excess cash availability for investment.



The Company had no conversion option derivative for the six months ended March 31, 2016 and, consequently, the associated gain on change in fair value of the derivative liability decreased by $378,484 compared to the six months ended March 31, 2015.



Vast Exploration, LLC, a related party, assumed liabilities in consideration of warrants to purchase shares of common stock of the Company, which resulted in a loss on settlement of liabilities of $274,349 during the six months ended March 31, 2016.



Liquidity and Capital Resources.



At March 31, 2016 and 2015, the Company's cash balances were $255 and $161, respectively.  The Company's accounts receivable totaled $Nil and $16,675 respectively.



The Company's working capital deficit (current liabilities less current assets) was $2,179,592 at March 31, 2016 of which $470,439 is in the form of convertible debentures which are currently due.  At March 31, 2015, the Company's working capital deficit was $2,868,151, of which $1,038,687 of convertible debentures were due in the current year and in default.



To fully carry out the Company's business plans the Company needs to raise a substantial amount of additional capital, or obtain industry joint venture financing. The Company can give no assurance that it will be able to raise such capital or enter into any other beneficial business arrangements. The Company has limited financial resources until such time that it is able to generate such additional financing or cash flow from operations. The Company's ability to establish profitability and positive cash flow is dependent upon its ability to exploit its mineral holdings, generate revenue from its planned business operations and control exploration cost.  Should the Company be unable to raise adequate capital or to meet the other above objectives, it is likely that the Company would have to substantially curtail its business activity, and that the Company's investors would incur substantial losses of their investment.



The accompanying Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As reflected in the accompanying Consolidated Financial Statements the Company is an independent oil and gas company with a limited operating history and losses since inception. These factors, among others, may indicate that the Company will be unable to continue as a going concern for reasonable period of time.









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The Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company's continuation as a going concern is dependent upon its ability to obtain additional operating capital, and ultimately, to attain profitability. The Company intends to acquire additional operating capital through debt or equity offerings, or through joint ventures or other business arrangements, to fund its business plan.  There is no assurance that the Company will be successful in raising additional funds.



Cash Flows:  Net cash provided by operations decreased primarily due to less cash being received for the Companys crude oil sales associated with improved ability to deliver oil to market.   Decline in oil prices adversely affected revenues and costs of workovers on the North Dakota  Crosby Project hampered gross margin.   For the six months ending at March 31, 2016, cash used by operating activities exceeded cash provided by operating activities by $165,934.  For the six months ending at March 31 2015, cash used by operating activities exceeded cash provided by operating activities by $171,446.



Cash flows used by investing activities for the six months ended March 31, 2016 and 2015, respectively, was $52 and $Nil.



The Cash flows provided (used) by financing activities were $166,241 and ($5,653) for the six months ended March 31, 2016 and 2015, respectively.   The Company entered into a Line of Credit agreement with related party Vast Exploration, LLC as a means to provide cash flow for ongoing capital needs of the Company.



Commitments:As noted in Item 3 of this report, on or about August 1, 2013, the North Dakota Industrial Commission (NDIC) submitted an administrative complaint to the State of North Dakota related to plugging and remediation of the Companys Jenks #1 and Knudsen #1 wells in Crosby, ND.  The administrative complaint alleges the Company violated certain portions of the North Dakota Century Code and request administrative relief against the Company for violation of sections of the North Dakota Administrative Code governing the oil and gas industry.



On February 18, 2014, the Company entered into a Consent Agreement with the State of North Dakota whereby the Company was required to finish reclamation work, by June 30, 2014, on the two waste water storage pits adjacent to the Jenks #1 and Knudsen #1 wells respectively.  The Consent Agreement required the Company to plug the production zone of the Jenks #1 well. Once plugging was completed, the Company could then apply for a permit to convert the Jenks #1 well into a salt water disposal well.  As a part of the Consent Agreement the Company agreed to pay a civil penalty of no less than $105,000, consisting of $25,000 due and payable upon execution of the Consent Agreement and a $16,000 installment payment per month for five successive months thereafter.  If the Company failed to comply with the terms of the Consent Agreement, the Company would be subject to penalties of up to an additional $420,000 (over and above the $105,000 penalty agreed to in the Consent Agreement). The Company made the initial $25,000 payment and subsequently made each monthly payment with the final installment of $16,000 paid to the State of North Dakota on June 26, 2014.



The Company made the final installment payment of $16,000 to the State of North Dakota on June 26, 2014.  As of September 30, 2014 the Company has completed substantially all reclamation work and has paid all fines assessed.



On July 10, 2014, the Company completed reclamation work on both the Jenks #1 and Knudsen #1 waste water storage pits.  Although reclamation work was to have been completed by June 30, 2014, unseasonably heavy rains saturated the soil and limited safe access to the site by heavy equipment delayed scheduled reclamation until such time as ground conditions improved. The Company also completed plugging of the production zone on the Jenks #1 well and set a balance plug on the Knudsen #1 well bore.



Due to the Companys failure to timely submit a cost estimate for the final plugging, abandonment and reclamation of the Jenks #1 well and site, the NDIC, on January 28, 2015, pursuant to Commission Order No. 25588 ordered JayHawk to file a $120,000 bond covering the Jenks #1. The bond was a plugging and reclamation bond.



On May 9, 2015, the Company received a copy of a Summons and Complaint filed by the State of North Dakota and the NDIC in the Northwest Judicial District Court of North Dakota alleging JayHawk had violated N.D.C.C. Chapter 38-08 by failing to post the $120,000 plugging and reclamation bond pursuant to Commission Order No. 25588. N.D.C.C. § 38-08-16 provides that anyone who violates a provision of N.D.C.C. Chapter 38-08, or any rule or regulation of the Commission is subject to a penalty of up to $12,500 for each offense, and each days violation is a separate offense. The Complaints prayer for relief requested that JayHawk be ordered to deposit $120,000 with the Bank of North Dakota to satisfy the Commissions requirement for the plugging and reclamation bond on the Jenks #1 well. The NDIC also requested that JayHawk pay a fine of $12,500 per day beginning February 4, 2015, for failure to provide a plugging and reclamation bond on the Jenks #1. Company management subsequently met with the NDIC, which resulted in the NDIC staying the litigation subject to JayHawks immediate plugging, abandonment and reclamation of the Jenks #1. In September of 2015 the Company completed final plugging and abandonment of the Jenks #1 and completed a partial reclamation of the well and site.









25



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On February 12, 2015, the Company entered into a settlement agreement with the Staff of the Corporation Commission of the State of Kansas with respect to a Penalty Order served by the Company for failure to comply with certain portions of the Kansas Administrative Regulations.  The Company was found in violation of failure to plug, return to service or temporarily abandon 71 wells and assessed a $7,100 penalty, of which $3,100 was payable immediately, a $2,000 payment due by April 1, 2015 and the final $2,000 payment by May 1, 2015.  The Company has subsequently submitted seventy-one (71) temporary abandonment applications, of which seventy-one (71 applications were approved.  The Company has up to one year to plug the wells, return them to service or file additional temporary abandonment applications.



Subsequent to the report date covering the period ending March 31, 2016, on August 29, 2016, the complaint by the North Dakota Industrial Commission was dismissed without prejudice.  Consequently, the contingency related to reclamation of the Jenks and Knudsen well sites has been relieved.



At March 31, 2016, the Company has no commitments to make any capital expenditures.  Any potential future capital expenditures will be dependent on concluding adequate and successful financing arrangements.



Off Balance Sheet Arrangements.



The Company has no off-balance sheet arrangements.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



Not required for Smaller Reporting Companies.



Item 4. Controls and Procedures.



(a)Evaluation of Disclosure Controls and Procedures  In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation was carried out by JayHawks management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of March 31, 2016.  Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on that evaluation, JayHawks management concluded, as of the end of the period covered by this Report, that the Companys disclosure controls and procedures were not effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Securities and Exchange Commissions rules and forms.



Management of JayHawk Energy, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.



The Companys internal control over financial reporting is a process, under the supervision of the Chief Executive Officer and the Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for external purposes in accordance with United States Generally Accepted Accounting Principles (GAAP). Internal control over financial reporting includes those policies and procedures that:



·   Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Companys assets;



·   Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and



·   Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.





26



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The Companys management conducted an assessment of the effectiveness of the Companys internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control  Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment, management identified a material weakness in internal control over financial reporting.



A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Companys annual or interim financial statements will not be prevented or detected on a timely basis.



The material weakness identified is described below:



Due to insufficient staffing, it was not possible to ensure appropriate segregation of duties between incompatible functions, and formalized monitoring procedures have not been established or implemented.



As a result of the material weakness in internal control over financial reporting described above, the Companys management has concluded that, as of March 31, 2016,  the Companys internal control over financial reporting was not effective based on the criteria in Internal Control  Integrated Framework (2013) issued by COSO.



This Quarterly Report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. The Company was not required to have, nor has it, engaged its independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only managements report in this Quarterly Report.



(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 March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



PART II  OTHER INFORMATION



Item 1. Legal Proceedings.



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



Item 1A. Risk Factors.



There have been no material changes from the risk factors as previously disclosed in our Form 10-K for the year ended September 30, 2015, which was filed with the SEC on January 28, 2016.



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



None.



Item 3.  Defaults Upon Senior Securities.



The Company has outstanding, convertible debentures in the outstanding principal amount, as of March 31, 2016, of $470,439 (See Note 8 Convertible Debentures).   The principal amount owed under the debentures is currently due and owing in full and the Company has not paid the principal amount owing.  As a result the Company is in default under the terms of the debentures.



27



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Item 4.  Mining Safety Disclosures.



Not applicable.



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



101*

The following financial information from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Condensed Notes to Consolidated Financial Statements.



* To be filed by amendment







28



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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 Nevada corporation |                                                                                                  
|                        |                                            |                                                                                                   | 
|Date: December 23, 2016 | By:                                        | /s/ Scott Mahoney                                                                                 | 
|                        |                                            | Scott Mahoney
Interim President and Interim Chief Executive Officer
(Principal Executive Officer) | 















































29