UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 x
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE QUARTERLY PERIOD ENDED JUNE 30,
2009.
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the transition period from   to
 
 Commission
File Number: 000-53311
  JayHawk Energy,
Inc.
 (Exact
name of small business issuer as specified in its charter)
 
 Colorado
              20-0990109(State
      or other jurisdiction
                of
      incorporation or organization)
              (I.R.S.
      Employer
                Identification
      No.)
 
 6240 E. Seltice Way, Suite C, Post Falls, Idaho
      83854(Address
      of principal executive offices)
 
 (208) 667-1328(Issuer’s
      Telephone Number)
   Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.   x Yes
  o
No
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this
chapter) during the preceding 12  months (or for such shorter period that
the registrant was required to submit and post such files).  xYes   oNo
  Indicate
by check mark whether the registrant is a large accelerated file, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
                (Do
      not check if a smaller reporting company)
              o
              Smaller
      reporting company
              x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   o Yes   x No
  APPLICABLE
ONLY TO CORPORATE ISSUERS
  State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practical date.  As of August 06, 2009, there were
44,479,496 shares of the issuer's $.001 par value common stock issued and
outstanding.
  1
 
 JAYHAWK
ENERGY, INC.
 
 Quarterly
Report on Form 10-Q for the
 Quarterly
Period Ending June 30, 2009
 
 TABLE OF
CONTENTS
 
 PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements
              3Balance Sheets:June
      30, 2009 (Unaudited) and September 30, 2008 (Audited)
              3Statements
      of Operations:Three and Nine Months Ended June 30, 2009 and 2008
      (Unaudited)
              4Statements of Cash Flows:Nine Months Ended June 30, 2009 and 2008
    (Unaudited)
              5Notes
      to Unaudited Financial Statements:June 30, 2009
              6Item
      2. Management Discussion and Analysis
              13Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              17Item
      4. Controls and Procedures
              17PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
              18Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              18Item
      3. Defaults Upon Senior Securities
              18Item
      4. Submission of Matters to a Vote of Security Holders
              18Item
      5. Other Information
              18Item
      6. Exhibits
              18Signatures
              19
  2
  PART
I - FINANCIAL INFORMATION
  Item 1. Financial
Statements
 
 JAYHAWK ENERGY,
INC.
 CONSOLIDATED
BALANCE SHEETS
  As
      at
                June
      30,
                2009
                (Unaudited)
              
              
              As
      at
                September
      30,
                2008
                (Audited)AssetsCash
      & cash equivalents
              
              $
              90,684
              
              
              $
              82,683Trade
      accounts receivable, less allowance for doubtful accounts of
      $119,763at
      June 30, 2009 and $95,810 at September 30, 2008 (Note 3)
              
              
              301,078
              
              
              
              413,862Other
      current assets net of allowance for doubtful collections of
      $9,500
              
              
              4,961
              
              
              
              16,027Total
      Current Assets
              
              
              396,723
              
              
              
              512,572Plant,
      Property and EquipmentUnproved
      oil and gas properties, net of allowance for impairment ofof
      $1,474,000 at June 30, 2009 and September 30, 2008
      andaccumulated
      amortization of $332,961 and $114,535, respectively (Note
    4)
              
              
              2,338,643
              
              
              
              2,555,910Proved
      and developed oil and gas properties net of accumulated
      depreciation,depletion
      and amortization of $1,238,890 at June 30, 2009and
      $613,159 at September 30, 2008 (Note 5)
              
              
              6,383,912
              
              
              
              6,991,043Computers,
      office equipment, furniture and leasehold improvements, net
    ofaccumulated
      depreciation of $10,309 at June 30, 2009 and $1,335 atSeptember
      30, 2008.
              
              
              34,603
              
              
              
              32,365Total
      Net Plant, Property and Equipment
              
              
              8,757,158
              
              
              
              9,579,318Other
      Long-Term Assets
              
              
              74,529
              
              
              
              247,586Total
      Assets
              
              $
              9,228,410
              
              
              $
              10,339,476Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesAccounts
      payable
              
              $
              326,894
              
              
              $
              381,197Working
      and royalty interests payable
              
              
              123,605
              
              
              
              106,003Deferred
      compensation
              
              
              30,000
              
              
              ─Accrued
      Taxes, Interest & Other Liabilities
              
              
              226,066
              
              
              
              147,100Convertible
      promissory note (Note 6)
              
              
              767,204
              
              
              
              472,038Total
      current liabilities
              
              
              1,473,769
              
              
              
              1,106,338Asset
      Retirement Obligation (Note 7)
              
              
              137,643
              
              
              
              128,040Total
      Liabilities
              
              
              1,611,412
              
              
              
              1,234,378Stockholders'
      EquityCommon
      Stock, $.001 par value; 200,000,000 shares authorized; shares
      issuedand
      outstanding 44,136,704 at June 30, 2009 and 42,810,929 at September 30,
      2009 (Note 8).
              
              
              44,137
              
              
              
              42,812Additional
      paid-in capital
              
              
              12,741,401
              
              
              
              12,400,782Stock
      issuance obligation
              
              
              -
              
              
              
              47,559Accumulated
      deficit
              
              
              (5,168,540
              )
              
              
              (3,386,055
              )Total
      Stockholders' Equity
              
              
              7,616,998
              
              
              
              9,105,098Total
      Liabilities and Equity
              
              $
              9,228,410
              
              
              $
              10,339,476
  See
Accompanying Notes to the Consolidated Financial Statements
  3
  JAYHAWK
ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF  OPERATIONS
 And
Comprehensive Loss (Unaudited)
  Three
      months ended
              
              
              Nine
      months endedJune
      30,
              
              
              June
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008RevenueOil
      Sales
              
              $
              144,257
              
              
              $
              430,022
              
              
              $
              295,214
              
              
              $
              688,579Gas
      Sales
              
              
              25,150
              
              
              22,293
              
              
              
              88,064
              
              
              22,293Total
      Net Revenues
              
              $
              169,407
              
              
              $
              452,315
              
              
              $
              383,278
              
              
              $
              710,872Costs
      and Operating ExpensesExploration
      and production expenses
              
              
              87,978
              
              
              
              272,494
              
              
              
              287,514
              
              
              
              373,296Depreciation,
      depletion and amortization
              
              
              340,371
              
              
              
              333,892
              
              
              
              853,132
              
              
              
              483,145General
      and administration expenses
              
              
              131,745
              
              
              
              509,067
              
              
              
              481,646
              
              
              
              858,437Other
      (income) and expense
              
              
              205,184
              
              
              
              ( 1,594
              )
              
              
              543,471
              
              
              
              (9,253)Total
      Costs and Operating Expenses
              
              
              765,278
              
              
              
              1,113,859
              
              
              
              2,165,763
              
              
              
              1,705,625Loss
      from continuing operations before income tax expense
              
              $
              (595,871
              )
              
              $
              ( 661,544
              )
              
              $
              (1,782,485
              )
              
              $
              (994,753
              )Income
      tax expense
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─Deferred
      tax benefit
              
              ─
              
              
              ─
              
              
              ─
              
              
              ─Net
      loss and total comprehensive loss
              
              $
              (595,871
              )
              
              $
              (661,544
              )
              
              $
              (1,782,485
              )
              
              $
              (994,753
              )Basic
      and diluted loss per share
              
              $
              (0.01
              )
              
              $
              (
      0.02
              )
              
              $
              (0.04
              )
              
              $
              (0.03
              )Basic
      and diluted weighted average shares outstanding
              
              
              44,060,385
              
              
              
              41,694,045
              
              
              
              43,474,923
              
              
              
              39,177,448
  See
Accompanying Notes to the Consolidated Financial Statements
  4
  JAYHAWK
ENERGY, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
 For the Nine Months Ended June 30,
2009 and 2008
  2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss from operations
              
              $
              (1,782,485
              )
              
              $
              (994,753
              )Adjustments
      to reconcile net loss to net cash usedby
      operating activities:Depreciation,
      depletion and amortization
              
              
              853,132
              
              
              
              483,145Amortization
      of discount on convertible note payable
              
              
              174,857
              
              
              
              -Accretion
      of convertible promissory note
              
              
              295,166
              
              
              
              -Accretion
      in annual asset retirement obligation
              
              
              9,603
              
              
              
              -Common
      stock issued in consideration for services
              
              
              94,385
              
              
              
              58,000(Increase)
      decrease in accounts receivable
              
              
              112,784
              
              
              
              (129,866
              )(Increase)
      decrease in other current assets
              
              
              11,066
              
              
              
              (1,800
              )Increase
      (decrease) in accounts payable
              
              
              (54,303
              )
              
              
              36,754Increase
      (decrease) in accruals and other current liabilities
              
              
              126,568
              
              
              
              -Net
      cash provided (used) by operating activities
              
              $
              (159,227
              )
              
              $
              (548,520
              )CASH
      FLOWS FROM INVESTING ACTIVITIESProved
      and unproved oil and gas property additions
              
              
              (19,760
              )
              
              
              (1,202,974
              )Other
      property additions
              
              
              (13,012
              )
              
              
              (4,286,193
              )Net
      cash used in investing activities
              
              $
              (32,772
              )
              
              $
              (5,489,167
              )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from the sale of common stock
              
              
              200,000
              
              
              
              5,899,901Net
      cash provided by financing activities
              
              $
              200,000
              
              
              $
              5,899,901NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              $
              8,001
              
              
              $
              (137,786
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              82,683
              
              
              
              525,117CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              90,684
              
              
              $
              387,331Supplemental
      Disclosure of Cash Flow and Non-cash Investing ActivitiesIncome
      tax paid
              
              
              -
              
              
              
              -Interest
      paid
              
              
              -
              
              
              
              -Property
      and equipment purchased with common stock
              
              
              -
              
              
              $
              3,069,141
  See
Accompanying Notes to the Consolidated Financial Statements
  5
  JAYHAWK
ENERGY, INC.
 Notes
to Financial Statements
 (Unaudited)
 For
the Period Ended June 30, 2009
   Note
1 – Basis of Presentation
  These
consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of the
results for the periods reported.  All such adjustments are of a
normal recurring nature unless disclosed otherwise.  JayHawk Energy,
Inc. (the "Company") reports on operations using a fiscal year end of September
30.  This report on Form 10-Q is for the third quarter of the fiscal
year to end September 30, 2009, the quarter ending June 30,
2009.  These consolidated financial statements, including notes, have
been prepared in accordance with the applicable rules of the Securities and
Exchange Commission (SEC) and do not include all of the information and
disclosures required by accounting principles generally accepted in the United
States of America ("U.S. GAAP") for complete financial
statements.  These financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto,
included in the Company’s Form 10-KSB for the year ended September 30, 2008 as
filed with the SEC.  Interim operating results are not necessarily
indicative of operating results for any future interim period or for the full
year.
  Note
2 - Summary of Significant Accounting Policies
  Going Concern - To
date  the Company has incurred operating losses.  As of June
30, 2009 we have limited financial resources with which to achieve our
objectives.  Achieving profitability and positive cash flows will be
dependent on our ability to obtain additional financing, to locate profitable
reserve properties and generate revenue from our current and planned business
operations, and control costs.  We plan to fund our future operations
by joint venturing, obtaining additional financing from investors, and attaining
additional commercial production.  However, there is no assurance that
we will be able to achieve these objectives.
  Basis of Consolidation – These
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, JayHawk Gas Transportation Company, Inc.  All
intercompany accounts and transactions have been eliminated.
  Joint Venture Operations –In
instances where the Company’s oil and gas activities are conducted jointly with
others, the Company’s accounts reflect only its proportionate interest in such
activities.
  Use of estimates -The
preparation of financial statements in accordance with  U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the respective reporting
periods.  Included in these estimates are assumptions about allowances
for valuation of deferred tax assets, allowances for doubtful accounts,
provisions for asset retirement obligations, depreciation, depletion, and
amortization, as well as management’s impairment assessment on its oil and gas
properties.  By their very nature, these estimates are subject to
measurement uncertainty.  The effect on the financial statements of
changes in these estimates, in future periods, could be significant. These
estimates and assumptions are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known.
  Loss per common share -Basic
loss per share is calculated based on the weighted average number of common
shares outstanding.  Diluted loss per share assumes exercise of stock
options and warrants and conversion of convertible debt and preferred
securities, provided the effect is not antidilutive.  As each of the
two fiscal periods covered by these financial statements reflect net losses from
operations, all of our warrants have an anti-dilutive effect on per common share
amounts.
  Revenue Recognition - Revenues
are recognized based on the actual volumes of gas and oil sold to purchasers.
The volume sold may differ from the volumes we are entitled to, based on our
individual interest in the property.  Revenues reflected in these
financial statements are the Company's net working interest after deduction of
amounts attributable to other working and royalty interest
owners.  See note above, "Joint Venture Operations" and subsequent
Management's Discussion and Analysis.
  6
  JAYHAWK
ENERGY, INC.
 Notes
to Financial Statements
 (Unaudited)
 For
the Period Ended June 30, 2009
   Note
2 – Summary of Significant Accounting Policies (continued)
  Accounts Receivable – When
volumes of crude oil or gas are delivered to the purchaser we record a
receivable based on the volumes delivered and field prices on the particular day
of delivery.  Subsequently these amounts may be adjusted for various
technical factors affecting volumes such as temperature, pressure and content of
basic sediment and water.  When it becomes evident that amounts
receivable become uncollectible we establish a valuation allowance and record a
provision for bad debts in our statement of operations.  Our sales of
crude oil and natural gas are delivered into a market with a very concentrated
group of purchasers.  As more specifically detailed in Note 3,
the  former purchaser of our crude filed for bankruptcy protection in
July 2008.
  Property, plant and equipment -The Company uses the successful-efforts method of accounting for oil and
gas property as defined under Statement of Financial Accounting Standards (SFAS)
No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies
(“FAS 19”). Under this method of accounting, costs to acquire mineral interests
in oil and natural gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells, are
capitalized.  Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs and costs of carrying and retaining
unproved properties are expensed.
  We
provide depletion  of the capitalized cost of proved oil and gas
property on a field-by-field basis using the units-of-production method,
based upon estimated proved reserves.  Support equipment and other
property, plant and equipment related to oil and gas production are depreciated
on a straight-line basis over their estimated useful lives which range from 5 to
35 years.  Property, plant and equipment unrelated to oil and gas
producing activities is recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets, which range from 3 to 25
years.
  In
computing depreciation, depletion, and amortization (DD&A) we take into
consideration restoration, dismantlement and abandonment cost and the
anticipated proceeds from equipment salvage. When applicable, we apply the
provisions of Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations, which provides guidance on accounting for
dismantlement and abandonment cost.  Also, specifically see Note 7,
Asset Retirement Obligation.
 
 We review
our long-lived assets for impairment at least annually or when events or changes
in circumstances indicate that impairment may have occurred in accordance with
SFAS 144.  In the impairment test we compare the expected undiscounted
future net revenue on a field-by-field basis with the related net capitalized
cost at the end of each period. Should the net capitalized cost exceed the
undiscounted future net revenue of a property, we will write down the cost of
the property to fair value, which we will determine using discounted future net
revenue. We will provide an impairment allowance on a property-by-property basis
when we determine that the unproved property will not be
developed.  Also, specifically see Note 4, Unproved Properties and
Impairment.
  Share Based Payments–
Periodically we compensate specific vendors of goods and services with shares of
our common stock.  The fair value of the common shares issued for
goods or services rendered by non-employees is measured based on the fair value
of the goods or services received.
 
 Income Taxes - Income taxes
are determined using the asset and liability method in accordance with SFAS No.
109, Accounting for Income Taxes.  Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.  Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  In addition, a valuation allowance is
established to reduce any deferred tax asset for which it is determined that it
is more likely than not that some portion of the deferred tax asset will not be
realized.
  7
 JAYHAWK
ENERGY, INC.
 Notes
to Financial Statements
 (Unaudited)
 For
the Period Ended June 30, 2009
   Note
2 - Summary of Significant Accounting Policies (continued)
 
 Recent Accounting Pronouncements
- The following new accounting standards have been issued, but have not
yet been adopted by the Company:
 
 On
December 31, 2008, the SEC adopted a final rule that amends its oil and gas
reporting requirements.  The revised rules change the way oil and gas
companies report their reserves in the financial statements.  The
rules are intended to reflect changes in the oil and gas industry since the
original disclosures were adopted in 1978.  Definitions were updated
to be consistent with Petroleum Resource Management System
(PRMS).  Other key revisions include a change in pricing used to
prepare reserve estimates, the inclusionof non-traditional
resources in reserves, the allowance for use of new technologies indetermining reserves,
optional disclosure of probable and possible reserves andsignificant new
disclosures. The revised rules will be effective for our annual report onForm 10-K. for the fiscal
year ending September 30, 2010.  The SEC is precluding application of
the new rules in quarterly reports prior to the first annual report in which the
revised disclosures are required and early adoption is not permitted. We are
currently evaluating the effect the new rules will have on our financial
reporting and anticipate that the following rule changes could have a
significant impact on our results of operations as follows:
 •   The
price used in calculating reserves will change from a single-day closing price
measured on the last day of the Company's Fiscal year to a 12-month average
price, and will affect our depletion and ceiling test
calculations.
 •   Several
reserve definitions have changed that could revise the types of reserves that
will be included in our year-end reserve report.
 •   Many
of our financial reporting disclosures could change as a result of the new
rules.
 In June
2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles - a replacement of
FASB Statement No. 162" ("SFAS No. 168"), to establish the codification as the
source of authoritative accounting principles in the preparation of financial
statements in conformity with GAAP. All guidance contained in the codification
carries an equal level of authority. SFAS No. 168 is effective for Financial
statements issued for interim and annual periods ending after September 15, 2009
and will not have an effect on the Company's consolidated financial
statements.
 In June
2009, the FASB issued SFAS 167, Amendments to FASB Interpretation
No.46(R).This
standard changes the consolidation analysis for variable interest entities. SFAS
167 is effective for fiscal years ending after November 15, 2009. We are
currently assessing the impact, if any, that the adoption of SFAS 167 will have
on our financial position, results of operations or cash flows.
  8
  JAYHAWK
ENERGY, INC.
 Notes
to Financial Statements
 (Unaudited)
 For
the Period Ended June 30, 2009
   Note
3 - Trade Accounts Receivable
 
 Trade
accounts receivable represents those amounts the Company is owed for its' oil
and gas production delivered during the months of June and July of 2008, and
June of 2009, less an allowance for doubtful accounts.  Also included
in the aggregate is an amount receivable from other working interests billed for
their percentages of joint operating costs.  Specifically, it is
detailed as follows at June 30, 2009 and September 30, 2008:
 
 June
      30,
                2009
              
              
              September30,
                2008Due
      for crude oil delivered in June & July - SemCrude
              
              $
              283,486
              
              
              $
              283,486Less:
      Allowance for doubtful collections
              
              
              (119,763
              )
              
              
              (95,810
              )Due
      for crude oil delivered
              
              
              116,029
              
              
              
              181,340Due
      for natural gas delivered
              
              
              7,123
              
              
              
              19,356Due
      from joint operating agreement working interests
              
              
              14,203
              
              
              
              25,490$
              301,078
              
              
              $
              413,862
 
 The
previous purchaser of our North Dakota crude oil, SemCrude, took delivery
of  the Company's June and July production and before compensating the
Company filed a Chapter 11 bankruptcy proceeding.  Management believes
that the Company will receive all the proceeds for the July sales but has
established an allowance for 100% of the value of the June deliveries,
equivalent to $119,763, charging bad debt expense for an equal
amount.   Amounts receivable at June 30, 2009, for oil and
natural gas deliveries were received in July 2009.
  Note
4 – Unproved Properties and Impairment
 
 The Company's
total investment in unproved properties consists of the capitalized costs
of property acquisitions made during the prior two fiscal years.  At
June 30, 2009 and September 30, 2008, net Unproved Properties was the aggregate
of the following:
  Description
              
              June
      30,
                2009
              
              
              September
      30,
                2008Land
      acquisition
              
              $
              4,145,604
              
              
              $
              4,144,445Less:
      Accumulated amortization
              
              
              (332,961
              )
              
              
              (114,535
              )Less:
      Allowance for impairment in value
              
              
              (1,474,000
              )
              
              
              (1,474,000
              )Total
      Net Investment in Unproved Properties
              
              $
              2,338,643
              
              
              $
              2,555,910
 
 Impairment of Uniontown
Project:In addition to amortizing the capitalized lease costs, the
Company periodically reviews and assesses its' unproved properties to determine
whether or not they have been impaired.  A property is considered
impaired if it will not or cannot be developed.  At that time an
allowance is established to revalue the capitalized cost and a provision of
equal amount is provided as an operating expense.  Management made a
review of the portfolio of leases acquired in the Uniontown transaction of July
2007 and decided based on geology and proximity to our pipeline, to permit
approximately one-third of the original leases acquired to expire without
renewal.  The Company's inability at September 30, 2008 to fund
development of any acreage, justified the creation of an impairment
valuation.  Management has estimated the allowance at two-thirds, 67
percent, of the original investment equaling $1,474,000.
  9
  JAYHAWK
ENERGY, INC.
 Notes
to Financial Statements
 (Unaudited)
 For
the Period Ended June 30, 2009
   Note
5 – Proved and Developed Oil & Gas Properties
  The
capitalized cost, net of depreciation, depletion and amortization (DD&A) of
the proved oil and gas properties was $6,383,912, at June 30, 2009, and
$6,991,043 at September 30, 2008.  These net capitalized costs are
comprised of the following; detailed by property:
  June
      30,
                2009
              
              
              September
      30,
                2008Candak,
      North Dakota PropertiesProved
      Reserves
              
              $
              2,357,752
              
              
              $
              2,357,752Field
      Equipment
              
              
              1,200,248
              
              
              
              1,200,248Less
      accumulated DD&A
              
              
              (1,033,044
              )
              
              
              (538,042
              )Net
      Capitalized Costs
              
              
              2,524,956
              
              
              
              3,019,958Girard,
      Kansas PropertiesField
      Equipment
              
              
              918,727
              
              
              
              634,705Capitalized
      Drilling Costs
              
              
              540,205
              
              
              
              807,227Less
      accumulated DD&A
              
              
              (61,913
              )
              
              
              (18,076
              )Net
      Capitalized Costs
              
              
              1,397,019
              
              
              
              1,423,856JayHawk
      Gas TransportationField
      Equipment
              
              
              2,605,870
              
              
              
              2,604,270Less
      accumulated Depreciation
              
              
              (143,933
              )
              
              
              (57,041
              )Net
      Capitalized Costs
              
              
              2,461,937
              
              
              
              2,547,229Total
      Net Proved Oil & Gas Properties
              
              $
              6,383,912
              
              
              $
              6,991,043
  Note
6 - Note Payable
 
 On July
30, 2008 JayHawk signed a convertible promissory note in the amount of $800,000
for cash received of an equal amount.  The note had a one year
maturity and bears an interest rate of 12 percent.  The interest is
accrued monthly, but is not payable until maturity along with principal on July
30, 2009.  The holder of the note has the right at its sole
discretion, to convert the outstanding principal balance and unpaid accrued
interest to shares of the Company's common stock, at any time at the conversion
price of $1.75.
 
 In
conjunction with the note the holder was granted 400,000 warrants, with an
exercise price of $2.10 per share, to convert to shares of the Company's common
stock.  In accordance with SFAS 133 we allocated the proceeds of the
note between notes payable and stockholder's equity based on the respective fair
values as of the agreement date.  The fair values were determined
using the Black-Scholes option model.  Originally, the note payable
portion was $472,038, the warrant and equity portion of $327,962, and $194,286
was charged to an unamortized discount on the note
payable.   This discount of $194,286 has been ratably amortized
over the life of the note.  One month of the discount, included in
"Other Long-term Assets" remains to be charged to operations (amortized). During
the nine months ending June 30, 2009, $295,166 has been charged to a non-cash
expense and the note payable balance accreted back to $767,204, the balance at
June 30, 2009.  Also see Note - 9, Subsequent Events.
  10
 
 JAYHAWK
ENERGY, INC.
 Notes
to Financial Statements
 (Unaudited)
 For
the Period Ended June 30, 2009
 
 
 Note
7 - Asset Retirement Obligation
  In the
period in which an asset retirement obligationis
incurred or becomes reasonably estimable, the Company  recognizes the
fair value of the liability if there is a legal obligation to dismantle the
asset and reclaim or remediate the property at the end of its useful
life.  The Company has identified potential asset retirement
obligations at the Girard, Kansas and Candak, North Dakota operating
sites.  These retirement obligations are determined based on the
estimated cost to comply with abandonment regulations established by the Kansas
Corporation Commission and the State of North Dakota.  The Company's
engineers have estimated the cost, in today's dollars, to comply with these
regulations.  These estimates were projected out to the anticipated
retirement date, 15 years from when placed in service, at an assumed annual
inflation rate of 1.5 percent.   The anticipated future cost of
remediation efforts in North Dakota and Kansas are $204,685 and $281,547,
respectively.  These amounts were discounted back at an assumed
interest rate of 10 percent, to arrive at a net present value of the
obligation.  The asset retirement obligation at June 30, 2009 of
$137,643, increased from the September 30, 2008 balance of $128,040 by the
amount of this "accretion expense" for the  nine
month  period, $9,603.
  Note
8 - Common Stock
  At June 30, 2009 the Company had
44,136,704 shares of its $0.001 par value Common Stock issued and
outstanding.  This reflects the issuance of 1,325,775 shares since the
prior fiscal year end when the issued and outstanding shares totaled
42,810,929.  The individual transactions aggregating the change in
shares outstanding are detailed in the following commentary:
 
 On October 31, 2008 the Company issued
25,000 shares of stock to a consultant in exchange for services
provided.  The shares were valued at the fair market value of $0.67,
on the date of the transaction.  This approximates the value of the
services provided.
 
 On
January 12, 2009 the Company issued 74,575 shares of  its $0.001 par
value Common Stock to Missouri Gas Partners.  Of this amount 22,225
shares represented the total "Stock Issuance Obligation" of $47,559 existing at
December 31, 2008.  This represented the residual from the June 30,
2008 transaction, wherein the Company agreed to release 25 shares per acre as
individual oil and gas mineral leases were renewed.  The remaining
52,350 shares were issued in recognition of the Company's obligation to issue 25
shares per acre for 2,094 acres in lieu of lease renewal.  These
shares were valued at $0.51 per share, the fair market value of a share on the
day the shares were issued.
  Also on
January 12, 2009, the Company issued a total of 51,000 shares to two individual
consultants, in exchange for services provided.   These shares
were all valued at $0.41 per share; the fair market value on the date of the
transaction.  This approximates the value of the services
provided.
  On
February 5, 2009 the Company completed a private placement of 1,000,000
of  its $.001 par value common shares.  The shares were
issued to one private investor in consideration for $200,000  in cash,
that was used as working capital.  The private placement was completed
in reliance upon  that certain exemption from the registration and
prospectus delivery requirements of the Securities Act of 1933, which exemption
is specified by the provisions of Section 4 of that Act.
 
 On April
20, 2009 the Company issued 85,400 shares of  its $0.001 par value
Common Stock to three vendors as compensation for services
rendered.  These shares were valued at $0.20 per share; the fair
market value on the date of the transaction for two of the vendors, and at $0.15
per share for the third.  This approximates the value of the services
provided.
 
 On May 20, 2009 the Company issued
40,000 shares of its $0.001 par value Common Stock to one vendor in lieu of cash
payment for services provided.  These shares were valued at $0.20 per
share; with the fair value of the aggregate issuance approximating the value of
the services rendered.
  11
 
  JAYHAWK
ENERGY, INC.
 Notes
to Financial Statements
 (Unaudited)
 For
the Period Ended June 30, 2009
   Note
8 – Common Stock (continued)
 
 On June 04, 2009 the Company issued
49,800 shares of its $0.001 par value Common Stock to one vendor, in lieu of a
cash payment, for services rendered.  These shares were valued at
$0.15 per share.  The fair value of the aggregate issuance
approximates the value of the services rendered.
 
 Note
9 – Subsequent Events
  On July 30, 2009 the Note Payable in
the amount of $800,000 matured.  Both the principal and accrued
interest in the amount of $96,000, the aggregate being $896,000, became due and
payable on July 31, 2009.  Management is in the process of negotiating
the roll-over of this amount.
  On July
31, 2009 the Company issued 49,800 shares of  its $0.001 par value
Common Stock to two vendors as compensation for services
rendered.  These shares were valued at $0.20 per share; the fair
market value on the date of the transaction for each of the
vendors.
 
 On August
04, 2009 the Company issued 203,625 shares to a vendor for settlement of past
due obligations.  These shares were also valued at $0.20 per share to
approximate the value of the services previously provided.
  On August
07, 2009 the Company completed a signed letter agreement with DK True Energy
Development Limited ("True Energy") which allows True Energy to earn up to an
85% working interest in JayHawk's Coal Bed Methane ("CBM") project in southeast
Kansas (the Girard and Uniontown projects).  This interest will be
earned by True Energy after paying the Company $500,000 and spending a minimum
of $1,300,000 over a three year period.  This agreement is expected to
be finalized by the end of August 2009.
 12
  Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements and
supplemental information presented in our Annual Report for the period ending
September 30, 2008, on Form 10-KSB.  Certain sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations include
forward-looking statements concerning trends or events potentially affecting our
business.  These statements typically contain words such as
"anticipates," "believes," "estimates," "expects," "plans," "probable,"
"should," "could," "would," or similar words indicating that future outcomes are
uncertain.  In accordance with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors, though not all
such factors, which could cause future outcomes to differ materially from those
set forth in the forward-looking statements.  For additional risk
factors affecting our business see "Risks Related to Our Business," under Item
1. Description of Business in our Annual Report for the period ending September
30, 2008, filed on Form 10-KSB.
 
 JayHawk
Energy, Inc. and its wholly owned subsidiary JayHawk Gas Transportation
Corporation, (herein referred to as the Company, JayHawk, we and
our)  is engaged in the acquisition, exploration, development,
production and sale of natural gas, crude oil and natural gas liquids primarily
from conventional reservoirs within North America.  The Company
incorporated in April 2004 as Bella Trading Company, Inc. and
changed  management and entered the oil and gas business in June of
2007.  At that time we changed our name to JayHawk Energy
Inc.  Since then, we have devoted our efforts principally to the
raising of capital, organizational infrastructure development, the acquisition
of oil and gas properties for the purpose of future extraction of resources, and
production of oil and natural gas.  To date, we have acquired three
main properties, the Uniontown in Kansas, the Candak in North Dakota, and Girard
in Kansas.  We did not begin producing and selling oil until the
second quarter of the previous fiscal year, the quarter ending March 31, 2008;
nor did we produce and sell any natural gas until the third quarter ending June
30, 2008.
 
 On
January 16, 2008, JayHawk purchased the Candak properties from JED Oil (USA)
Inc. a 65% working interest in 5 producing oil wells located in the Williston
Basin of North Dakota, along with the right to develop the oil, gas and mineral
resources on 15,500 acres of leases in this same area.  In
consideration for these properties JayHawk paid JED Oil $3.5 million in
cash.  Because of the significance of this acquisition, Securities and
Exchange rules and regulations define operations of these five wells (the Candak
properties) to be "predecessor operations and an acquired
business".  As such, the Securities and Exchange Commission, through
Article 8-04 of Regulation S-X, requires a complete set of audited financial
statements of the acquired business operations to be provided for at least the
two most recent fiscal years.
  As a
consequence of the previous operator being in bankruptcy proceedings and having
limited staff, sufficient evidential material was unavailable to our external
auditors to prepare complete financial statements reflecting the carved out
operations of the five wells.  These would be required for the period
from October 1, 2006 through September 30, 2007 and from October 1, 2007 through
January 16, 2008, the date of the acquisition.  We did not have any
previous relationship with the prior operator and there were no ongoing
arrangements with the prior operator.  Failure to provide this
information will preclude the Company from completing a registration statement
with the Securities and Exchange Commission prior to having sufficient
historical financial information on these operations for a two
year  period.  This condition should be met with the
completion of the fiscal year ending September 30, 2009.
  13
 
 Results
of Operations
 
 Revenues -derived from
oil sales delivered from our Candak, North Dakota properties are reported at our
net working interest.  For the three month and nine month periods
ending June 30, 2009, net revenues before production and severance taxes, were
$144,257 and $295,214, respectively.  These net revenues compare to
$430,022, and $688,579 for comparable periods end in 2008.  The
unfavorable apparent decline in revenues is primarily attributable to declines
in prices received for our crude oil.  Prices received during the
quarter ending June 30, 2008 averaged $96.77 per barrel whereas during this
quarter ending June 30, 2009 prices received averaged only
$47.32.  This represents a 51 percent decline from the comparable
period in 2008.  Additionally, all five wells where shut-in for 45
days during the months of January and February 2009, due to constraints of
weather conditions, yet production declined only 87 barrels from the comparable
2008 three month period.
 
 Revenues
derived from the sale of gas produced and delivered from our Girard, Kansas
properties for the three and nine months ending June 30, 2009 were $25,150 and
$88,063, respectively.  The Company did not start selling gas until
the quarter end June 30, 2008 and therefore the nine month figures are not
comparable.  Gas prices paid for our Girard, Kansas production have
continued to be volatile, fluctuating from a high of $4.67 received in January
of 2009 to a low of $2.37 per mcf received in June 2009.  Our
revenues, operating results and ability to grow in the future are highly
dependent on the prices we receive for our oil and natural gas.
 
 Operating Expenses -include
direct production expensessuch as field labor,
fuel, power, well repair and maintenance, saltwater disposal and severance
taxes, depreciation, depletion and amortization and corporate general and
administrative expenses and other income and expense.  The following
two tables segregate all operating expenses by producing properties, and the
corporate office, for the three and nine month periods ending June 30, 2009,
respectively:
  Quarter
      EndJune
      30, 2009
              
              
              June
      30,2008Candak,
      N.D.
              
              
              Girard,
      KS.
              
              
              G&A
              
              
              Total
              
              
              TotalDirect
      production costs
              
              $
              51,189
              
              
              $
              36,789
              
              
              
              -
              
              
              $
              87,978
              
              
              $
              272,494Depreciation,
      depletion, and amortization
              
              
              220,950
              
              
              
              116,424
              
              
              
              2,997
              
              
              
              340,371
              
              
              
              333,892General
      and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              131,745
              
              
              
              131,745
              
              
              
              509,067Other
      net (income) and expense
              
              
              
              
              
              
              
              
              
              
              205,184
              
              
              
              205,184
              
              
              
              (1,594
              )Totals
              
              $
              272,139
              
              
              $
              153,213
              
              
              $
              339,926
              
              
              $
              765,278
              
              
              $
              1,113,859
  
 For
      the Nine Months EndJune
      30, 2009
              
              
              June
      30,2008Candak,
      N.D.
              
              
              Girard,
      KS.
              
              
              G&A
              
              
              Total
              
              
              TotalDirect
      production costs
              
              $
              124,415
              
              
              $
              163,099
              
              
              
              -
              
              
              $
              287,514
              
              
              $
              373,296Depreciation,
      depletion, and amortization
              
              
              495,004
              
              
              
              349,154
              
              
              
              8,974
              
              
              
              853,132
              
              
              
              483,145General
      and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              481,646
              
              
              
              481,646
              
              
              
              858,437Other
      net (income) and expense
              
              
              
              
              
              
              
              
              
              
              543,471
              
              
              
              543,471
              
              
              
              (9,253
              )Totals
              
              $
              619,419
              
              
              $
              512,253
              
              
              $
              1,034,091
              
              
              $
              2,165,763
              
              
              $
              1,705,625
 
 14
  General and Administrative
Expenses:
 
 During
this current three month period ending June 30, 2009, the Company has focused on
reducing costs in all aspects of its business, particularly those associated
with its general and administrative expenses.  General and
administrative expenses incurred during the three and nine month periods ending
June 30, 2009 and 2008, respectively is detailed as follows, evidencing the
significant cost reductions:
  Periods
      EndJune
      30, 2009
              
              
              Periods
      EndJune
      30, 2008Three
      Months
              
              
              Nine
      Months
              
              
              Three
      Months
              
              
              Nine
      MonthsSalaries,
      wages and compensation
              
              $
              34,500
              
              
              $
              190,775
              
              
              $
              136,873
              
              
              $
              346,862Legal
      and audit fees
              
              
              63,145
              
              
              
              109,787
              
              
              
              74,308
              
              
              
              132,793Other
      public company expenses
              
              
              14,874
              
              
              
              68,492
              
              
              
              22,624
              
              
              
              23,455Insurance
              
              
              6,704
              
              
              
              20,751
              
              
              
              29,289
              
              
              
              49,082All
      other general and administrative expenses
              
              
              12,522
              
              
              
              91,841
              
              
              
              245,973
              
              
              
              306,245Total
              
              $
              131,745
              
              
              $
              481,646
              
              
              $
              509,067
              
              
              $
              858,437
  
 Other Income and Expenses -for the three and nine month periods ending June 30, 2009, are detailed
below.  For the comparable periods ending June 30, 2008, other income
and expenses was comprised only of interest income of $1,594, for the three
month period and $9,253 for the nine month period.
  Periods
      End June 30, 2009Three
      Months
              
              
              Nine
      MonthsNet
      interest (income) expense
              
              $
              24,095
              
              
              $
              72,959Accretion
      of convertible note payable
              
              
              98,389
              
              
              
              295,166Amortization
      of note discount
              
              
              58,286
              
              
              
              174,857Accretion
      of asset retirement obligation
              
              
              3,201
              
              
              
              9,603Net
      bad debt expense foregiveness (income)
              
              
              21,213
              
              
              
              ( 9,114
              )Total
              
              $
              205,184
              
              
              $
              543,471
  15
  Cash
Flows, Liquidity and Capital Resources
 
 As of
June 30, 2009, our current assets totaled $396,724, consisting of
cash,  $90,684, accounts receivable, $301,078, and prepaid expenses,
$4,961.  At the same time, our current liabilities were
$1,473,769.  Our main sources of liquidity are cash and internally
generated cash flow from the sale of crude oil and natural gas.  As of
June 30, 2009, we have limited financial resources with which to achieve our
objectives, and obtain profitability and positive cash flows.
 
 The net
change in cash and cash equivalents is the sum of cash used by operating
activities and in investing activities, and that provided by financing
activities for a net total increase in cash of $8,001 for the nine months ending
June 30, 2009.  This increased the cash balance from $82,683 existing
at September 30, 2008 to the cash balance at June 30, 2009 of
$90,684.
 
 Net cash used by operating activitiestotaled $159,227 for the nine months ending June 30, 2009, compared to $548,520
used  in operating activities for the nine month period ending
June 30, 2008.
  Net cash used in investing
activities totaled $32,772 in the nine months ending June 30, 2009 as
compared to $5,489,167 used in the same period ending June 30,
2008.
  Net cash provided by financing
activities during the nine months ending June 30, 2009 was
$200,000.  For the nine month period ending June30, 2008, $5,899,901
was provided by financing activities.
 
 As
clearly demonstrated in this current quarter ending June 30, 2009, our revenue
and operating cash flows, are highly dependent on the prices we receive for
crude oil and natural gas.  A substantial decline in these prices will
further reduce our operating results and cash flows, and will impact our rate of
growth and the carrying values of our assets.  For the immediate
future we plan to reduce our operating expenses, consolidate our properties, and
fund our future operations by joint venturing, obtaining additional financing
from investors, and attaining additional commercial
production.  However, there is no assurance that we will be able to
achieve these objectives.
  Off-Balance
Sheet Arrangements
 
 We have
no off-balance sheet arrangements.
  16
  Item 3. Quantitative and
Qualitative Disclosures About Market Risk
  We have
no investments, trading or non-trading, that would be sensitive to market
risk.
  Item 4T. Controls and
Procedures
  (a) Evaluation of disclosure controls and
procedures - We maintain controls and procedures designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of June 30, 2009, the date of this report,
our chief executive officer and the chief financial officer concluded that our
disclosure controls and procedures were effective.
  (b) Changes in internal controls -
There were no significant changes in our internal controls during this last
fiscal quarter that have materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  17
  PART
II — OTHER INFORMATION
  Item 1. Legal
Proceedings.
  None.
  Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds.
  None.
  Item 3.  Defaults
Upon Senior Securities
  None.
  Item
4.  Submission of Matters to Vote of Security
Holders
  None.
  Item 5.  Other
Information
  None.
  Item
6.  Exhibits
  31.1          Rule
13a - 14(a) / 15d - 14(a) Certification of CEO
 31.2          Rule
13a - 14(a) / 15d - 14(a) Certification of CFO
 32.1          Section
1350 Certification of CEO
 32.2          Section
1350 Certification of CFO
  18
  SIGNATURES
 
 In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
  JayHawk
      Energy, Inc.,
                a
      Colorado corporationDate:
      August 12,
      2009
              By:
              /s/ Lindsay
      E. GorrillLindsay
      E. Gorrill
                Principal
      Executive Officer,
                President
      and a Director
  Date:
      August 12,
      2009
              By:
              /s/ Thomas
      G. RymanThomas
      G. Ryman
                Chief
      Financial Officer
   19