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, 2010.





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from   to





Commission File Number: 000-53311





JayHawk Energy, Inc.


(Exact name of small business issuer as specified in its charter)





Colorado

20-0990109(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)





6240 E. Seltice Way, Suite C, Post Falls, Idaho 83854(Address of principal executive offices)





(208) 667-1328(Issuer’s Telephone Number)








Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o No





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





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





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





APPLICABLE ONLY TO CORPORATE ISSUERS





State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date.  As of May 12, 2010, there were 48,857,549 shares of the issuer's $.001 par value common stock issued and outstanding.










JAYHAWK ENERGY, INC.





Quarterly Report on Form 10-Q for the


Quarterly Period Ending March 31, 2010





TABLE OF CONTENTS





PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets:March 31, 2010 (Unaudited) and September 30, 2009
3Consolidated Statements of Operations:Three Months and Six Months Ended March 31, 2010 and 2009 (Unaudited)
4Consolidated Statements of Cash Flows:Six Months Ended March 31, 2010 and 2009 (Unaudited)
5Notes to Consolidated Unaudited Financial Statements:March 31, 2010
6Item 2. Management Discussion and Analysis
13Item 3. Quantitative and Qualitative Disclosures About Market Risk
15Item 4. Controls and Procedures
15PART II. OTHER INFORMATIONItem 1. Legal Proceedings
16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
16Item 3. Defaults Upon Senior Securities
16Item 4. Submission of Matters to a Vote of Security Holders
16Item 5. Other Information
16Item 6. Exhibits
16Signatures
17






2




PART I - FINANCIAL INFORMATIONItem 1. Financial StatementsJAYHAWK ENERGY, INC.Consolidated Balance Sheets (Unaudited)March 31, 2010


September 30, 2009AssetsCurrent AssetsCash and cash equivalents

$
826,698


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


129,284



293,507Other Current Assets


15,364



2,544Total Current Assets


971,346



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


2,151,743



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


6,961,389



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


25,611



31,605Total Net Plant, Property and Equipment


9,138,743



8,553,516Other Long-Term Assets


56,900



55,100Total Assets

$
10,166,989


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

$
1,496,894


$
172,166Working and royalty interests payable


94,420



107,905Other payables and accrued costs


82,426



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


--



800,000Total Current Liabilities


1,673,740



1,430,868Commitments and Contingencies


--



--Long-Term Liabilities (Note 7)


605,642



140,844Total Liabilities


2,279,382



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


--



--Common Stock; $0.001 par value; 200,000,000 shares authorized;48,824,883 shares issued and outstanding at March 31, 2010, and44,509,496 shares issued and outstanding at September 30, 2009 (Note 7)


48,825



44,509Additional paid-in capital


16,198,997



12,821,792Stock issuance obligation






136,000Accumulated deficit


( 8,360,215
)


(5,663,688
)Total Stockholders' Equity


7,887,607



7,338,613Total Liabilities and Stockholders' Equity

$
10,166,989


$
8,910,325See Accompanying Condensed Notes to the Interim Consolidated Financial Statements




3




JAYHAWK ENERGY, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


And Comprehensive Loss (Unaudited)




Three months ended


Six months endedMarch 31,


March 31,2010


2009


2010


2009RevenueOil Sales

$
176,269


$
61,599


$
346,575


$
184,932Gas Sales


18,544



29 ,213



42,638



62,913Total Net Revenues

$
194,813


$
90,812


$
389,213


$
247,845Costs and Operating ExpensesProduction Costs – North Dakota


80,464



35,695



152,279



107,200Production Costs – Kansas


9,407



71,876



15,916



153,009Depreciation, Depletion and Amortization


230,868



200,623



522,795



512,761General and Administration Expenses


225,382



101,627



435,163



323,202Other (Income) and Expense


1,907,384



179,443



1,959,587



338,287Total Costs and Operating Expenses


2,453,505



589,264



3,085,740



1,434,459Loss from continuing operations before income tax expense

$
(2,258,692
)

$
( 498,452
)

$
(2,696,527
)

$
(1,186,614
)Income tax expense

─


─


─


─Deferred tax benefit

─


─


─


─_________


_________


__________


_________Net loss

$
(2,258,692
)

$
(498,452
)

$
(2,696,527
)

$
(1,186,614
)Basic and diluted loss per share

$
(0.05
)

$
( 0.01
)

$
(0.06
)

$
(0.03
)Basic and diluted weighted average shares outstanding


47,428,292



43,544,761



46,112,417



43,182,192








See Accompanying Condensed Notes to the Interim Consolidated Financial Statements





4





JAYHAWK ENERGY, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009





2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss from operations

$
(2,696,527
)

$
(1,186,614
)Adjustments to reconcile net loss to net cash used by operating activities:Depreciation, depletion and amortization


522,795



512,762Amortization of discount on note payable


457,756



116,572Accretion of convertible promissory note


--



196,777Accretion in annual asset retirement obligation


7,042



6,402Debt Conversion Expense


1,466,978Common stock issued in lieu of interest


55,143



--Common stock issued in consideration for services


23,400



78,916(Increase) decrease in accounts receivable


164,223



132,380(Increase) decrease in other current assets


(12,820
)


7,598(Increase) decrease in long-term assets


(1,800
)


--Increase (decrease) in accounts payable


1,324,728



(71,105
)Increase (decrease)  in accruals and other current liabilities


(281,857
)


(24,468
)Net cash provided (used) by operating activities


1,029,061



(230,780
)CASH FLOWS FROM INVESTING ACTIVITIESProved and unproved oil and gas property additions


(1,358,021
)


(18,600
)Other property additions


--



(12,373
)Sale of 42.5 percent interest in Girard gas properties


250,000



--Net cash used in investing activities


(1,108,021
)


(30,973
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from the sale of common stock


--



200,000Proceeds from issuance of  10% convertible debentures


900,000



-Net cash provided by financing activities


900,000



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

$
821,040


$
(61,753
)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


5,658



82,683CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
826,698


$
20,930SUPPLEMENTAL DISCLOSURE of CASH FLOWSIncome tax paid


-



-Interest paid


-



-








See Accompanying Condensed Notes to the Interim Consolidated Financial Statements




5





JAYHAWK ENERGY, INC.


Condensed Notes to Consolidated Financial Statements


(Unaudited)


For the Three and Six Months ended March 31, 2010 and March 31, 2009





Note 1 – Organization and Description of Business




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




Note 2 - Summary of Significant Accounting Policies





Basis of Presentation –These consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission (the “SEC”) and do not include all of the information and disclosures required by accounting principles generally accepted in the United States ("U.S. GAAP") for complete financial statements.  These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods reported.  All such adjustments are of a normal recurring nature unless disclosed otherwise.  JayHawk reports on operations using a fiscal year end of September 30.  This report on Form 10-Q is for the second quarter ending March 31, 2010, and comparable quarter ended March 31, 2009.  These financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto, included in the Company’s Form 10-K for the year ended September 30, 2009, and interim reports on Forms 10-Q and 8-K as filed with the SEC.  Interim operating results are not necessarily indicative of operating results for any future interim period or for the full year.





Going Concern – The accompanying financial statements have been prepared assuming that the Company continues operating as a going concern.  As of March 31, 2010 our ability to continue as such is dependent upon our ability to obtain sufficient additional financing and upon achieving profitable future operations.  We plan to fund our future operations by raising additional capital in the public and private markets, drilling new wells and attaining additional commercial production, thereby increasing our operating income.  However, there is no assurance that we will be able to achieve these objectives.





Joint Venture Operations –In instances where the Company’s oil and gas activities are conducted jointly with others, the Company’s accounts reflect only its proportionate interest in such activities.





Use of estimates -The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods.  A change in accounting estimate is accounted for prospectively over the current and future years.





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





Revenue Recognition – We use the sales method of accounting for oil and gas revenues.  Under this method revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes we are entitled to, based on our individual interest in the property.  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".





6




JAYHAWK ENERGY, INC.


Condensed Notes to Consolidated Financial Statements


(Unaudited)


For the Three and Six Months Ended March 31, 2010 and March 31, 2009





Note 2 – Summary of Significant Accounting Policies (continued)





Property, plant and equipment -JayHawk follows the successful efforts method of accounting for oil and gas property as promulgated in Accounting Standards Codification (ASC) Topic 932, Extractive Activities – Oil and Gas.  Under this method of accounting, costs to acquire mineral interests in oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells, are capitalized.  Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs and costs of carrying and retaining unproved properties are expensed.




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




Support equipment and other property, plant and equipment related to oil and gas production are depreciated on a straight-line basis over their estimated useful lives which range from 5 to 35 years.  Property, plant and equipment unrelated to oil and gas producing activities is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 25 years.




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




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





Income Taxes - The Company follows the guidance of ASC Topic 740, Income Taxes (previously the FASB has issued interpretation No. 48 (FIN-48) “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement 109”.   Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.




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




7





JAYHAWK ENERGY, INC.


Condensed Notes to Consolidated Financial Statements


(Unaudited)


For the Three and Six Months Ended March 31, 2010 and March 31, 2009






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




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


8


JAYHAWK ENERGY, INC.


Condensed Notes to Consolidated Financial Statements


(Unaudited)


For the Three and Six Months Ended March 31, 2010 and March 31, 2009








Note 3 - Trade Accounts Receivable





At March  31, 2010 trade accounts receivable represents those amounts the Company is owed for its' oil and gas production delivered during the month of March 2010 and amounts due from other working interests for their respective percentages of joint operating costs and drilling costs.  At September 30, 2009, the trade accounts receivable also included a net amount anticipated to be collected from the SemCrude bankruptcy.  On February 25, 2010 the Company received $224,183 in complete settlement of this litigation and the receivable and associated allowance were accordingly eliminated.  Specifically, trade accounts receivable are detailed as follows at March 31, 2010 and September 30, 2009:




March 31,

2010


September 30,

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

$
--


$
283,486Less: Allowance for doubtful collections


--



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


87,066



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


7,549



5,954Due from joint operating working interests


34,669



14,756Total

$
129,284


$
293,507





Note 4 – Unproved Properties and Impairment





The total of JayHawk's investment in unproved properties at March 31, 2010 and September 30, 2009 consists of the following capitalized costs respectively:




March 31,

2010


September 30,

2009Kansas Uniontown Project

$
2,494,479


$
2,494,479Less: Allowance for impairment


(1,474,000
)


( 1,474,000
)Less: Accumulated amortization


( 211,814
)


( 162,734
)Net investment in Uniontown Project

$
808,665


$
857,745Kansas Girard Project

$
1,652,284


$
1,651,125Less: accumulated amortization


( 340,056
)


( 243,197
)Net investment in Girard Project

$
1,312,228


$
1,407,928Crosby Project Capitalized New Lease Costs

$
30,850


$
-Total Unproved Oil and Gas Property

$
2,151,743


$
2,265,673


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





9





JAYHAWK ENERGY, INC.


Condensed Notes to Consolidated Financial Statements


(Unaudited)


For the Three and Six Months ended March 31, 2010 and March 31, 2009








Note 5 – Proved and Developed Oil & Gas Properties





The capitalized cost, net of depreciation, depletion and amortization (DD&A) of the proved oil and gas properties was $6,574,389, at March 31, 2010, and $6,256,238 at September 30, 2009.  These net capitalized costs are comprised of the following; detailed by property:




March 31,

2010


September 30,

2009Crosby North Dakota Properties:Proved Reserves

$
2,357,752


$
2,357,752Field Equipment


1,200,248



1,200,248Capitalized Drilling Costs


1,326,012Less: Accumulated DD&A


(1,396,660
)


( 1,117,265
)Net Capitalized Costs

$
3,487,352


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

$
796,033


$
796,033Capitalized Drilling Costs


662,899



662,899Less: investment from Joint Venture Partner


(250,000
)


--Less: accumulated DD&A


(109,940
)


(76,402
)Net Capitalized Costs

$
1,098,992


$
1,382,530JayHawk Gas TransportationField Equipment

$
2,605,870


$
2,605,870Less: accumulated Depreciation


(230,825
)


(172,897
)Net Capitalized Costs

$
2,375,045


$
2,432,973Total Net Proved Oil & Gas Properties

$
6,961,389


$
6,256,238
  Note 6 – Convertible Promissory Note




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




On February 25, 2010 the $800,000 principal of the note payable and currently accrued interest was converted to 1.6 million shares of the Company’s common stock.  Accounting Standards Codification (ASC) topic 470-20-40-16 requires expense to be recognized when convertible debt is converted to equity securities of the debtor to the extent that the fair value of the securities and other consideration transferred exceeds the fair value of securities issuable pursuant to the original conversion terms.  Management made an assessment of the modified terms of conversion and determined that the fair value of the 1.6 million shares on the date of issuance was $2,112,000 and exceeded the value of shares issuable pursuant to the amended agreement of $645,022, by $1,466,978.  This amount was charged to non-cash debt conversion expense.





10





JAYHAWK ENERGY, INC.


Condensed Notes to Consolidated Financial Statements


(Unaudited)


For the Three and Six Months Ended March 31, 2010 and March 31, 2009





Note 7 – Long-term Liabilities





Long-term liabilities at March 31, 2010 are comprised of an asset retirement obligation of $147,886, and convertible debentures of $900,000, net of discounts for the imputed fair value of common stock purchase warrants attached to the debentures and the imputed fair value of the conversion feature of the debentures.  At September 30, 2009 the only long-term liability was the asset retirement obligation reflected in the amount of $140,844.  The composition of long-term liabilities existing at March 31, 2010 and September 30, 2009, the previous fiscal year end, is reflected in the following table:




March 31,

2010


September 30,

2009Asset retirement obligation

$
147,886


$
140,844Long-term notes (debentures) payable face value


900,000



--Less: Unamortized discount(s)Imputed fair value of common stock purchase warrants


(1,374
)


--Imputed fair value of beneficial conversion feature


(410,870
)


--Total long-term liabilities

$
605,642


$
140,844


In December 2009 the Company issued 10 percent convertible debentures with a face value of $900,000, and a two year maturity.  These debentures were issued with attached common stock purchase warrants.  The debentures are convertible at any time after the original issue date into a number of shares of the Company’s common stock, determined by dividing the amount to be converted by a conversion price of $0.30 per share.  The attached common share purchase warrants, expire in 42 months from the original issue date and permit the holders two exercise options.  The warrants were exercisable by purchase of the Company’s common stock for cash at an exercise price of $0.45, or alternatively, in a cashless exercise, the number of shares being determined in accordance with a predetermined formula based upon the Company’s then current stock price.  In two transactions the holders of the debentures and the common stock purchase warrants, exercised their rights under those warrants to acquire 2,111,388 shares of the Company’s common stock in two separate cashless exercises on January 6, and January 27 of this current quarter.  All but 166,000, or 7.3 percent, of the common stock purchase warrants issued with these convertible debentures have now been exercised.   The Company issued additional 10 percent convertible debentures with a face value of $600,000 in April 2010, increasing the total amount of long-term debentures payable to $1,500,000 (See Note 8- Subsequent Events).




In accordance with ASC Topic 470, the Company allocated the proceeds to the two elements (detachable warrants and convertible instrument) based upon their relative fair values of the debt instrument without the warrants and the warrants themselves at the time of issuance.  The fair value of the warrants was determined following the guidance of ASC Topic 718; using the Black-Scholes option model (using a risk free interest rate of .06 percent and volatility of 99.3 percent) with the value allocated to the warrants reflected in Stockholders’ Equity and a debt discount.  Based upon the respective fair values as of the original agreement dates, we allocated $430,435 to the common stock purchase warrants.  As mentioned in the preceding paragraph, all but 166,000 common stock purchase warrants were exercised.  Accordingly, at March 31, 2010, of the original $430,435 allocated to the warrants, all but $31,374 has been amortized.  Additionally, the Company determined that the convertible notes contain a beneficial conversion feature.  Following the guidance provided by ASC 470, after first allocating proceeds of the convertible debt to the warrants, an additional amount of $469,565, was recorded as a discount for the beneficial conversion feature of the debentures.  These amounts are and will continue to be amortized over the remaining life of the underlying warrants and convertible debentures.





Note 7 - Common Stock





Holders of the debentures and the common stock purchase warrants, more fully described in the preceding Note 6, exercised their rights under those warrants to acquire 2,111,388 shares of the Company’s common stock in two separate cashless exercises on January 6, and January 27, 2010, in the amount of 1,398,065 shares, and 713,322 shares, in each of the respective transactions.





On February 25, 2010 the 1,600,000 shares of the Company’s common stock were issued for the conversion of the $800,000 convertible note payable reflected at September 30, 2009, and the accrued interest through February 25, 2010 of $55,143.





11





JAYHAWK ENERGY, INC.


Condensed Notes to Consolidated Financial Statements


(Unaudited)


For the Three and Six Months Ended March 31, 2010 and March 31, 2009





Note 8 – Subsequent Events





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





On April 21, 2010 the Compensation Committee of the Company’s Board of Directors approved paying three employees the compensation they had previously sacrificed to help meet past obligations of the Company during prior fiscal periods.  This deferred compensation will be paid quarterly beginning with the third quarter ending June 30, 2010 and ending with the first quarter end of the new fiscal year, December 31, 2010.  The amounts to be accrued monthly are approximately $21,900, beginning with April 2010.




On April 23, 2010 the Company sold additional Convertible Debentures with a face value of $600,000.  This transaction completes the Securities Purchase Agreement in which the Company entered with a group of investors on December 09, 2009, for an aggregate issuance of $1.5 million of 10 percent Convertible Debentures.  This second funding is similar to the first in that the debentures are convertible at any time after the original issue date into a number of shares of the Company’s common stock, determined by dividing the amount to be converted by a price of $0.30 per share.  Additionally, the investors were issued Common Stock Purchase Warrants, each having a term of 42 months, expiring October 2013, and giving the investors the right to purchase JayHawk’s common shares at an exercise price of $0.45 per share.





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




12





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








Results of Operations for the three and six months ended March 31, 2010 and 2009




Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and supplemental information presented in our Annual Report for the period ending September 30, 2009, on Form 10-K, and the Forms 8-K and Forms 10-Q issued in the periods subsequent to September 30, 2009.  Certain sections of Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting our business.  These statements typically contain words such as "anticipates," "believes," "estimates," "expects," "plans," "probable," "should," "could," "would," or similar words indicating that future outcomes are uncertain.  In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not all such factors, which could cause future outcomes to differ materially from those set forth in the forward-looking statements.




Drilling Operations – during the three month period ended March 31, 2010, JayHawk spud and completed two new oil wells on the Crosby, North Dakota properties.  The Knudson #1 and Jenks #1 were each spud and completed during March 2010.  Both are expected to commence production during this current quarter ending June 30, 2010.  Based on the flow rates achieved during initial testing, the Company is anticipating commercial production from each.  At March 31, 2010 all of the costs associated with the drilling and completion of these two wells have been capitalized and included in the net cost of the proved and developed Crosby, North Dakota oil properties.  As capital costs, these items do not affect the cost and expenses associated with the normal production activities reflected in these current financial statements.  As of March 31, 2010 we have capitalized drilling costs totaling approximately $1.3 million.





Oil Revenues –derived from oil sales delivered from our Crosby, North Dakota properties are reported in the Consolidated Statements of Operations net of working and royalty interests.  For the three and six month periods ending March 31, 2010, JayHawk sold a gross 4,845 Bbls. and 9,773 Bbls., respectively.  This production was sold at average prices of $65.59/Bbl. and $63.27/Bbl., yielding gross sales amounts of $317,805 and $618,298 for the three and six month periods.  These gross numbers are reconciled to the net sales revenue by deducting those amounts applicable to the outside working and royalty interests.





JayHawk’s net oil revenues for the three and six month periods end March 31, 2010, of $160,732 and $309,058, reflect very  favorable variances from the net oil revenues reported for the comparable periods ending March 31, 2009, of $61,599 and $184,932.   This is attributable to a strong price variance and a significant volume variance, as there was no production or sales during the month of January 2009 due to severe winter weather in North Dakota.  Prices for the three and six month periods ending March 31, 2009 averaged only $34.78 and $39.18 per barrel, respectively.





Gas Revenues – Gross sales of gas produced and delivered from our Girard, Kansas properties for the three and six month periods ending March 31, 2010 were $30,059 and $63,435, respectively.  The amount reported in the financial statements of the Company however reflect only JayHawk’s net working interest.  During the first quarter ending December 31, 2009 the Company entered into an agreement whereby 42.5 percent of the gas revenues generated from the Girard properties were assigned to a joint venture partner in exchange for $250,000.  Therefore, the net gas revenues accruing to the Company for the three and six month periods ending March 31, 2010 are reported net of our joint venture partner’s interest.  JayHawk’s net gas revenues from the gross sales were $18,544 and $42,638 for the respective three and six month periods.  Additionally during the three months ending March 31, 2010 the pipeline has undergone significant maintenance and modifications in an attempt to increase daily volumes.  This has caused a decrease in the volumes sold during this period.





Prices received for our gas production continue to be volatile.  During the three months ending March 31, 2010 they have fluctuated between a low of $3.58 per mcf. to a high of $5.41 per mcf.  During the comparable periods ending March 31, 2009 prices fluctuated between a low of $2.48 and a high of $4.67 per mcf.  Gas revenues accruing to JayHawk during the three and six month periods ending March 31, 2009 were $29,213 and $62,913, respectively.





Production Expenses –include direct costs and expenses such as field labor, fuel, power, well repair and maintenance, saltwater disposal, and production and severance taxes.  The direct production expenses are reported net of amounts charged to our non-operating partners for their working interest share of applicable costs and expenses.  The increase in production expenses for the North Dakota oil operations for the three and six month periods end March 31, 2010 is primarily associated with an extra month of operations in the 2010 period end.  During the 2009 period end there were no production activities for a full month due to unfavorable weather conditions.





13


Relative to the Company’s Kansas natural gas activities, throughout both the three and six month periods ending March 31, 2010, in accordance with the joint operating agreement, the joint venture partner has paid the majority of all costs associated with those operations.  This accounts for the reduction in production costs reflected between the comparable three and six month periods ending March 31, 2010 and 2009.





General and Administrative Expenses –include the cost of head office administration and the salaries and wages paid senior management and administrative staff.  An comparative analysis of the  general and administrative expense for the three and six month periods ending March 31, 2010 and 2009 is provided in the following table:




Period End March 31, 2010


Period End March 31, 2009Three Months


Six Months


Three Months


Six monthsCompensation

$
120,500


$
194,000


$
48,500


$
160,000Legal and consulting fees


43,537



133,490



20,910



78,894Audit and public company expense


34,289



53,961



16,029



18,343Employer payroll taxes


8,551



9,637



3,606



11,228Office expense


6,237



10,875



9,509



19,834All other corporate general & administrative


12,268



33,200



3,073



34,903Total

$
225,382


$
435,163


$
101,627


$
323,202


Other net (income) expense – includes interest and financing costs and the non-cash costs of debt conversion expense more fully discussed in Note 6 to the Condensed Notes to the Financial Statements, discount amortization, and note accretion expenses.  The detail comprising the total other net (income) and expense follows:




Period End March 31, 2010


Period End March 31, 2009Three Months


Six Months


Three Months


Six MonthsInterest and financing costs

$
37,637



108,366



19,567



43,501Debt conversion expense


1,466,978



1,466,978



--



--Debenture discount amortization & expense


457,756



457,756



58,286



116.572Accretion of convertible note payable


--



--



98,389



196,777All other miscellaneous (income) & expense


(54,987
)


(73,513
)


3,201



(18,563
)Total

$
1,907,384


$
1,959,587


$
179,443


$
338,287
  Cash Flows, Liquidity and Capital Resources




As of March 31, 2010 our current assets totaled $971,346 consisting of cash, $826,698, accounts receivable, $129,284, and prepaid expenses, 15,364.  At the same time our current liabilities were $1,673,740.  This apparently significant working capital shortage was substantially alleviated with the receipt of $600,000 in April in consideration for the issuance of 10% convertible debentures (see Note 8 – Subsequent Events).





Net cash provided by operating activitiestotaled $1,029,061 for the six months ending March 31, 2010, compared to $230,780 used in operating activities for the six month period ending March 31, 2009.





Net cash used in investing activities totaled $1,108,021 in the three months ending March 31, 2010 as compared to $30,973 in the same period ending March 31, 2009.





Cash in the amount of $900,000 was provided by financing activities during the six months ending March 31, 2010.  During the comparable period ending March 31,2009, $200,000 was provided by financing activities.





The net change in cash and cash equivalents is the sum of cash provided by operating and financing activities and used in investing activities, or a net total of $821,040 which is the increase in the Company's cash balance of $5,658 existing at September 30, 2009, to the cash balance at March 31, 2010 of $826,698.  Generally, our main sources of liquidity are cash and internally generated cash flow from the sale of crude oil and natural gas.  In this six month period ending March 31, 2010 the cash position was significantly augmented by the issuance of the debentures in the amount of $900,000.





Off-Balance Sheet Arrangements





We have no off-balance sheet arrangements.





14





Item 3. Quantitative and Qualitative Disclosures About Market Risk





We have no investments, trading or non-trading, that would be sensitive to market risk.





Item 4. Controls and Procedures





(a) Evaluation of disclosure controls and procedures - We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon the evaluation of those controls and procedures performed as of March 31, 2010, the date of this report, our chief executive officer concluded that our disclosure controls and procedures were effective.





(b) Changes in internal controls – During the quarter ending March 31, 2010 the Company has significantly enhanced its’ internal control over financial reporting (as defined in Rule 13(a)-15(f) of the Exchange Act).  These changes materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Subsequent to December 31, 2009 the Company has, through its CEO and Board of Directors, implemented more rigorous and timely reviews of its financial reporting process, including scheduled quarterly audit committee meetings and direct communication with the field staff. This change was noted in the preceding Form 10-Q for the period ending December 31, 2009 and has been implemented.





15





PART II — OTHER INFORMATION





Item 1. Legal Proceedings.





None.





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





None.





Item 3.  Defaults Upon Senior Securities





None.





Item 4.  Submission of Matters to Vote of Security Holders





None.





Item 5.  Other Information





None.





Item 6.  Exhibits





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





32.1          Section 1350 Certification of CEO





16





SIGNATURES





In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





JayHawk Energy, Inc.,

a Colorado corporationDate: May 12, 2010
By:
/s/ Lindsay E. GorrillLindsay E. Gorrill

Principal Executive Officer,

President and a Director