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 DECMBER 31,
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 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 February 11, 2010, there were
47,224,884 shares of the issuer's $.001 par value common stock issued and
outstanding.
  1
 
 JAYHAWK
ENERGY, INC.
 
 Quarterly
Report on Form 10-QSB for the
 Quarterly
Period Ending December 31, 2009
 
 TABLE OF
CONTENTS
 
 PART
      I. FINANCIAL INFORMATIONItem
      1. Financial StatementsBalance Sheets:December
      31, 2009 (Unaudited) and September 30, 2009
              3Statements
      of Operations:Three Months Ended December 31, 2009 and 2008
      (Unaudited)
              4Statements of Cash Flows:Three Months Ended December 31, 2009 and 2008
      (Unaudited)
              5Notes
      to Unaudited Financial Statements:December 31, 2009
              6Item
      2. Management Discussion and Analysis
              11Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              12Item
      4. Controls and Procedures
              12PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
              13Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              13Item
      3. Defaults Upon Senior Securities
              13Item
      4. Submission of Matters to a Vote of Security Holders
              13Item
      5. Other Information
              13Item
      6. Exhibits
              13Exhibit
      31.1 and Exhibit 31.2
              AttachedExhibit 32.1 and Exhibit 32.2
              AttachedSignatures
              14
  2
  PART
      I - FINANCIAL INFORMATIONItem
      1. Financial StatementsJAYHAWK
      ENERGY, INC.Consolidated
      Balance SheetsDecember
      31, 2009
              
              
              September
      30, 2009Assets
              
              (Unaudited)Current
      AssetsCash
      and cash equivalents
              
              $
              952,892
              
              
              $
              5,658Trade
      accounts receivable, less allowance for doubtful accounts (Note
      3)
              
              
              277,554
              
              
              
              293,507Other
      current assets
              
              
              1,454
              
              
              
              2,544Total
      Current Assets
              
              
              1,231,900
              
              
              
              301,709Plant,
      Property and EquipmentUnproved
      oil and gas properties, net of allowance for impairment
andand
      accumulated amortization (Note 4)
              
              
              2,213,083
              
              
              
              2,265,673Proved
      and developed oil and gas properties net of accumulateddepreciation,
      depletion and amortization (Note 5)
              
              
              5,790,279
              
              
              
              6,256,238Computers,
      office equipment, furniture and leasehold improvements,net
      of accumulated depreciation
              
              
              28,608
              
              
              
              31,605Total
      Net Plant, Property and Equipment
              
              
              8,031,970
              
              
              
              8,553,516Other
      Long-Term Assets
              
              
              55,100
              
              
              
              55,100Total
      Assets
              
              $
              9,318,970
              
              
              $
              8,910,325Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesAccounts
      Payable
              
              $
              269,182
              
              
              $
              172,166Working
      and royalty interests payable
              
              
              139,845
              
              
              
              107,905Other
      payables, interest and taxes accrued
              
              
              141,720
              
              
              
              350,797Convertible
      promissory notes maturing in less than 1 year
              
              
              800,000
              
              
              
              800,000Total
      Current Liabilities
              
              
              1,350,747
              
              
              
              1,430,868Long-Term
      Liabilities (Note 6)
              
              
              144,045
              
              
              
              140,844Total
      Liabilities
              
              
              1,494,792
              
              
              
              1,571,712Stockholders'
      EquityPreferred
      Stock, $.001 par value; 10,000,000 shares authorized,no
      shares issued and outstanding.
              
              
              --
              
              
              
              --Common
      Stock; $.001 par value; 200,000,000 shares authorized,45,113,496
      issued and outstanding at December 31, 2009, and44,509,496
      shares issued and outstanding at September 30, 2009. (Note
    7)
              
              
              45,113
              
              
              
              44,509Additional
      paid-in capital
              
              
              13,880,587
              
              
              
              12,821,792Stock
      issuance obligation
              
              
              --
              
              
              
              136,000Accumulated
      deficit
              
              
              (6,101,522
              )
              
              
              (5,663,688
              )Total
      Stockholders' Equity
              
              
              7,824,178
              
              
              
              7,338,613Total
      Liabilities and Stockholders' Equity
              
              $
              9,318,970
              
              
              $
              8,910,325"See
      Accompanying Condensed Notes to the Consolidated Financial
      Statements"
  3
 JAYHAWK
      ENERGY, INC.Consolidated
      Statement of Operations (Unaudited)For
      the three
              
              
              For
      the threemonths
      ended
              
              
              months
      endedDecember
      31,
              
              
              December
      31,2009
              
              
              2008Revenue
      (Net Working Interest)Oil
      Sales
              
              $
              170,307
              
              
              $
              123,333Gas
      Sales
              
              
              24,094
              
              
              
              33,700Total
      Net Revenues
              
              $
              194,401
              
              
              $
              157,033Cost
      and Operating ExpensesProduction
      Costs – North Dakota
              
              
              71,815
              
              
              
              71,505Production
      Costs – Kansas
              
              
              6,510
              
              
              
              81,133Depreciation,
      depletion and amortization
              
              
              291,926
              
              
              
              312,139General
      and Administrative
              
              
              209,781
              
              
              
              221,574Other
      (Income) and Expense
              
              
              52,203
              
              
              
              158,844Total
      Costs and Expenses
              
              
              632,235
              
              
              
              845,195Net
      loss and total comprehensive loss
              
              $
              (437,834
              )
              
              $
              (688,162
              )Basic
      and diluted loss per share
              
              $
              (0.01
              )
              
              $
              (0.02
              )Basic
      weighted average number of shares outstanding
              
              
              44,825,148
              
              
              
              42,827,505"See
      Accompanying Condensed Notes to the Consolidated Financial
      Statements"
  4
  JAYHAWK
      ENERGY, INC.Consolidated
      Statement of Cash Flows (Unaudited)For
      the three
              
              
              For
      the threemonths
      ended
              
              
              months
      endedDecember
      31,
              
              
              December
      31,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss from operations
              
              $
              (437,834
              )
              
              $
              (688,162
              )Adjustments
      to reconcile net loss to net cash used in operationsDepreciation,
      depletion and amortization
              
              
              291,926
              
              
              
              312,139Amortization
      of Discount on Note Payable
              
              
              -
              
              
              
              58,286Accretion
      of convertible promissory note
              
              
              -
              
              
              
              98,389Accretion
      of annual asset retirement obligation
              
              
              3,201
              
              
              
              3,201Common
      stock issued in consideration for services
              
              
              23,400
              
              
              
              16,750(Increase)
      decrease in accounts receivable
              
              
              15,952
              
              
              
              155,723(Increase)
      decrease in other current assets
              
              
              1,090
              
              
              
              11,555Increase
      (decrease) in accounts payable
              
              
              97,016
              
              
              
              56,249Increase
      (decrease) in accruals and other current liabilities
              
              
              72,863
              
              
              
              6,798Net
      cash provided by operating activities
              
              
              67,614
              
              
              
              30,928CASH
      FLOWS FROM INVESTING ACTIVITIESUnproved
      oil and gas property additions
              
              
              (20,380
              )
              
              
              -Proved
      oil and gas property additions
              
              
              -
              
              
              
              (18,600
              )Other
      property additions
              
              
              -
              
              
              
              (11,212
              )Net
      cash used in investing activities
              
              
              (20,380
              )
              
              
              (29,812
              )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from the sale of common stock
              
              
              -
              
              
              
              -Borrowings
      with convertible notes payable
              
              
              900,000
              
              
              
              -Net
      cash provided by financing activities
              
              
              900,000
              
              
              
              -NET
      CHANGE IN CASH AND CASH EQUIVALENTS
              
              
              947,234
              
              
              
              1,116CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              5,658
              
              
              
              82,683CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              952,892
              
              
              $
              83,799
  Supplemental
Disclosure of Cash Flow and Non-cash Investing and Financing
Activity:
  Income taxes
      paid
              
              $
              --
              
              
              $
              --Interest
      paid
              
              $
              --
              
              
              $
              --
 
 "See
Accompanying Condensed Notes to the Consolidated Financial
Statements"
  5
 
 JAYHAWK
ENERGY, INC.
 Condensed
Notes to Consolidated Financial Statements
 (Unaudited)
 For
the Three Months ended December 31, 2009 and December 31, 2008
 
 Note
1 – Organization and Description of Business
  Nature of Operations –JayHawk
Energy, Inc. (the Company, we, or JayHawk) and its wholly owned subsidiary, 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.  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) in North
Dakota, and Girard in Kansas.  We also formed a wholly owned
subsidiary to transport our 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
first quarter of the fiscal year to end September 30, 2010, the quarter ending
December 31, 2009, and comparable quarter ended December 31,
2008.  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 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 – As shown in
the accompanying financial statements, we have incurred operating losses since
inception.  As of December 31, 2009 our ability to achieve our
objectives and obtain profitability and positive cash flows will be dependent on
our ability to locate profitable mineral properties and generate revenue from
our current and planned business operations, and control costs.  We
plan to fund our future operations by drilling new wells and attaining
additional commercial production, thereby increasing our operating income, and
raising additional capital in the public and private
markets.  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 antidilutive.  As each of the
two fiscal periods covered by these financial statements reflects net losses
from operations, all of our warrants have 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 Months ended December 31, 2009 and December 31, 2008
 
 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 Months ended December 31, 2009 and December 31, 2008
 
 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, July of 2008, and
December and September 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 December 31, and
September 30, 2009:
   December
      31,2009
                
                
                September
      30,2009Due
      for crude oil delivered in June & July 2008 – SemCrude
                
                $
                283,486
                
                
                $
                283,486Less:
      Allowance for doubtful collections
                
                
                (
      119,763
                )
                
                
                (
      119,763
                )Due
      for crude oil delivered in December and September 2009
                
                
                78,037
                
                
                
                109,074Due
      for natural gas delivered in December and September 2009
                
                
                12,333
                
                
                
                5,954Due
      from joint operating working interests
                
                
                23,462
                
                
                
                14,756Total
                
                $
                277,555
                
                
                $
                293,507
 
 The
previous purchaser of our North Dakota crude oil, SemCrude, took delivery of
JayHawk's June and July 2008 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.  Since August
of 2008 all crude oil production has been delivered to a new
purchaser.  Proceeds for the December 2009 deliveries valued at
$78,037, were subsequently received in January 2010.  Amounts
receivable for the natural gas delivered in December 2009 we also received in
January 2010.
 
 Note
4 – Unproved Properties and Impairment
 
 The total
of JayHawk's investment in unproved properties at December 31, and September 30,
2009 consists of the following capitalized costs respectively:
   December
      31,
                    2009
                
                
                September
      30,
                  2009Kansas
      Uniontown Project
                
                $
                2,494,479
                
                
                $
                2,494,479Less:
      Allowance for impairment
                
                
                (1,474,000
                )
                
                
                (
      1,474,000
                )Less:
      Accumulated amortization
                
                
                ( 187,275
                )
                
                
                ( 162,734
                )Net
      investment in Uniontown Project
                
                $
                833,204
                
                
                $
                857,745Kansas
      Girard Project
                
                $
                1,651,125
                
                
                $
                1,651,125Less:
      accumulated amortization
                
                
                ( 291,626
                )
                
                
                ( 243,197
                )Net
      investment in Girard Project
                
                $
                1,359,499
                
                
                $
                1,407,928Crosby
      Project Capitalized New Lease Costs
                
                $
                20,380
                
                
                $
                -Total
      Unproved Oil and Gas Property
                
                $
                2,213,083
                
                
                $
                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.
  8
 
 JAYHAWK
ENERGY, INC.
 Condensed
Notes to Consolidated Financial Statements
 (Unaudited)
 For
the Three Months ended December 31, 2009 and December 31, 2008
 
 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 $5,790,279, at December 31, 2009, and
$6,256,238 at September 30, 2008.  These net capitalized costs are
comprised of the following; detailed by property:
  December
      31,2009
                
                
                September
      30,2009Crosby
      North Dakota Properties:Proved
      Reserves
                
                $
                2,357,752
                
                
                $
                2,357,752Field
      Equipment
                
                
                1,200,248
                
                
                
                1,200,248Less:
      Accumulated DD&A
                
                
                ( 1,288,567
                )
                
                
                ( 1,117,265
                )Net
      Capitalized Costs
                
                $
                2,269,433
                
                
                $
                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
                
                
                ( 92,096
                )
                
                
                ( 76,402
                )Net
      Capitalized Costs
                
                $
                1,116,836
                
                
                $
                1,382,530JayHawk
      Gas TransportationField
      Equipment
                
                $
                2,605,870
                
                
                $
                2,605,870Less:
      accumulated Depreciation
                
                
                ( 201,860
                )
                
                
                ( 172,897
                )Net
      Capitalized Costs
                
                $
                2,404,010
                
                
                $
                2,432,973Total
      Net Proved Oil & Gas Properties
                
                $
                5,790,279
                
                
                $
                6,256,238
 Note
6 – Long-term Liabilities
 
 Long-term liabilities at December 31,
2009 are comprised of an asset retirement obligation of $144,045, and
convertible debentures of $900,000 net of discounts as follows:
  December
      31,2009
                
                
                September
      30,2009Asset
      retirement obligation
                
                $
                144,045
                
                
                $
                140,844Long-term
      notes (debentures) payable face value
                
                
                900,000
                
                
                
                --Less:
      Imputed fair value of common stock purchase warrants
                
                
                ( 430,435
                )
                
                
                --Imputed
      fair value of beneficial conversion feature
                
                
                ( 469,565
                )
                
                
                --Total
      long-term liabilities
                
                $
                144,045
                
                
                $
                140,844
 Long-term Notes Payable – 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 may be
exercised 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.  All of the common stock purchase
warrants issued with these convertible debentures were exercised in a cashless
exercise in January 2010, which is more fully described in Note 8, Subsequent
Events.
  9
 
 JAYHAWK
ENERGY, INC.
 Condensed
Notes to Consolidated Financial Statements
 (Unaudited)
 For
the Three Months ended December 31, 2009 and December 31, 2008
 
 Note
6 – Long-term Liabilities (cont.)
 
 Long-term Notes Payable (cont.)
- 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 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.
 
 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.  The aggregate of the two discount
components is $900,000, the full maturity amount of the
debentures.  This essentially is a deferred cost of financing, and as
such, will be amortized over the life of the debentures in the amount of $37,500
per month.
 
 Note
7 - Common Stock
  The
Company made two issuances of 30,000 shares each of its common stock on October
2 and November 1, 2009, in exchange for consulting services
rendered.
  On November 16, 2009 the
Company issued the 544,000 shares of its common stock to fulfill the stock
issuance obligation recognized on July 30, 2009.   This
obligation was recognized as the result of amending the original $800,000
short-termconvertible promissory note, signed in July
2008.  The original note had a one-year maturity, maturing July 30,
2009, and provided for interest to be paid upon maturity, computed at a rate of
12 percent per annum.  The amendment extended the maturity date to
July 30, 2010.  Accrued interest to the date of the amendment was
$96,000.  This along with a 5 percent extension fee of $40,000 was
converted to shares of the Company’s restricted common stock, at the rate of
$0.25 per share.  The total amount of $136,000 was reflected as a
stock issuance obligation as at September 30, 2009.
  Note
8 – Subsequent Events
  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 1,398,066 shares, and 713,322 shares, in each
of the respective transactions.
 
 Effective January 01, 2010 the
Board of Directors approved increasing the Chief Executive Officer’s and
President’s compensation to $15,000 and $10,000, per month,
respectively.
  Subsequent
events have been evaluated through February 4, 2009, the date that the
consolidated financial statements were available to be issued.
  10
  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, 2009, on Form 10-K, and the Forms 8-K issued in the period
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.
 
 Results
of Operations for the three months ended December 31, 2009 and 2008
 
 Revenues -For the three
months ending December 31, 2009 and 2008, revenues, reported as JayHawk's net
working interest, were $194,401 and $157,033, respectively.  The
comparative volumes of oil and gas delivered and the average prices received
during each of the two respective three month periods of 2009 and 2008, are
disclosed in the following table:
  Volumes
                
                
                Average
      Prices
                
                
                Gross
      Revenue2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Oil
      Sales   (in barrels)
                
                
                4,928
                
                
                
                4,601
                
                
                $
                60.97
                
                
                $
                42.10
                
                
                $
                300,492
                
                
                $
                193,699Gas
      Sales  (in thousand cubic feet)
                
                
                8,459
                
                
                
                10,710
                
                
                $
                3.98
                
                
                $
                3.15
                
                
                
                33,377
                
                
                
                33,700Total
      Gross Receipts
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                333,869
                
                
                $
                227,399Less:  working
      & royalty interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                ( 139,468
                )
                
                
                ( 70,366
                )Net
      Revenues to JayHawk
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                194,401
                
                
                $
                157,033
 
 Volumes
of oil delivered during the three month period ending December 31, 2009 are
slightly higher than the same period end in 2008 due to production operations
being temporarily stopped by weather conditions during the 2008
period.  Field prices for the oil (after delivery charges) fluctuated
from a low of $57.52 to a high of $63.46 during the three month period ending
December 31, 2009.  During the quarter ending December 31, 2008 these
same field prices, after delivery charges, fluctuated between a low of
$20.60/Bbl. and high of $59.22/Bbl.  Beginning in November of 2009,
the gross gas revenues are reduced by a 42.5 percent interest distributed to our
joint venture partner in Girard, Kansas.
 
 Operating Expenses -Total
operating expenses for the three months ended December 31, 2009 and 2008 were
$632,235, and $845,195, respectively.  These expenses are segregated
as follows:
 
 Quarter
      End
                December
      31, 2009
              
              
              Quarter
      End
                December
      31, 2008Crosby,
      N.D
              
              
              Girard,
      KS.
              
              
              G&A
              
              
              Total
              
              
              TotalDirect
      regional costs
              
              $
              71,815
              
              
              $
              6,510
              
              
              
              -
              
              
              $
              78,325
              
              
              $
              152,638Depreciation,
      depletion, and amortization
              
              
              172,505
              
              
              
              116,424
              
              
              
              2,997
              
              
              
              291,926
              
              
              
              312,139General
      and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              209,781
              
              
              
              209,781
              
              
              
              221,574Other
      net (income) and expense
              
              
              
              
              
              
              
              
              
              
              52,203
              
              
              
              52,203
              
              
              
              158,844Totals
              
              $
              244,320
              
              
              $
              122,934
              
              
              $
              264,981
              
              
              $
              632,235
              
              
              $
              845,195
 
 The
direct regional costs above for the three months ending December 31, 2009 and
2008, represent direct production costs, including, production and severance
taxes, labor, supplies and materials, maintenance, chemicals, and salt water
disposal for both the North Dakota and Kansas properties.
 
 General
and administrative expenses incurred for the corporate office
and  management, for the period ending December 31, 2009 was
significantly lower when compared to the same period ending December 31, 2008,
primarily due to focused attention to cost reduction efforts.
  11
  Cash
Flows, Liquidity and Capital Resources
 
 Net cash
provided by operating activitiestotaled $67,614 in the
quarter ending December 31, 2009, compared to $30,928 provided in operating
activities for the three month period ending December 31, 2008.  This
increase in cash provided by operations is primarily attributable to the
significant reduction in the quarterly net operating loss, for the comparable
quarters.
 
 Net cash
used in investing activities totaled $20,380 in the three months ending December
31, 2009 as compared to $29,812 in the same period ending December 31,
2008.
 
 Cash in
the amount of $900,000 was provided by financing activities during the quarter
ending December 31, 2009.  There were no financing activities during
the same period of 2008.
 
 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
$947,234 which is the increase in the Company's cash balance of $5,658 existing
at September 30, 2009, to the cash balance at December 31, 2009 of
$952,892.  Generally, our main sources of liquidity are cash and
internally generated cash flow from the sale of crude oil and natural
gas.  In this quarter ending December 31, 2009 the cash position was
significantly augmented by the issuance of the debentures in the amount of
$900,000.  Our current assets at December 31, 2009 totaled $1,231,900
and our current liabilities totaled $1,350,747.
 
 As
clearly demonstrated in this current quarter ending December 31, 2009, our
revenue and operating cash flows, are highly dependent on the prices we receive
for crude oil and natural gas.  A substantial and continued 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.
 
 Off-Balance
Sheet Arrangements
 
 We have
no off-balance sheet arrangements.
 
 Item 3. Quantitative and
Qualitative Disclosures About Market Risk
 
 We have
no investments, trading or non-trading, that would be sensitive to market
risk.
 
 Item 4. Controls and
Procedures
 
 (a) Evaluation of disclosure controls and
procedures - We maintain controls and procedures designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon the evaluation of those controls
and procedures performed as of December 31, 2009, the date of this report, our
chief executive officer concluded that our disclosure controls and procedures
were effective.
 
 (b) Changes in internal controls –
There have been no changes in internal control over financial reporting (as
defined in Rule 13(a)-15(f) of the Exchange Act) during the period ended
December 31, 2009, that 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 a more rigorous and timely review
its financial reporting process, including scheduled quarterly audit committee
meetings and direct communication with the field staff. This change will likely
materially affect the Company’s internal control over financial reporting for
the quarter to end March 31, 2010.
  12
  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
  13
  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:
      February 11, 2010
              By:
              /s/ Lindsay
      E. GorrillLindsay
      E. Gorrill
                Chief
      Executive Officer andChief
      Financial Officer
   14