UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-QSB
  x
              QUARTERLY REPORT UNDER SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
      PERIOD ENDED JUNE 30, 2008
 
 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)
                (IRS
      Employer Identification No.)6240
      E. Seltice Way, Suite C, Post Falls, Idaho
                  (Address
      of principal executive office)
                83702
                  (Postal
      Code)(208)
      667-1328
                  (Issuer's
      telephone number)
  370
Interlocken Blvd. Suite 400, Broomfield, Colorado 80021
 (Former
name or former address, if changed since last report.)
  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 filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer o                                                                                         Accelerated
filer o
 Non-accelerated
filer o (Do not
check if a smaller reporting
company)         Smaller reporting
company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   o Yes   x No
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
  State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practical date.  As of August 14, 2008, there were
42,598,953 shares of the issuer's $.001 par value common stock issued and
outstanding.
  Transitional
Small Business Disclosure format (check one):  o
Yes   x No
  1
  
 JAYHAWK
ENERGY, INC.
 
 Quarterly
Report on Form 10-QSB for the
 Quarterly
Period Ending June 30, 2008
 
 Table of
Contents
  
 PART
      I. FINANCIAL INFORMATION
              
              Page
      NumberItem
      1.  Financial StatementsBalance
      Sheets:June
      30, 2008 (Unaudited) and September 30, 2007
              
              
              3Statements of
      Operations:Three and Nine Months Ended June 30, 2008 and 2007
      (Unaudited)
              
              
              4Statements of Cash
      Flows:Nine Months Ended June 30, 2008 and 2007
      (Unaudited)
              
              
              5Notes to Unaudited Consolidated
      Financial Statements:June 30, 2008
              
              
              6-14Item 2.  Management
      Discussion and Analysis
              
              
              15Item
      3.  Controls and
      Procedures
              
              
              20PART
      II. OTHER INFORMATIONItem
      4.  Legal
      Proceedings
              
              
              21Item
      5.  Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              
              21Item
      6.  Defaults Upon
      Senior Securities
              
              
              21Item
      7.  Submission of
      Matters to a Vote of Security Holders
              
              
              21Item
      8.  Other
      Information
              
              
              21Item
      9.  Exhibits
              
              
              21Signatures
              
              
              22
 
  2
  
 PART I- FINANCIAL INFORMATION
 
 Item 1.  Financial
Statements
 
 JAYHAWK
ENERGY, INC.
 Consolidated
Balance Sheet
  Quarter
      Ended
                June
      30,
              
              
              Year
      Ended September 30,2008
              
              
              2007Assets
              
              (Unaudited)Cash
      and cash equivalents
              
              $
              387,331
              
              
              $
              525,117Accounts
      receivable
              
              
              129,866
              
              
              
              —Prepaids
      and other current assets
              
              
              1,800
              
              
              
              —Total
      current assets
              
              
              518,997
              
              
              
              525,117Proved
      and unproved oil & gas property, net of $339,577 (Sept 2007 – nil) in
      accumulated depletion and $55,136 (Sept 2007 – nil) leasehold
      amortization
              
              
              6,021,845
              
              
              
              2,200,000Equipment,
      net of $88,432 (Sept 2007 – nil) in accumulated
    depreciation
              
              
              4,253,891
              
              
              
              573Total
      assets
              
              $
              10,794,733
              
              
              $
              2,725,690Liabilities
      and Stockholders’ EquityAccounts
      payable
              
              $
              72,588
              
              
              $
              40,000Taxes
      payable
              
              
              5,705
              
              
              
              1,539Total
      current liabilities
              
              
              78,293
              
              
              
              41,539Stockholders’
      equity:Preferred
      stock, $.001 par value; 10,000,000 shares authorized; none
      outstanding
              
              
              —
              
              
              
              —Common
      stock, $.001 par value; 200,000,000 shares authorized; 42,598,953 and
      36,882,659 shares issued and outstanding respectively
              
              
              42,599
              
              
              
              36,883Additional
      paid-in capital
              
              
              11,407,296
              
              
              
              2,904,981Stock
      issuance obligation
              
              
              519,011
              
              
              
              —Accumulated
      deficit
              
              
              (1,252,466
              )
              
              
              (257,713
              )Total
      stockholders’ equity
              
              
              10,716,440
              
              
              
              2,684,151Total
      liabilities and stockholders’ equity
              
              $
              10,794,733
              
              
              $
              2,725,690
 
 See
accompanying notes to unaudited consolidated financial
statements.
  3
  JAYHAWK ENERGY, INC.
 Consolidated
Statement of Operations
 (Unaudited)
  Three
      Months Ended
              
              
              Nine
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue
              
              $
              452,315
              
              
              $
              —
              
              
              $
              710,872
              
              
              $
              —Operating
      expensesExploration
      and production
              
              
              272,494
              
              
              
              —
              
              
              
              373,296
              
              
              
              —Depreciation
      and depletion
              
              
              333,892
              
              
              
              —
              
              
              
              483,145
              
              
              
              —General
      and administrative
              
              
              509,067
              
              
              
              10,000
              
              
              
              858,437
              
              
              
              10,000(663,138
              )
              
              
              (10,000
              )
              
              
              (1,004,006
              )
              
              
              (10,000
              )Other
      income (expense)Interest
      income (expense)
              
              
              1,594
              
              
              
              (3,667
              )
              
              
              9,253
              
              
              
              (3,667
              )Total
      other income (expense)
              
              
              1,594
              
              
              
              (3,667
              )
              
              
              9,253
              
              
              
              (3,667
              )Loss
      from continuing operations before income tax
              
              
              (661,544
              )
              
              
              (13,667
              )
              
              
              (994,753
              )
              
              
              (13,667
              )Income
      tax expense
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Deferred
      tax benefit
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Loss
      from continuing operations
              
              $
              (661,544
              )
              
              $
              (13,667
              )
              
              $
              (994,753
              )
              
              $
              (13,667
              )Revenues
      from discontinued operations
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              242Expenses
      from discontinued operations
              
              
              —
              
              
              
              (8,148
              )
              
              
              —
              
              
              
              (62,337
              )Loss
      from discontinued operations
              
              
              —
              
              
              
              (8,148
              )
              
              
              —
              
              
              
              (62,095
              )Net
      loss and total comprehensive loss
              
              $
              (661,544
              )
              
              $
              (21,815
              )
              
              $
              (994,753
              )
              
              $
              (75,762
              )Basic
      and diluted loss per share
              
              $
              (0.02
              )
              
              $
              (0.00
              )
              
              $
              (0.03
              )
              
              $
              (0.00
              )Basic
      and diluted weighted average shares outstanding
              
              
              41,694,045
              
              
              
              90,000,000
              
              
              
              39,177,448
              
              
              
              90,000,000
  See
accompanying notes to unaudited consolidated financial
statements.
  4
  JAYHAWK ENERGY, INC.
 Consolidated
Statement of Cash Flows
 (Unaudited)
  Nine
      Months EndedJune
      30,2008
              
              
              2007Cash
      flow from operating activities:Net
      loss
              
              $
              (994,753
              )
              
              $
              (75,762
              )Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
      and depletion
              
              
              483,145
              
              
              
              —Common stock issued in consideration for services
              
              
              58,000
              
              
              
              —Changes
      in operating assets and liabilities:Receivables
              
              
              (129,866
              )
              
              
              —Prepaids
      & other assets
              
              
              (1,800
              )
              
              
              —Accounts
      payable & other liabilities
              
              
              36,754
              
              
              
              4,281Net
      cash provided by (used in) operating activities
              
              $
              (548,520
              )
              
              $
              (71,481
              )Cash
      flow from investing activities:Proved
      and unproved oil and gas property additions
              
              
              (1,202,974
              )
              
              
              —Purchase
      of equipment
              
              
              (4,286,193
              )
              
              
              —Net
      cash used in investing activities
              
              $
              (5,489,167
              )
              
              $
              —Cash
      flow from financing activities:Proceeds
      from the sale of common stock
              
              
              5,899,901
              
              
              
              —Borrowings
      on note payable
              
              
              —
              
              
              
              550,000Net
      cash provided by financing activities:
              
              
              5,899,901
              
              
              
              550,000Net
      decrease in cash and equivalents
              
              
              (137,786
              )
              
              
              478,519Cash
      and equivalents at beginning of period
              
              
              525,117
              
              
              
              47,901Cash
      and equivalents at end of period
              
              $
              387,331
              
              
              $
              526,420Supplemental
      Disclosure of Cash Flow and Non-cash Investing and Financing
      Activity:Income
      tax paid
              
              $
              —
              
              
              $
              —Interest
      paid
              
              $
              —
              
              
              $
              —Non
      cash:Property
      purchased with common stock
              
              $
              3,013,011
              
              
              $
              —Equipment
      purchased with common stock
              
              $
              56,130
              
              
              $
              —Common
      stock issued in consideration of services
              
              
              58,000
              
              
              
              —
  See
accompanying notes to unaudited consolidated financial
statements.
  5
  JAYHAWK ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
  Note
1 – Nature of Operations and Summary of Significant Accounting
Policies
 
 Nature
of Operations
 
 JayHawk
Energy, Inc. (“the Company” or “we” or “our” or “us”) is engaged in the
exploration, acquisition, 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 (inception) as
Bella Trading Company, Inc., and were originally formed to offer traditional
ethnic and contemporary jewelry, imported from Nepal and Thailand. During the
second quarter ending June 30, 2007, we changed management and entered the oil
and gas business, and ceased all activity in the retail jewelry industry. 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, organizational
infrastructure development, and the acquisition of oil and gas properties for
the purpose of future extraction of resources.  To date, we have
acquired three main properties, the Uniontown in Kansas, the Candak in North
Dakota, and the 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. While we have offices in Kansas and Colorado, our principal
offices are in now in Post Falls, Idaho.  The accompanying financial
statements as of and for the periods ended June 30, 2008 and 2007 are presented
in accordance with generally accepted accounting principles in the United States
of America (“US GAAP”).
 
 As shown
in the accompanying financial statements, we have incurred operating losses
since inception and previously incurred a loss on our discontinued retail
jewelry business. As of June 30, 2008, we have limited financial resources until
such time that we are able to generate substantial positive cash flow from
operations. Our ability to achieve and maintain profitability and positive cash
flow is dependent upon our ability to locate profitable mineral properties,
generate revenue from our planned business operations, and control exploration
cost.  We plan to fund our future operation by joint venturing,
obtaining additional financing, and attaining additional commercial production.
However, there is no assurance that we will be able to obtain additional
financing from investors or private lenders, or that additional commercial
production can be attained.
 
 Basis
of presentation
 
 The
accompanying interim condensed financial statements of the Company have been
prepared pursuant to the rules of the Securities and Exchange Commission (the
“SEC”) for quarterly reports on Form 10-QSB and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These condensed financial statements and notes herein are unaudited,
but in the opinion of management, include all the adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
Company’s financial position, results of operations, and cash flows for the
periods presented. These condensed financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto
included in the Company’s Form 10-KSB for the year ended September 30, 2007 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.
 
 Cash and Cash
Equivalents
 
 We
consider all highly liquid securities purchased with maturity of three months or
less to be cash equivalents.
  6
 
 JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
  Property
and Equipment
  Property
and equipment is recorded at cost. Depreciation is provided for on the
straight-line method over the estimated useful lives of the related assets as
follows:
  Furniture
and fixtures:  5 years
 Software:
 3 to 10 years
 Computer and office equipment:  3 to 5 years
 Field
equipment:  1 to 30 years
 
 The cost
of maintenance and repairs is charged to expense in the period incurred.
Expenditures that increase the useful lives of assets are capitalized and
depreciated over the remaining useful lives of the assets. When items are
retired or disposed of, the cost and accumulated depreciation are removed from
the accounts and any gain or loss is included in income.
  Investment
in Oil and Gas Properties
 
 Wefollow the
successful-efforts method of accounting for oil and gas property as defined
under Statement of Financial Accounting Standards (“SFAS”) No. 19, “Financial Accounting and Reporting
by Oil and Gas Producing Companies”. .Under this method of accounting, we
capitalize all property acquisition costs and the cost of exploratory and
development wells when incurred, pending determination of whether the well has
found proved reserves. If an exploratory well does not find proved reserves, we
charge to expense the cost of drilling the well. We include exploratory dry hole
cost in cash flow from investing activities within the cash flow statement. We
capitalize the cost of development wells whether productive or nonproductive. We
had no exploratory well costs that had been suspended for one year or more as of
June 30, 2008.
 
 We
expense, as incurred, geological and geophysical costs and the cost of carrying
and retaining unproved property. We provide depletion, depreciation and
amortization (DD&A) of capitalized costs 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 SFAS No. 143, “Accounting for Asset Retirement
Obligations”, which provides guidance on accounting for dismantlement and
abandonment cost.
  We review
our long-lived assets for impairment when events or changes in circumstances
indicate that an 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 the unproved property will not be
developed.
  Impairment
of Unproved (Non-Producing) Property
 
 Unproved
properties will be assessed periodically, to determine whether or not they have
been impaired. We will provide an impairment allowance on unproved property at
any time we determine a property will not be developed. At June 30, 2008, we
consider our current property to be economically and operationally viable, in
accordance with FAS 19.  In determining that there was no impairment
of the unproved property, we considered such factors as our commitment to bring
the project into production, the cost being incurred to develop the project, and
others.
  7
 
 JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
  Sales
of Producing and Non-producing Property
 
 We
account for the sale of a partial interest in a proved property as normal
retirement. We recognize no gain or loss as long as this treatment does not
significantly affect the unit-of-production depletion rate. We recognize a gain
or loss for all other sales of producing properties and include the gain or loss
in the results of operations.  We account for the sale of a partial
interest in an unproved property as a recovery of cost when substantial
uncertainty exists as to recovery of the cost applicable to the interest
retained. We recognize a gain on the sale to the extent that the sales price
exceeds the carrying amount of the unproved property. We recognize a gain or
loss for all other sales of non-producing properties and include the gain or
loss in the results of operations.
  Asset
Retirement Obligation
 
 We follow
SFAS No. 143, “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.  Our asset retirement
obligation will consist of costs related to the plugging of wells and removal of
facilities and equipment on its oil and gas properties.  The asset
retirement liability will be allocated to operating expenses using a systematic
and rational method. At June 30, 2008, there was no asset retirement obligation
and accretion expense because a reasonable estimate of fair value cannot be made
at this time.
  Use
of Estimates
 
 The
preparation of financial statements in conformity with U.S. GAAP requires us to
make certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Although these estimates are based
on the knowledge of current events and actions that we may undertake in the
future, they may ultimately differ from actual results.  Included in
these estimates are assumptions about allowances for valuation of deferred tax
assets. Accounts receivable are stated after evaluation as to their
collectability and an appropriate allowance for doubtful accounts is provided
where considered necessary. The provision for asset retirement obligation,
depletion, as well as our impairment assessment on our oil and gas properties
and other long lived assets are based on estimates and by their nature, these
estimates are subject to measurement uncertainty and the effect on the financial
statements of changes in these estimates, in future periods, could be
significant. These estimates and assumptions are reviewed periodically and as
adjustments become necessary they are reported in earnings in the period in
which they become known.
 
 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.  Periodically,
imbalances between production and nomination volumes can occur for various
reasons.  In cases where imbalances have occurred, a production
imbalance receivable or liability will be recorded.  Costs associated
with production are expensed in the period in which they are
incurred.
  8
 
 JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
  Income
Tax
 
 Income
taxes are determined using the liability method in accordance with SFAS No. 109,
“Accounting for Income
Taxes”. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. 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.
  Net
Loss per Common Share
 
 We have
adopted SFAS No. 128, “Earnings Per Share”. SFAS
No. 128 requires the reporting of basic and diluted earnings/loss per share. We
calculate basic loss per share by dividing net loss by the weighted average
number of outstanding common shares during the period.  We calculate
diluted loss per share by dividing net loss by the weighted average number of
outstanding common shares including all potentially dilutive securities during
the period.  For the inception-to-date period ended June 30, 2008, all
weighted average shares outstanding have been calculated reflecting the stock
split retroactively through inception.  Additionally, all of our
warrants have an anti-dilutive effect on per common share amounts.
  New
Accounting Pronouncements
 
 Accounting for Uncertainty in Income
Taxes.In June 2006, the Financial Accounting Standards Board (the
“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), an interpretation of FASB Statement
No. 109, “Accounting for
Income Taxes”. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Interpretation
requires that the Company recognize in the financial statements, the impact of a
tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. FIN 48 also provides
guidance on recognition, classification, interest and penalties, accounting in
interim periods and disclosure. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and we adopted these new requirements as of the
beginning of fiscal year 2008, with the cumulative effect of the change in
accounting principle recorded as an adjustment to the opening balance of
accumulated deficit. We have evaluated the impact of FIN 48 on our financial
statements, and have concluded that the Company has not taken any tax positions
that would be less than likely of being sustained upon audit.
  Fair Value Measurements. In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“FAS 157”), which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, and is
applicable beginning in the first quarter of 2008. The Company is currently
evaluating the impact of SFAS No. 157.
 
  9
  JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
 The Fair Value Option for Financial
Assets and Financial Liabilities. In February 2007, the FASB issued
SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities – Including an
amendment of FASB Statement No. 115”, which permits entities to
choose to measure many financial instruments and certain other items at fair
value at specified election dates. A business entity is required to report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. This statement is
expected to expand the use of fair value measurement. SFAS No. 159 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, and is
applicable beginning in the first quarter of 2008. We have evaluated SFAS
No. 159, and do not consider it to have an impact on our financial
statements.
 
 Note
2 – Unproved Property
 
 Uniontown
Project, Kansas
 
 On July
25, 2007, we acquired the Uniontown project for a total of
$2,200,000, consisting of mineral leases that include approximately 35,000
gross acres in Bourbon County, Kansas within the Cherokee basin, and are leased
for the development of coal-bed methane and conventional oil and gas. Wells
within the leased area were drilled by previous operators with mud logs and
cores taken to identify coal properties and gas contents.  There have
been at least 11 gas bearing coals identified within the Cherokee Group from
depths of 250 – 750 feet, with typical thicknesses of 1 to 4 feet, yielding
total net coal thickness ranges from 20 to 38 feet.  Gas contents have
been measured between 22 – 124 scf/ton.  No production tests have yet
been conducted.
 
 Girard
Project, Kansas
 
 Adjacent
to the Uniontown project, is the Girard Project in Crawford County Kansas, also
located in the Cherokee basin, which we acquired on March 31,
2008.  With the acquisition of the Girard project, we now hold over
55,000 acres in the Bourbon and Crawford counties of Kansas for the purchase
price of $1,000,000 in cash and 1,000,000 shares of our common stock. Included
in the acreage is a 16 mile gas pipeline we acquired from Galaxy Energy, Inc.,
along with 34 wells, 7 of which are tied-in to the pipeline.  Our
entire position and drill targets in the 55,000 acres can be tied into our 100%
owned 16 mile pipeline. This pipeline is tied into a 2 million cubic ft sales
pipeline.  After the acquisition, we formed a wholly-owned subsidiary
to operate the pipeline, called Jayhawk Gas transportation Corporation, which is
the basis for the consolidation of our financial statements.
 
 Our first
step has been to dewater the 7 tied-in wells, and then connect the additional 27
wells on our way to maximizing production in this area.  These assets
combined with our Uniontown project provide over 4,100 drilling locations with a
net interest of 100% to JayHawk Energy, expanding our South Eastern sector asset
base as a 'core area' with the acreage positions adjacent to each
other.
 
 On March
14, 2008, we executed a Purchase and Sale Agreement with Missouri Gas Partners
LLP, pursuant to which we will acquire certain oil, gas and mineral rights and
interests and other related operating assets located in Crawford and Bourbon
Counties, Kansas in exchange for $140,006 in cash and 286,550 shares of the
Company’s common stock which is to be issued upon completion of each lease
assignment, which are estimated to be completed in December 2008. Each lease
renewal assignment triggers the issuance of a corresponding number of shares at
25 shares per acre. The land base in this acquisition is contiguous to the
“Galaxy Energy Inc” acquisition as described above.
 
 Subsequent
to the quarter ended June 30, 2008, we drilled 20 wells which are pending
completion at the date of this filing.
  10
  JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
 On April
18, 2008, we entered into a Purchase and Sale Agreement with Titan West Energy
Inc. to acquire certain petroleum and natural gas rights and interests and other
related operating assets located in Crawford County, Kansas in exchange for
$300,000 in cash and 50,000 shares of common stock.  The agreement
provides that 50% of the cash price is payable upon request of Titan West Energy
Inc. before the closing date, with the remainder of the cash and the shares of
stock, payable at closing.  As June 30, 2008, we had paid the
full $300,000.
  The
acquisition completes the purchase of assets in the Crawford County, Kansas,
which includes 1,336 acres of leases and 14 completed gas wells.  We
believe the acquisition brings needed infrastructure to the adjacent Uniontown
project for its development. The purchase of the new acres added to current
acreage in the Uniontown project provides over 4,100 drilling locations with a
net interest of 100% to Jayhawk Energy Inc.
  Note
3 – Proved Property
 
 Candak
Project, North Dakota
 
 On
January 16, 2008, we acquired the Candak project from JED Oil (USA)
Inc.  Located in the Williston Basin of North Dakota, the Candak
Property provides stable production of light crude oil of approximately 65bbls
daily from 5 existing wells.
 
 Along
with the acquisition of the 5 existing wells, we acquired a 15,500-acre land
position including tangible assets for a total purchase price of $3,500,000.
This acreage is located in a highly active area by other operators in the
Williston Basin play in North Dakota, and across the border into Canada.
Candak’s stable production from its low well count and significant undeveloped
land base places the Company in a high potential growth position to develop the
light oil play.
 
 Note 4 – Commitments and
Contingencies
  There is
no pending litigation or proceeding involving any director or officer of the
Company for which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification.
Accordingly, no provision has been made in these financial
statements.
 
 On July
8, 2008, we leased an office space for $1,500 per month with no escalation
clause for the term of three years. In connection with this lease we are
required to pay $19,000 for leasehold improvements that will remain part of the
property upon termination of the lease. We believe this office space and
facilities are sufficient to meet our present needs, and do not anticipate any
difficulty securing alternative or additional space, as needed, on terms
acceptable to us.
 
 On March
24, 2008, we leased an office in Girard, Kansas for $1000 per month for two
years.  This office was leased for the purpose of moving our Girard
project forward.  We believe this office space and facilities are
sufficient to meet our present needs, and do not anticipate any difficulty
securing alternative or additional space, as needed, on terms acceptable to
us.
 
 On March
14, 2008, we executed a Purchase and Sale Agreement pursuant to which we will
acquire certain oil, gas and mineral rights and interests and other related
operating assets located in Crawford and Bourbon Counties, Kansas in exchange
for $140,006 in cash and 286,550 shares of the Company’s common stock which is
to be issued upon completion of lease assignments, which are estimated to be
completed in December 2008. As the remaining two leases are renewed, the Company
will be obligated to issue an additional 52,350 shares of common stock to
satisfy the terms of the agreement.
  11
  JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
 
 
 Note
5 – Common Stock
 
 Increase in Authorized Shares.
On June 21, 2007, we increased the authorized number of shares of common stock
from 50,000,000 shares to 200,000,000 shares.  The changes became
effective with the filing of a Certificate of Amendment to our Articles of
Incorporation with the Colorado Secretary of State.  Our purpose in
increasing its authorized common stock was to allow flexibility in future
financings and stock issuances. Shareholders holding a majority of our
outstanding common stock approved those actions at a meeting of shareholders on
June 21, 2007, held in accordance with the relevant sections of the Colorado
Revised Statutes.
 
 Stock
Split.  Effectuated after the increase in authorized shares,
our Board of Directors approved a 15 for 1 stock split of the issued and
outstanding common stock to be effectuated through the issuance of 14 shares for
each share of common stock outstanding as of the record date.  Our
intent of the stock split is to increase the marketability and liquidity of our
common stock. The pay date was June 25, 2007 for shareholders of record on June
21, 2007.  After the split, the total number of our issued and
outstanding shares of common stock was 90,000,000 shares.  Our common
stock remains at $.001 par value. All share and per share information in
these financial statements have been presented on a retroactive basis as if the
stock split took place at the beginning of all periods presented.
 
 Additionally
on July 25, 2007, Sara Preston, our former officer and director, agreed to have
56,000,000 shares of her common stock cancelled in exchange for $20,000, in
addition to the remaining inventory of our former jewelry business valued at
approximately $1,500.
 
 Private Placements. On July
25, 2007 concurrent with the execution of the Asset Purchase and Sale Agreement
of our Uniontown Project in Bourbon County, Kansas, we completed a private
placement for gross proceeds of approximately $2,882,659. The Private Placement
was completed in reliance upon that certain exemption from the registration and
prospectus delivery requirements of the Securities Act of 1933, which exemption
is specified by the provisions of Section 5 of that act and Regulation
S.  Specifically, we sold 2,882,659 Units at a purchase price of $1.00
per Unit, each Unit consisting of (a) one share of common stock, $.001 par value
per share and (b) one warrant which will provide to the holder the right to
purchase one share of our common stock at a purchase price of $1.00 and which
shall expire in two years.  Approximately 562,679 of the Units of the
Private Placement were issued to Berrigan Portfolio, Inc. to repay the principal
and interest accrued as of July 25, 2007, on the promissory note dated April 12,
2007, between us and Berrigan Portfolio, Inc. and 20,000 of the Units were
issued to Berrigan Portfolio, Inc. to repay approximately $20,000 that Berrigan
paid on our behalf.
 
 Concurrent
with the execution of the Purchase and Sale Agreement of our Candak project in
North Dakota, on January 16, 2008, we completed a private placement of
approximately $4,000,000 completed in reliance upon that certain exemption from
the registration and prospectus delivery requirements of the Securities Act of
1933, which exemption is specified by the provisions of Section 5 of that act
and Regulation S.  Specifically, we sold 2,666,667 Units at a purchase
price of $1.50 per Unit, each Unit consisting of (a) one share of common stock,
$.001 par value per share and (b) one warrant which will provide to the holder
the right to purchase one share of the Registrant’s common stock at a purchase
price of $1.60 and which shall expire one year from the date that the Registrant
accepts the subscription.
  12
  JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
 
 Share Purchase
Warrants.  In connection with the private placements mentioned
above, we issued 2,882,659 and 2,666,667 (for a total of 5,549,326) warrants as
part of the units sold.  The warrants are exercisable into an equal
number of common shares for a two-year and one-year period expiring on July 25,
2009 and January 16, 2009, at an exercise price of $1.00 and $1.60 per common
share, respectively. We assigned a fair value to the warrants of $1,557,415 and
$1,759,884 based on a Black-Scholes option model and the following weighted
average assumptions as at the date of grant:
 
 Risk-free
interest rate – 4.74% and 2.86%, respectively
 Expected
and contractual life – 2 years and 1 year, respectively
 Expected
volatility – 99.34% and 104.29%, respectively
 Expected
dividend yield – Nil and Nil, respectively
 
 The fair
value of the warrants was allocated to the recipients based on the percentage of
the proceeds due to each party in relation to the total proceeds
received.
  June
      30,
              
              
              September
      30,2008
              
              
              2007Shares
      of common stock issued and outstanding
              
              
              42,598,953
              
              
              
              36,882,659Shares
      to be issued upon exercise of warrants
              
              
              3,649,425
              
              
              
              2,882,659Total
      shares of common stock outstanding upon exercise of
      warrants
              
              
              46,248,378
              
              
              
              39,765,318
 
 Issuance of Common Stock. On
March 31, 2008, we closed the Purchase and Sale Agreement with Galaxy Energy
Inc., completing the acquisition certain oil, gas and mineral rights, and
interests and other related operating assets located in Crawford and Bourbon
Counties, Kansas in exchange for $1,000,000 in cash and 1,000,000 shares of
common stock.  These shares were valued at $2.27.  In
addition, we acquired a smeal workover unit which is mounted to a 1980 Ford
Truck, in exchange for $30,000 in cash and 24,727 shares.  These
shares were also valued at $2.27.  On February 18, 2008, we agreed to
issued 50,000 shares of our common stock to Titan West Energy Inc. for
services provided in connection with the above Purchase and Sale
Agreement.  These shares were valued at $2.20, upon entering into the
above Purchase and Sale Agreement..
  On May 5,
2008, we issued 25,000 shares of our common stock to a consultant in exchange
for consulting services for the term of nine months.  These shares
were valued at $2.32 on the date of the agreement.
 
 On May 7,
2008, we issued 50,000 shares of our common stock to Titan West Energy Inc. to
acquire certain petroleum and natural gas rights and interests and other related
operating assets located in Crawford County, Kansas.  These shares
were valued at $2.28 in connection with closing the above Purchase and Sale
Agreement.
 
 Exercise of Warrants.  On
March 31, 2008, we issued 900,000 shares of our common stock to two of our
shareholders who exercised certain warrants to purchase shares of common stock
at an exercise price of $1.00 per share. We used the proceeds of $900,000 to
close on the Agreement with Galaxy Energy Inc. as discussed
above.
 
 On April
15, 2008, we issued 599,939 shares of our common stock to two of our
shareholders who exercised certain warrants to purchase shares of common stock
at an exercise price of $1.00 per share. We used the proceeds for working
capital.
  13
 
 JAYHAWK
ENERGY, INC.
 Notes
to Unaudited Consolidated Financial Statements
 June
30, 2008
 On May 7,
2008, we issued 399,962 shares of our common stock to one of our shareholders
who exercised certain warrants to purchase shares of common stock at an exercise
price of $1.00 per share. We used the proceeds for working capital.
  Stock Issuance Obligation.Pursuant to the Purchase and Sale Agreement with Missouri Gas Partners,
LLP in exchange for certain assets we are obligated to issue 234,200 shares of
common stock to Missouri Gas Partners, LLP as a result of having completed
certain lease extensions and assignments. On June 23, 2008, our board of
directors authorized the issuance of those 234,200 shares.  These
shares were valued at an average price of $2.22 per share based on the share
prices at the time leases are renewed.
 
 Note
6 – Related party transactions
  On July
15, 2007, we subleased an office space for $800 per month from Resource
Consulting, LLC, an entity owned by our Chief Financial Officer.  This
transaction occurred within the normal course of business and was measured at
the exchange amount, which is the amount of consideration established and agreed
to by the related parties.
  Note
7 – Discontinued Operations
 
 On June
21, 2007, we changed our name from Bella Trading Company, Inc. to JayHawk
Energy, Inc. and shifted our focus from the retail jewelry industry to the oil
and gas business. Bella was incorporated on April 5, 2004 but did not begin
operations until August of 2004. From inception until the third quarter 2007,
Bella had gross revenues from the sale of merchandise of approximately $19,000
and expenses of $107,000. During the third quarter ending June 30, 2007, we
decided to change management, enter the oil and gas business, and cease all
activity in the retail jewelry industry. We shifted our focus to exploration,
acquisition, development, production and sale of natural gas, crude oil and
natural gas liquids primarily from conventional reservoirs within North America.
On July 25, 2007, we acquired certain oil, gas, mineral leases, and other
mineral rights and interests located in Bourbon County, Kansas.
 
 Note
8 – Income taxes
  We record
our income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes.”  We incurred net operating losses during all periods
presented resulting in a deferred tax asset, which was fully allowed for;
therefore, the net benefit and expense resulted in zero income
taxes.
  Note
9 – Subsequent Events
 
 On July
8, 2008, we moved to new offices located at 6240 E. Seltice Way, Suite C, Post
Falls, Idaho, 83702, consisting of approximately 1,568 square feet, and are
leased for three years at the rate of $1,500 per month, with no escalation
clause.  In connection with this lease we are required to pay $19,000
for leasehold improvements that will remain part of the property upon
termination of the lease. The offices are leased from Marlin Property
Management, a company owned by the spouse of Lindsay Gorrill, the Company’s
President and a director.
 
 On
July 30, 2008, we entered into a convertible promissory note with an investor
for $800,000 (“Convertible Note”).  The Convertible Note is due in one
year, or upon default, whichever is earlier, and bears interest at the annual
rate of 12%.  The Convertible Note has an optional conversion feature
by which the holder can convert the principal and accrued interest to shares of
our common stock at a conversion price of $1.75 per share. In connection with
the issuance of the Convertible Note, we also agreed that the holder will be
entitled to a grant of 400,000 warrants exercisable at $2.10 per share (“Warrant
Agreement”) and which expire after two years.
  14
  Item
2.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 Forward-Looking
Statements
 
 This
following information specifies certain forward-looking statements of management
of the company. Forward-looking statements are statements that estimate the
happening of future events and are not based on historical fact. Forward-looking
statements may be identified by the use of forward-looking terminology, such as
“may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”,
“probable”, “possible”, “should”, “continue”, or similar terms, variations of
those terms or the negative of those terms. The forward-looking statements
specified in the following information have been compiled by our management on
the basis of assumptions made by management and considered by management to be
reasonable. Our future operating results, however, are impossible to predict and
no representation, guaranty, or warranty is to be inferred from those
forward-looking statements.
 
 The
assumptions used for purposes of the forward-looking statements specified in the
following information represent estimates of future events and are subject to
uncertainty as to possible changes in economic, legislative, industry, and other
circumstances. As a result, the identification and interpretation of data and
other information and their use in developing and selecting assumptions from and
among reasonable alternatives require the exercise of judgment. To the extent
that the assumed events do not occur, the outcome may vary substantially from
anticipated or projected results, and, accordingly, no opinion is expressed on
the achievability of those forward-looking statements. We cannot guarantee that
any of the assumptions relating to the forward-looking statements specified in
the following information are accurate, and we assume no obligation to update
any such forward-looking statements.
 
 Critical
Accounting Policies and Estimates
 
 Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including those related to
revenue recognition, accrued expenses, financing operations, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources.
 
 These
accounting policies are described at relevant sections in this discussion and
analysis and in the notes to the financial statements included in our Annual
Report on Form 10-KSB for the fiscal year ended September 30,
2007.
  15
  Overview
 
 From
inception through March 31, 2007, our operations consisted of the purchase of
jewelry and other accessories from our Asian suppliers, which were then sold at
arts and crafts shows and on the Internet. In April 2007, we changed management
and changed our business plan. Our new business plan is to acquire oil and gas
properties for exploration and development with the intent to determine the
feasibility of drilling at those properties with success, at which time we will
either contract out the operations or joint venture the project to qualified
interested parties.  Our main priority will be given to projects with
near term cash flow potential, although consideration will be given to projects
that may not be as advanced from a technical standpoint but demonstrate the
potential for significant upside.
  On June
21, 2007, we changed our name from Bella Trading Company, Inc. to Jayhawk
Energy, Inc. and increased the authorized number of shares of common stock from
50,000,000 shares to 200,000,000 shares.  The changes became effective
with the filing of a Certificate of Amendment to our Articles of Incorporation
with the Colorado Secretary of State.  Our purpose in changing our
name was to reflect a change in our business focus.  Our purpose in
increasing our authorized common stock was to allow flexibility in future
financings and stock issuances and other corporate purposes. The actions to
effect the name change and increase in authorized common stock were approved on
April 3, 2007, by unanimous approval of our Board of Directors. In
addition, shareholders holding a majority of our outstanding common stock
approved those actions at a meeting of shareholders on June 21, 2007, held in
accordance with the relevant sections of the Colorado Revised
Statutes.
 
 On July
25, 2007, we entered into an Asset Purchase and Sale Agreement with Armstrong
Investments Incorporated, pursuant to which we acquired the Uniontown project,
which includes gas and mineral leases, and other mineral rights and interests
located in Bourbon County, Kansas (“Uniontown Project”) in exchange for
$2,200,000 in cash.
 
 Concurrent
with the execution of the Asset Purchase and Sale Agreement as disclosed above,
we completed a private placement of approximately $2,882,659, in which we sold
2,882,659 Units at a purchase price of $1.00 per Unit, each Unit consisting of
(a) one share of common stock, $.001 par value per share and (b) one warrant
which will provide to the holder the right to purchase one share of our common
stock at a purchase price of $1.00 and which shall expire in two years.
Approximately 562,679 of the Units of the Private Placement were issued to
Berigan Portfolio, Inc. to repay the principal and interest accrued as of July
25, 2007, on the promissory note dated April 12, 2007 between us and Berigan
Portfolio, Inc. and 20,000 of the Units were issued to Berigan Portfolio, Inc.
to repay $20,000 that Berigan paid on our behalf.
  Basis
of Presentation and Financial Information
 
 Direct
operating expenses include equipment rentals, contract operation,
instrumentation and mechanical repairs and maintenance, utilities, and other
direct operating expenses. Certain costs such as depreciation, depletion and
amortization, general and administrative expenses, interest expense, and
corporate taxes are not allocated to the Candak wells.
 
 Use of
Estimates – The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions regarding certain types of revenues and expenses. Such estimates
primarily relate to unsettled transactions and events as of the date of the
financial statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
  16
  Historical
financial statements reflecting financial position, results of operations and
cash flows required by accounting principles generally accepted in the United
States of America are not presented as such information is not readily available
on an individual property basis and not meaningful to the acquired property.
Historically, no allocation of general and administrative, interest, corporate
income taxes, accretion of asset retirement obligations, depreciation, depletion
and amortization was made to the Candak wells. Accordingly, the statements are
presented in lieu of the financial statements required under Rule 3-01 of the
Securities and Exchange Commission Regulation S-X.
  Results
of Operations
 
 Previous Operations.On June
21, 2007, we changed our name from Bella Trading Company, Inc. to JayHawk
Energy, Inc. and shifted our focus from the retail jewelry industry to the oil
and gas business. We do not expect that we will generate any revenues from our
jewelry business as we have discontinued the operations related to our jewelry
business. Going forward, we hope to generate larger revenues as we implement our
new business plan, which we adopted in April 2007.
 
 For
the three months ended June 30, 2008 and June 30, 2007
 
 Revenues. We had $452,000 in
revenue for the three months ended June 30, 2008, as compared to no sales for
the three months ended June 30, 2007.  Revenues for the three months
ended June 30, 2008 consisted of $430,000 related to the sale of oil and $22,000
related to the sale of natural gas.
 
 Operating Expenses.For the
three months ended June 30, 2008, our total operating expenses were $1,115,000,
as compared to $10000 total operating expenses for the three months ended June
30, 2007. The increase in total operating expenses is primarily due to
production related expenses, depreciation, depletion and amortization expense,
legal and professional fees, audit fees, and other general and administrative
expenses.  We expect that we will continue to incur significant
professional fees related to being a public company. For the three months ended
June 30, 2008, our operating expenses consisted of production expenses of
$272,000, $334,000 in depreciation, depletion, and amortization, $295,000
in legal and professional consulting fees, $48,000 in payroll expense, $19,000
in audit fees, $29,000 in insurance, $22,000 in public relations expense, $8,000
in rent, $65,000 in travel, and $23,000 in utilities, taxes and licenses, office
and other general and administrative expenses. In comparison, for the three
months ended June 30, 2007, we had professional fees and payroll expense of
$18,000, and other general and administrative expenses of $4,000.
 
 Net Income or
Loss.For the three months ended June 30, 2008, our net loss
from operations was $663,000, with a total net loss of $662,000.  This
is in comparison to the three months ended June 30, 2007, where our net loss
from operations and net loss was $22,000.  The increase in our net
loss for the three months ended June 30, 2008, was due to an increase in
operating expenses between the two periods as a result of our change in focus,
which was primarily represented by the cost to operate and explore our
properties and related depreciation, depletion and amortization expenses, as
well as legal and professional services expenses.
 
 For
the nine months ended June 30, 2008 and June 30, 2007
 
 Revenues. We had $711,000 in
revenue for the nine months ended June 30, 2008, as compared to $242 in sales
for the nine months ended June 30, 2007 related to our former jewelry
business.  For the nine months ended June 30, 2007, we had $79 in cost
of goods sold for a gross profit of $163. We had no revenues related to our
continuing operations as of June 30, 2007.  Revenues for the nine
months ended June 30, 2008 consisted of $689,000 related to the sale of oil and
$22,000 related to the sale of gas.
  17
 
 Operating Expenses.For
the nine months ended June 30, 2008, our total operating expenses were
$1,715,000, as compared to $10,000 total operating expenses for the nine
months ended June 30, 2007. The increase in total operating expenses is
primarily due to production related expenses, depreciation, depletion and
amortization expense, legal and professional fees, audit fees, and other general
and administrative expenses.  We expect that we will continue to incur
significant professional fees related to being a public company. For
the nine months ended June 30, 2008, our operating expenses consisted of
production related expenses of $373,000, $483,000 in depreciation, depletion and
amortization expenses, $489,000 in legal and professional consulting fees,
$108,000 in payroll expense, $46,000 in audit fees, $49,000 in insurance,
$35,000 in public relations expense, $15,000 in rent, $76,000 in travel, and
$40,000 in utilities, taxes and licenses, office and other general and
administrative expenses. In comparison, for the nine months ended June 30,
2007, we had professional fees and payroll expense of $62,000, and other general
and administrative expenses of $14,000.
 
 Net Income or
Loss.For the nine months ended June 30, 2008, our net
loss from operations was $1,004,000, with a total net loss of
$995,000.  This is in comparison to the nine months ended June
30, 2007, where our net loss was $76,000.  The increase in our net
loss for the six months ended June 30, 2008, was due to an increase in
operating expenses between the two periods as a result of our change in focus,
which was primarily represented by the cost to operate and explore our
properties and related depreciation, depletion and amortization expenses, as
well as legal and professional services expenses.
 
 Liquidity
and Capital Resources
 
 As of June 30, 2008, we
had cash of $387,000, $130,000 in accrued receivables, and $2,000 in prepaid
expenses.  Our current liabilities were $78,000 as of June 30, 2008,
which was represented principally by accounts payable for professional fees,
audit review fees, and payroll tax payable.  We had no other
liabilities including long term commitments or contingencies, which provides for
a net working capital of $441,000 as of June 30, 2008.
 
 Other
than the expenses of exploring other business opportunities as described above,
and the anticipated increases in legal and accounting costs due to the reporting
requirements of being a reporting company, we are not aware of any other known
trends, events or uncertainties, which may affect our future
liquidity.
 
 Our
Plan of Operation for the Next Twelve Months
 
 In April
2007, we discontinued the operations related to our jewelry business. We do not
expect that we will generate any future revenues from our jewelry business. Our
new business plan is to acquire oil and gas properties for exploration and
development with the intent to bring the projects to feasibility at which time
we will either contract out the operations or joint venture the project to
qualified interested parties.
 
 As
described above, on July 25, 2007, we entered into an Asset Purchase and Sale
Agreement with Armstrong Investments Incorporated, pursuant to which we acquired
the Uniontown Project, which includes gas and mineral leases and other mineral
rights and interests located in Bourbon County, Kansas in exchange for
$2,200,000 in cash.
  18
  The
acquisition of the Uniontown Project is the initial step of our new business
plan to acquire oil and gas properties for exploration and development. Over the
next twelve months, we intend to engage in the exploration, acquisition,
development, production and sale of natural gas, crude oil and natural gas
liquids primarily from conventional reservoirs within North
America.
 
 Additionally
as described above, on January 16, 2008, we entered into a Purchase and Sale
Agreement with JED Oil (USA) Inc., pursuant to which we acquired the Candak
Property, which certain oil, gas, mineral rights and interests, and other
related operating assets located in the Candak Area, North Dakota in exchange
for $3,500,000 in cash. The acquisition of the Candak Property provides us with
a daily 65bbls net of light oil production and operation. We acquired a
15,500-acre land position with this acquisition and related production
equipment. We believe that the lands are in an area that is highly active by
other operators. Subject to financing we are planning on drilling 2-3 more wells
in the next twelve months as well as implementing a water flood
program.
 
 Adjacent
to the Uniontown project, is the Girard Project in Crawford County Kansas, which
we acquired on March 31, 2008.  With the acquisition of the Girard
project, we now hold over 55,000 acres in the Bourbon and Crawford counties of
Kansas. Included in the acreage is a sixteen (16) mile gas pipeline we acquired
from Galaxy Energy, Inc., along with 34 wells, 7 of which are tied-in to the
pipeline.  Our entire position and drill targets in the 55,000 acres
can be tied into our 100% owned 16 mile pipeline. This pipeline is tied into a 2
million cubic ft sales pipeline and allows for substantial growth.
 
 Our first
step has been to dewater the 7 tied-in wells, and then connect the additional 27
wells on our way to maximizing production in this area.  These assets
combined with our Uniontown project provide over 4,100 drilling locations with a
net interest of 100% to JayHawk Energy, significantly expanding our South
Eastern sector asset base as a 'core area' with the acreage positions adjacent
to each other.
  Subject
to financing we plan to drill a minimum of 48 new wells in this area in the next
twelve months, and tie in approximately 30 completed wells, as acquired in the
last 3 months.  Subsequent to the quarter ended June 30, 2008, we
drilled 10 wells which are pending completion at the date of this
filing.  We remain focused on drilling approximately 100 well targets
in the Cherokee Basin in the near term.
 
 As of
June 30, 2008, we do not have any commitments or arrangements to provide any
additional capital. Even if our new operations can generate cash, our future
plans will, in part, be dependent upon additional capital which may be available
to us. If additional financing is not available when needed, we may continue to
operate in our present mode or we may need to cease operations.
 
 Our
forecast for the period for which our financial resources will be adequate to
support our operations involves risks and uncertainties and actual results could
fail as a result of a number of factors. In the event that we experience a
shortfall in our capital, we intend to pursue capital through public or private
financing as well as borrowings and other sources, such as our officers,
director and principal shareholders. We cannot guarantee that additional funding
will be available on favorable terms, if at all. If adequate funds are not
available, we hope that our officers, director and principal shareholders will
contribute funds to pay for our expenses to achieve our objectives over the next
twelve months.
 
 We are
not currently conducting any research and development activities. We do not
anticipate that we will purchase or sell any significant equipment. In the event
that we generate significant revenues and expand our operations, then we may
need to hire additional employees or independent contractors as well as purchase
or lease additional equipment.
 
 Off-Balance
Sheet Arrangements
 
 We have
no off-balance sheet arrangements.
  19
  Item 3. Controls and
Procedures
 
 (a)
Evaluation of disclosure controls and procedures.
 
 Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as
of June 30, 2008. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their
costs.
 
 Based
on our evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are designed at a
reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.
 
 (b)
Changes in internal control over financial reporting.
 
 We
regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more
efficient systems, consolidating activities, and migrating
processes.
 
 There
were no changes in our internal control over financial reporting that occurred
during the period ended June 30, 2008 on Form 10-QSB that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
  20
 
 PART
II — OTHER INFORMATION
 
 Item 4.
Legal Proceedings.
 
 None.
 
 Item 5.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
 On
January 16, 2008, concurrent with the execution of the Candak property Purchase
and Sale Agreement, we completed a private placement of approximately
$4,000,000. The Private Placement was completed in reliance upon that certain
exemption from the registration and prospectus delivery requirements of the
Securities Act of 1933, which exemption is specified by the provisions of
Section 5 of that act and Regulation S.  Specifically, we sold
2,666,667 Units at a purchase price of $1.50 per Unit, each Unit consisting of
(a) one share of common stock, $.001 par value per share and (b) one warrant
which will provide to the holder the right to purchase one share of the
Registrant’s common stock at a purchase price of $1.60 and which shall expire in
one year.
 
 On March
31, 2008, we closed the Purchase and Sale Agreement with Galaxy Energy Inc.,
completing the acquisition certain oil, gas and mineral rights, and interests
and other related operating assets located in Crawford and Bourbon Counties,
Kansas in exchange for $1,000,000 in cash and 1,000,000 shares of common
stock.  These shares were valued at $2.27.  In addition, we
acquired a smeal workover unit which is mounted to a 1980 Ford Truck, in
exchange for $30,000 in cash and 24,727 shares.  These shares were
also valued at $2.27.  On February 18, 2008, we agreed to issued
50,000 shares of our common stock to Titan West Energy Inc. for services
provided in connection with the above Purchase and Sale
Agreement.  These shares were valued at $2.20.
 
 Item
6.  Defaults Upon Senior Securities
 
 None.
 
 Item
7.  Submission of Matters to Vote of Security
Holders
 
 None.
 
 Item
8.  Other Information
 
 None.
 
 Item
9.  Exhibits
 
 Exhibit
              Description31.1
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended31.2
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended32.1
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
    Officer)32.2
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
    Officer)
   21
  
 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.
 
 
 
 August
14,
2008                                 By:/s/
Lindsay E. Gorrill
 Name: Lindsay E. Gorrill
 Its:
Principal Executive Officer, President and a Director
 
 
 
 August
14,
2008                                 By:/s/
Joseph B. Young
 Name: Joseph
B. Young
 Its: Principal Accounting Officer, Chief Financial
Officer