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EX-31.1 - CERTIFICATION CEO - Jayhawk Energy, Inc. | ex31-1.htm |
EX-32.2 - CERTIFICATION CFO - Jayhawk Energy, Inc. | ex32-2.htm |
EX-31.2 - CERTIFICATION CFO - Jayhawk Energy, Inc. | ex31-2.htm |
EX-32.1 - CERTIFICATION CEO - Jayhawk Energy, Inc. | ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Fiscal Year Ended September 30, 2009
[ ]
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)
|
83854
(Postal
Code)
|
(208) 667-1328
(Issuer's
telephone number)
|
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par
value
Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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.
Yes
[ x ] No [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [
x ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to Form
10-K.
Yes [ ] No [
x ] Delinquent filers are disclosed herein.
The
Company had $ 588,410 in revenue during the year.
The
aggregate market value of the Common Stock held by non-affiliates (as affiliates
are defined in Rule 12b-2 of the Exchange Act) of the registrant, computed by
reference to the average of the high and low sale price on December 04, 2008,
was $14,135,864.
As of
December 17, 2009 there were 45,113,496 shares of issuer’s common stock
outstanding.
1
JAYHAWK
ENERGY, INC.
FORM
10-K
For
the Fiscal Year Ended September 30, 2009
TABLE OF CONTENTS
Part
I
|
Page
|
|
Item
1 and 2
|
Description
of Business and Properties
|
3
|
Item
1A
|
Risk
Factors
|
6
|
Item
1B
|
Unresolved
Staff Comments
|
9
|
Item
3
|
Legal
Proceedings
|
9
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
9
|
Part
II
|
Page
|
|
Item
5
|
Market
for Common Equity and Related Stockholder Matters
|
10
|
Item
6
|
Selected
Financial Data
|
10
|
Item
7
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
10
|
Item
7A
|
Quantitative
and Qualitative Disclosures About Market Risk
|
14
|
Item
8
|
Financial
Statements
|
15
|
Item
9
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
36
|
Item
9A
|
Controls
and Procedures
|
37
|
Item
9B
|
Other
Information
|
38
|
Part
III
|
Page
|
|
Item
10
|
Directors,
Executive Officers and Corporate Governance
|
39
|
Item
11
|
Executive
Compensation
|
40
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
41
|
Item
13
|
Certain
Relationships and Related Transactions, and Director
Independence
|
41
|
Item
14
|
Principal
Accounting Fees and Services
|
41
|
Part
IV
|
Page
|
|
Item
15
|
Exhibits
|
42
|
Signatures
|
43
|
|
EXHIBIT
31.1
|
Attached
|
|
Certification
of Chief Executive Officer
|
||
EXHIBIT
31.2
|
Attached
|
|
Certification
of Chief Financial Officer
|
||
EXHIBIT
32.1
|
Attached
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
||
EXHIBIT
32.2
|
Attached
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
2
PART I
DISCLOSURES
REGARDING FORWARD-LOOKING STATEMENTS
Portions
of this Annual Report of JayHawk Energy, Inc. on Form 10-K, and the information
appearing under "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," generally, and specifically
therein under the captions "Liquidity and Capital Resources" contain
forward-looking statements and involve uncertainties that could materially
affect the expected results of operations, liquidity, cash flows and business
prospects. Words such as "estimate," "may," "might," "anticipates,"
"believes," "expects," "plans," “intends," “objectives” and similar expressions
that convey the uncertainty of future events or outcomes generally identify
forward-looking statements. The reader should not place undue reliance on these
forward-looking statements, which speak only to the date of this
report.
ITEMS
1 and 2. DESCRIPTION OF BUSINESS and PROPERTIES
General
Unless the context otherwise requires,
in this report, the term “JayHawk” or “Company”, we, or our, refer to JayHawk
Energy, Inc., a Colorado Corporation, and its wholly owned subsidiary, JayHawk
Gas Transportation Corporation. JayHawk's executive offices are
located at 6240 E. Seltice Way, Suite C, Post Falls, Idaho
83854. Our telephone number is (208)
667-1328. JayHawk reports its operations using a fiscal year ending
September 30 and the operations reported on this Form 10-K, are presented on a
consolidated basis.
Our
principal executive offices are located at 6240 E. Seltice Way, Suite C, Post
Falls, Idaho 83854. JayHawk began leasing this office space of
approximately 900 sq. ft. on July 1, 2008. The monthly rental payment
is $1,000, and was negotiated in an arm's length transaction from Marlin
Property Management, Inc., a related party (see Note 12 of Notes to the
consolidated financial statements). The Company closed its former
office located in Broomfield, CO., in September of 2008. We believe
that our current office space and facilities are sufficient to meet our present
needs and do not anticipate the need to secure any additional
space.
The Company files Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
registration statements and other items with the Security and Exchange
Commission (SEC). JayHawk provides access free of charge to all of
these SEC filings, as soon as reasonably practicable after filing on its
internet site located at www.jayhawkenergy.com. In
this report on Form 10-K, the language “this fiscal year, or current fiscal
year” refers to the 12 month period ending September 30, 2009.
In addition, the public may read and
copy any materials JayHawk files with the SEC at the SEC’s Public Reference Room
at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an internet site (www.sec.gov.) that
contains reports, proxy and information statements regarding issuers, like
JayHawk, that file electronically with the SEC.
Business
Development
JayHawk
Energy, Inc. was incorporated in Colorado on April 5, 2004 as Bella Trading
Company, Inc. We were originally formed to offer for sale,
traditional ethnic and contemporary jewelry, as well as accessories, imported
from Nepal and Thailand. During the third quarter of the fiscal year ending
September 30, 2007, we decided to change management, enter the oil and gas
business, and cease all activity in the retail jewelry industry. At
that time we changed our name to JayHawk Energy, Inc. and shifted our focus to
the acquisition, exploration, development, production and sale of natural gas,
crude oil, and natural gas liquids, primarily from conventional reservoirs
within North America.
We
initiated this new focus in July of 2007 with the acquisition of certain oil,
gas and mineral leases totaling approximately 35,000 gross acres, located in
Bourbon County, Kansas within the Cherokee basin, referred to as the Uniontown
properties. This acreage is leased for the development of
coal-bed methane and conventional oil and gas reserves. We continued
our development strategy in the 2nd quarter of the year ending September 30,
2008, acquiring a 65% gross working interest in 5 producing oil wells located in
the Williston Basin of North Dakota, along with the right to develop the oil,
gas and mineral resources on 15,500 acres of leases in this same
area.
In March
and April of 2008 the Company augmented its initial investment in southeast
Kansas with the acquisition of additional assets, referred to as the Girard
properties, including leased acreage, adjacent to the Uniontown properties, 34
gas wells, and a 16 mile natural gas pipeline. During July and August
of 2008 the Company completed drilling, casing and tying-in of an additional 20
gas wells.
3
Our
strategy is to increase shareholder value through strategic acquisitions,
drilling and development, and by prudently managing our balance
sheet. We believe in creating opportunities for our shareholders
through acquisition and through the “drill-bit.” In this regard, the
Company’s investments to date have been concentrated in essentially coal bed
methane gas properties, located in southeast Kansas, and oil producing
properties in northwest North Dakota.
Due to a
lack of funding, during the fiscal year ending September 30, 2009, no new
additional acreage was acquired and no new development or drilling took
place. This lack of funding contributed to management’s decision in
August of 2009 to enter into a joint venture agreement with DK True Energy
Development (DKTED) for the continued development of our coal-bed methane wells
of the Girard properties. DKTED has contributed $250,000 through the
date of this report to acquire an interest in the Girard
properties. This is more fully discussed in the Management Discussion
and Analysis, Item 7 of Part II, and in Notes 14 and 15 to the
consolidated financial statements, of this Form 10-K.
As at
September 30, 2009, we remain an early stage oil and gas company led by an
experienced management team focused on exploration and production of oil and
natural gas. Our immediate business plan is to focus our efforts
on further developing the as yet undeveloped acreage in Southeast Kansas and to
drill two or more wells in the Candak, North Dakota properties. 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. Future development activities will be determined by our
ability to access sources of sufficient funding.
Oil
and Gas Properties
S.E. Kansas - Uniontown Properties
– Located in S.E. Kansas, these properties consist of the leased acreage
and wells within the leased area drilled by previous operators. Mud
logs and cores have been 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 standard
cubic feet per ton. No production tests have yet been
conducted.
S.E. Kansas - Girard
Properties - Adjacent to the Uniontown Project is the Girard Project in
Crawford County Kansas which we acquired on March 31, 2008. With this
transaction JayHawk acquired 34 wells, of which 7 were tied into a pipeline also
acquired at this time (more fully described immediately
following). This acquisition provided JayHawk infrastructure
necessary for future development of existing and acquired leased acreage, and
during July and August of 2008 we completed drilling and casing an additional 20
gas wells. Our acreage position in both Bourbon and Crawford counties
Kansas was enhanced again with the acquisition from Missouri Gas Partners of
certain oil, gas and mineral rights to 11,462 leased acres in June of
2008. As at September 30, 2009, we have 20 producing gas wells
tied-in to the pipeline. At September 30, 2009 we had a total of
44,216 leased acres in Kansas, and are producing and selling an average of 105
MCF daily of coal bed methane gas. Since June of 2008 through
September of 2009, our gas production and sales has contributed $200 thousand in
gross revenues.
JayHawk Gas Transportation Company -
Associated with the acquisition of the Girard properties in March of
2008, the Company acquired a 16 mile pipeline. Management
anticipates that the pipeline will play a significant part in JayHawk's future
development. As such, in May of 2008, the Company established a 100%
owned and controlled subsidiary, "JayHawk Gas Transportation Corporation" to
hold and manage the assets associated with the pipeline. This
pipeline is tied into a 2 million cubic foot sales pipeline and allows for
substantial growth.
North Dakota - Candak Project – On January
16, 2008, we acquired a 65% working interest in five producing oil wells,
historically referred to as the Candak properties, located in the Williston
Basin area, of North Dakota. In addition to the five producing wells,
we acquired certain oil, gas, and mineral rights in a 15,500-acre land
position. The Candak properties provide stable production of
approximately 65 Bbls of light crude oil daily from the five existing
wells. We have been pleased with the success of these five producing
wells. Since their acquisition and through September 30, 2009 these
five wells have produced and sold in excess of 40,000 Bbls. and generated net
revenues to JayHawk of $1,587,653.
Reserves - For the North
Dakota properties, the independent petroleum engineering firm of McDaniel &
Associates Consultants, Ltd. of Calgary, Alberta Canada, prepared the estimates
of our proved developed and proved undeveloped reserves as at September 30, 2008
and 2009, and the future net cash flows (and related present value) attributable
to proved reserves at these respective dates. Proved developed
reserves are defined as estimated quantities of oil, natural gas and natural gas
liquids which upon analysis of geological and engineering data, appear with
reasonable certainty to be recoverable in the future from known oil
and gas reservoirs under existing economic and operating
conditions. Proved undeveloped reserves are those reserves which can
be expected to be recovered from new wells with existing equipment and operating
methods.
4
Estimated
quantities of proved reserves for the North Dakota, Candak properties for the
year end September 30, 2009 are presented below:
|
Reserves
In
Barrels
|
|||
Proved
developed reserves
|
60,400 | |||
Proved
undeveloped reserves
|
88,500 | |||
Total
proved reserves
|
148,900 |
The
Kansas properties identified above as the Girard and Uniontown projects have not
been evaluated and no independent estimates of proved reserves have yet been
made. Additional information about the Company’s proved oil and gas
reserves are presented under Supplemental Oil and Gas Disclosures on pages 30
through 32 in the accompanying financial statements.
Employees
During
the year ending September 30, 2009 JayHawk employed 6
individuals. Administrative and executive functions are carried out
by three individuals located in Post Falls, Idaho. Two of these
individuals are compensated as independent contractors. Oil
production operations are overseen by the Company’s President and a field
superintendent located in the Williston Basin area of North
Dakota. Both of these individuals were compensated as independent
contractors. Additionally one employee functioned as the field
superintendent of the Girard and Uniontown properties and was responsible for
the gas production operations. Going forward, and for the foreseeable
future, we plan to outsource our geological, geophysical, drilling and petroleum
engineering requirements to independent consultants and
contractors.
Competitive
Business Conditions
We are a
junior oil and gas exploration company. We compete with other companies for
financing and for the acquisition of new oil and gas properties. Many of the oil
and gas exploration companies with whom we compete have greater financial and
technical resources than those available to us. Accordingly, these competitors
may be able to spend greater amounts on acquisitions of oil and gas properties
of merit, on exploration of their properties and on development of their
properties. In addition, they may be able to afford more geological expertise in
the targeting and exploration of oil and gas properties. This competition could
result in competitors having properties of greater quality and interest to
prospective investors who may finance additional exploration and development.
This competition could have an adverse impact on our ability to achieve the
financing necessary for us to conduct further exploration of our acquired
properties.
We will
also compete with other junior oil and gas exploration companies for financing
from a limited number of investors that are prepared to make investments in
junior oil and gas exploration companies. The presence of competing junior oil
and gas exploration companies may have an adverse impact on our ability to raise
additional capital in order to fund our exploration programs if investors are of
the view that investments in competitors are more attractive based on the merit
of the oil and gas properties under investigation and the price of the
investment offered to investors. Additionally, there is competition
for other resources, including, but not limited to, professional geologists,
camp staff, helicopter or float planes, mineral exploration supplies and drill
rigs.
Patents
and Trademarks
We do not own, either legally or
beneficially, any patent or trademark.
Governmental
Regulations
Our oil and gas operations are subject
to various federal, state and local governmental regulations. Matters subject to
regulation include discharge permits for drilling operations, drilling and
abandonment bonds, reports concerning operations, the spacing of wells, pooling
of properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve supplies
of oil and gas. The production, handling, storage, transportation and disposal
of oil and gas, by-products thereof, and other substances and materials produced
or used in connection with oil and gas operations are also subject to regulation
under federal, state and local laws and regulations relating primarily to the
protection of human health and the environment. To date, we have incurred no
cost related to complying with these laws, for remediation of existing
environmental contamination and for plugging and reclamation of our oil and gas
exploration property. The requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and we are unable to predict
the ultimate cost of compliance with these requirements or their effect on our
operations.
5
ITEM
1A. RISK FACTORS RELATED TO OUR BUSINESS
JayHawk
is subject to various risks and uncertainties in the course of its
business. The following summarizes some, but not all, of the risks
and uncertainties that may adversely affect our business, financial condition or
results of operations.
Going Concern – As shown in
the accompanying consolidated financial statements, we have incurred operating
losses since inception. As of September 30, 2009, we have limited
financial resources with which to achieve our objectives and obtain
profitability and positive cash flows. Achievement of our objectives
will be dependent upon our ability to obtain additional financing, to locate
profitable mineral properties and generate revenue from our current and planned
business operations, and control costs. We plan to fund our future
operation by joint venturing, obtaining additional financing from investors, and
attaining additional commercial production. However, there is no
assurance that we will be able to achieve these objectives.
Commodity Price
Risk: Our estimated proved reserves, revenue, operating cash
flows, and operating margins are highly dependent on the prices of crude oil and
natural gas. A substantial or extended decline in oil or natural gas
prices would reduce our operating results and cash flows and could impact our
rate of growth and carrying value of our assets. Prices for liquid
hydrocarbons and natural gas are very volatile. Our revenues,
operating results and ability to grow in the future are highly dependent on the
prices we receive for our oil and natural gas. Many factors beyond
our control influence the price we receive for our production. These
include, but are not limited to, general economic conditions worldwide,
political instability in other parts of the world, changes in weather patterns,
price and availability of alternative sources of energy, and government
regulation.
Technical Risk: Our
exploration and development operations are subject to many risks which may
affect our ability to profitably extract oil and natural gas reserves or achieve
targeted returns. In addition, continued growth requires that we
acquire and successfully develop additional oil and natural gas
reserves.
Our
exploration and development activities will depend in part on the evaluation of
data obtained through geophysical testing and geological analysis, as well as
test drilling activity. The results of such studies and tests are
subjective, and no assurances can be given that exploration and development
activities based on positive analysis will produce oil or natural gas in
commercial quantities or costs. As developmental and exploratory
activities are performed, further data required for evaluation of our oil and
natural gas interests will become available. The exploration and
development activities that will be undertaken by us are subject to greater
risks than those associated with the acquisition and ownership of producing
properties. The drilling of development wells, although generally
consisting of drilling to reservoirs believed to be productive, may result in
dry holes or a failure to produce oil and natural gas in commercial
quantities. Moreover, any drilling of exploratory wells is subject to
significant risk of dry holes.
Our
commercial success depends on our ability to find, acquire, develop and
commercially produce oil and natural gas reserves. Without the
continual addition of new reserves, any existing reserves and the production
there from will decline over time as such existing reserves are depleted. A
future increase in our reserves will depend not only on our ability to explore
and develop any properties we may have from time to time, but also on our
ability to select and acquire suitable producing properties or
prospects. No assurance can be given that we will be able to continue
to locate satisfactory properties for acquisition or
participation. Moreover, if such acquisitions or participations are
identified, we may determine that current markets, terms of acquisition and
participation or pricing conditions make such acquisitions or participations
economically disadvantageous. There is no assurance that commercial
quantities of oil and natural gas will be discovered or acquired by
us.
Catastrophic
Risk: Our oil and natural gas operations are subject to
unforeseen operating hazards which may damage or destroy
assets. Although we maintain a level of insurance coverage
consistent with industry practices against property or casualty losses unique
circumstances to any particular event may make the coverage
inadequate. Oil and natural gas exploration, development and
production operations are subject to all the risks and hazards typically
associated with such operations, including hazards such as fire, explosion,
blowouts, sour gas releases and spills, each of which could result in
substantial damage to oil and natural gas wells, production facilities, other
property and the environment or in personal injury.
Competitive
Risk: The petroleum industry is highly competitive and very
capital intensive. If we are unable to successfully compete with the
large number of oil and natural gas producers in our industry, we may not be
able to achieve profitable operations. We encounter competition from
numerous companies in each of our activities, including acquiring rights to
explore for crude oil and natural gas. Our competitors include oil
and natural gas companies that have substantially greater financial resources,
staff and facilities than us. Our ability to increase reserves in the
future will depend not only on our ability to explore and develop our existing
properties, but also on our ability to select and acquire suitable producing
properties or prospects for exploratory drilling. Competitive factors
in the distribution and marketing of oil and natural gas include price and
methods and reliability of delivery. Competition may also be
presented by alternate fuel sources.
6
Regulatory and Environment
Risk: We are subject to various regulatory requirements,
including environmental regulations, and may incur substantial costs to comply
and remain in compliance with those requirements. Our oil and gas
operations are subject to environmental hazards such as oil spills, produced
water spills, gas leaks and ruptures and discharges of substances or gases that
could expose us to substantial liability. Our operations are also
subject to numerous laws and regulations at the federal, state and local levels,
including regulation relating to matters such as the exploration for and the
development, production, marketing, pricing, transmission and storage of oil and
natural gas, as well as environmental and safety matters. Failure to
comply with applicable regulations could result in fines or penalties being owed
to third parties or governmental entities, the payment of which could have a
material adverse effect on our financial condition or results of
operations. Our operations are subject to significant laws and
regulations, which may adversely affect our ability to conduct business or
increase our costs.
Environmental
legislation provides for, among other things, restrictions and prohibitions on
spills, releases or emissions of various substances produced in association with
oil and natural gas operations. The legislation also requires that wells and
facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of the applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties.
The
discharge of oil, natural gas or other pollutants into the air, soil or water
may give rise to liabilities to governments and third parties and may require us
to incur costs to remedy such discharge. No assurance can be given that
environmental laws will not result in a curtailment of production or a material
increase in the costs of production, development or exploration activities or
otherwise adversely affect our financial condition, results of operations or
prospects. We could incur significant liability for damages, clean-up
costs and/or penalties in the event of discharges into the environment,
environmental damage caused by us or previous owners of our property or
non-compliance with environmental laws or regulations. In addition to actions
brought by governmental agencies, we could face actions brought by private
parties or citizens groups. Any of the foregoing could have a
material adverse effect on our financial results.
Market Risk: The
marketability and price of oil and natural gas that may be acquired or
discovered by us will be affected by numerous factors beyond our
control. Our ability to market our natural gas may depend upon our
ability to acquire space on pipelines that deliver natural gas to commercial
markets. We may also be affected by deliverability uncertainties related to the
proximity of our reserves to pipelines and processing facilities, by operational
problems with such pipelines and facilities, and by government regulation
relating to price, taxes, royalties, land tenure, allowable production, the
export of oil and natural gas and by many other aspects of the oil and natural
gas business.
Financial
Risks: Our business may be harmed if we are unable to retain
our interests in existing leases. All of our properties are held
under interests in oil and gas mineral leases, some of which expire within the
next twelve months. If we fail to meet the specific requirements of each lease,
especially future drilling and production requirements, the lease may be
terminated or otherwise expire. We cannot be assured that we will be able to
meet our obligations under each lease. The termination or expiration of our
working interest relating to any lease would harm our business, financial
condition and results of operations.
Estimation
Risks: Our reserve estimates, like all estimates, are subject
to numerous uncertainties and may be inaccurate. There are numerous
uncertainties inherent in estimating quantities of oil or natural gas reserves
and cash flows to be derived from, including many factors beyond our control.
The reserve and associated cash flow information set forth herein represents
estimates only. In general, estimates of economically recoverable oil and
natural gas reserves and the future net cash flows therefrom are based upon a
number of variable factors and assumptions, such as historical production from
the properties, production rates, ultimate reserve recovery, timing and amount
of capital expenditures, marketability of oil and natural gas, royalty rates,
the assumed effects of regulation by governmental agencies and future operating
costs, all of which may vary from actual results. All such estimates are to some
degree speculative, and classifications of reserves are only attempts to define
the degree of speculation involved. For those reasons, estimates of the
economically recoverable oil and natural gas reserves attributable to any
particular group of properties, classification of such reserves based on risk of
recovery and estimates of future net revenues expected therefrom prepared by
different engineers, or by the same engineers at different times, may vary. Our
actual production, revenues, taxes and development and operating expenditures
with respect to our reserves will vary from estimates thereof and such
variations could be material.
Estimates
of proved or unproved reserves that may be developed and produced in the future
are often based upon volumetric calculations and upon analogy to similar types
of reserves rather than actual production history. Estimates based on these
methods are generally less reliable than those based on actual production
history. Subsequent evaluation of the same reserves based upon production
history and production practices will result in variations in the estimated
reserves and such variations could be material.
Default Risks: Our
properties are held in the form of licenses, leases and working interests in
operating agreements and leases. If we or the holder of a lease fail to meet the
specific requirements of the lease, license or operating agreement the specifice
instrument may terminate or expire. There can be no assurance that any of the
obligations required to maintain each license or lease will be met, although we
exercise our commercially reasonable efforts to do so. The termination or
expiration of our licenses or leases or the working interests relating to a
license or lease may have a material adverse effect on our results of operations
and business.
7
Risk of Loss of Key
Personnel: Our success depends in large measure on certain key
personnel, including our President, Chief Executive Officer, and Chief Financial
Officer. The loss of the services of such key personnel could have a
material adverse effect on us. Although we are looking into acquiring
key person insurance, we do not currently have such insurance in effect for
these key individuals. In addition, the competition for qualified personnel in
the oil and natural gas industry is intense and there can be no assurance that
we will be able to continue to attract and retain all personnel necessary for
the development and operation of our business.
Risks Related to our Common
Stock: Shares of our common stock may continue to be subject
to price volatility and illiquidity because our shares are thinly traded and may
never become eligible for trading on a national securities
exchange. While we may at some point be able to meet the requirements
necessary for our common stock to be listed on a national securities exchange,
we cannot assure you that we will ever achieve a listing of our common stock on
a national securities exchange. Initial listing on a national securities
exchange is subject to a variety of requirements, including minimum trading
price and minimum public “float” requirements, and could also be affected by the
general skepticism of such markets concerning companies that are the result of
mergers with inactive publicly-held companies. There are also continuing
eligibility requirements for companies listed on public trading markets. If we
are unable to satisfy the initial or continuing eligibility requirements of any
such market, then our stock may not be listed or could be delisted. This could
result in a lower trading price for our common stock and may limit your ability
to sell your shares, any of which could result in you losing some or all of your
investments.
Our
common stock is subject to the “penny stock” rules of the Securities and
Exchange Commission and the trading market in our securities is limited, which
makes transactions in our stock cumbersome and may reduce the value of an
investment in our stock. The Securities and Exchange Commission (the
“SEC”) has adopted Rule 3a51-1 which establishes the definition of a “penny
stock,” for the purposes relevant to us, as any equity security that (i) has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, or (ii) is not registered on a national securities exchange or
listed on an automated quotation system sponsored by a national securities
exchange. For any transaction involving a penny stock, unless exempt, Rule 15g-9
of the Securities and Exchange Act of 1934, as amended, requires:
•
|
that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
|
|
•
|
the
broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
|
In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
•
|
obtain
financial information and investment experience objectives of the person;
and
|
|
•
|
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SECrelating to the penny stock market, which, in
highlight form:
|
•
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
|
•
|
attests
that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading, and about the commissions payable to the
broker-dealer and the registered representatives, as well as current quotations
for the securities, and the rights and remedies available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny
stocks. Generally, brokers may be less willing to execute
transactions in securities subject to the “penny stock” rules. This
may make it more difficult for investors to dispose of our common stock and
cause a decline in the market value of our stock.
8
The
market valuation of energy companies, such as us, frequently fluctuate due to
factors unrelated to the past or present operating performance of such
companies. Our market valuation may fluctuate significantly in
response to a number of factors, many of which are beyond our control,
including:
•
|
changes
in securities analysts’ estimates of our financial performance, although
there are currently no analysts covering our stock;
|
|
|
•
|
fluctuations
in stock market prices and volumes, particularly among securities of
energy companies;
|
|
•
|
changes
in market valuations of similar companies;
|
|
•
|
announcements
by us or our competitors of significant contracts, new technologies,
acquisitions, commercial relationships, joint ventures or capital
commitments;
|
|
•
|
variations
in our quarterly operating results;
|
|
•
|
fluctuations
in oil and natural gas prices; and
|
|
•
|
additions
or departures of key personnel.
|
Dividends: Investors
should not look to dividends as a source of income. In the interest
of reinvesting initial profits back into our business, we do not intend to pay
cash dividends in the foreseeable future. Consequently, any economic
return will initially be derived, if at all, from appreciation in the fair
market value of our stock, and not as a result of dividend
payments.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None
ITEM
3. LEGAL PROCEEDINGS.
JayHawk, at September 30,
2009, was the subject of, or a party to, two known, pending or threatened, legal
actions. As of the date of this report on Form 10-K, only one of the
legal proceedings remains to be resolved. Following is a discussion
of each:
1. The
Company was named as the defendant in a legal proceeding brought by L&S Well
Service, LLC (the plaintiff) in the District Court of Crawford County,
Kansas. The plaintiff alleged breach of a verbal contract, alleging
that the Company had committed to have L&S Well Service drill 60 wells, and
subsequently cancelled the request for such services, after L&S purchased
the necessary materials to complete the work. During the first half
of November 2009 the Company settled this claim out of court by paying the
plaintiff $42,500 (see Note 14 to the Financial Statements, Subsequent
Events).
2. On
July 22, 2008 SemCrude, LLC filed a Chapter 11 bankruptcy proceeding in the
United States Bankruptcy Court, District of Delaware. For the months
of June and July of 2008, SemCrude, as was customary, took the production from
JayHawk's Candak, North Dakota properties and failed to compensate the Company
before filing their bankruptcy petition. JayHawk has retained legal
representation to recover the maximum possible from the amount owed the Company,
which is $283,485. We are anticipating recovering 100% of the value
of the July production, less legal costs, but do not anticipate receiving
anything for the value of the June production. Accordingly, we have
provided an allowance for doubtful collections for all of the June receivable of
$119,763.
The
Bankruptcy Court administrating the SemCrude Bankruptcy has approved the 4th
Amended Plan of Reorganization and JayHawk has been advised by its legal council
that the Company may anticipate receiving the proceeds of its July 2008 priority
claim by the end of December 2009.
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There
were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report Form 10-K.
9
PART II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the symbol "JYHW.OB". For
the periods indicated, the following table sets forth the high and low bid
prices per share of JayHawk’s common stock since inception of trading. These
prices represent inter-dealer quotations without retail markup, markdown, or
commission and may not necessarily represent actual transactions.
2009 | 2008 | |||||||||||||||
High
|
Low
|
High
|
Low
|
|||||||||||||
1st Quarter end December
31
|
$ | 1.06 | $ | 0.13 | $ | 2.71 | $ | 1.66 | ||||||||
2nd
Quarter end March 31
|
0.56 | 0.17 | 2.27 | 0.94 | ||||||||||||
3rd
Quarter end June 30
|
0.64 | 0.20 | 2.54 | 1.64 | ||||||||||||
4th
Quarter end September30
|
0.50 | 0.25 | 2.14 | 0.71 |
Holders
As of
September 30, 2009, there were 104 stockholders of record who owned 44,509,496
shares of common stock. The number of record holders was determined
from the records of our transfer agent and does not include beneficial owners of
common stock whose shares are held in the names of various security brokers,
dealers, and registered clearing agencies. The transfer agent of our common
stock is Corporate Stock Transfer Company at 3200 Cherry Creek Drive South,
Suite #340, Denver, Colorado, 80209.
Description
of Securities
The
authorized capital stock of the Company consists of 200,000,000 of the common
stock, at $0.001 par value, and 10,000,000 shares of preferred stock, at $0.001
par value. The shares of preferred stock may be issued in one or more
series. The designations, powers, rights, preferences,
qualifications, restrictions, and limitations of each series of preferred stock
shall be established from time to time by the Board of Directors in accordance
with Colorado law.
Dividends
Holders
of common and preferred stock are entitled to receive dividends as may be
declared by the Board of Directors. The Board of Directors is not restricted
from paying any dividends but is not obligated to declare a dividend. No
dividends have ever been declared and it is not anticipated that dividends will
ever be paid, but will be dependent upon our financial condition, results of
operations, capital requirements, and such other factors as the Board of
Directors deem relevant.
ITEM
6. SELECTED FINANCIAL DATA
The Registrant is a “smaller reporting
company” as defined Rule 10(f)(1) of Regulation S-K, and as such is not required
to present the information required under this Item.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS
The
following information should be read in conjunction with the consolidated
financial statements and the notes thereto contained elsewhere in this report.
All notes referred to in this Management Discussion and Analysis refer to the
notes to the Financial Statements presented in Item 8. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements. Information in this Item 7, "Management's Discussion
and Analysis or Plan of Operation," and elsewhere in this 10-K that does not
consist of historical facts, are "forward-looking statements."
Statements
accompanied or qualified by, or containing words such as "may," "will,"
"should," "believes," "expects," "intends," "plans," "projects," "estimates,"
"predicts," "potential," "outlook," "forecast," "anticipates," "presume," and
"assume" constitute forward-looking statements, and as such, are not a guarantee
of future performance. The statements involve factors, risks and uncertainties
including those discussed in the “Risk Factors” section contained elsewhere in
this report, the impact or occurrence of which can cause actual results to
differ materially from the expected results described in such
statements.
10
Investors
should not place undue reliance on forward-looking statements as predictive of
future results. The Company disclaims any obligation to update the
forward-looking statements in this report.
Overview
This overview is presented in
chronological order as to dates the respective transactions were
completed. It should be read in conjunction with the "Notes to
consolidated financial statements" presented in Item 4, specifically Note 9
relative to Common Stock, and Note 4 relative to Asset Impairments.
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. Our new business plan was to acquire oil
and gas properties for exploration and development with the intent to bring
the projects to feasibility at which time we would either contract out the
operations or joint venture the project to qualified interested
parties.
We
implemented this plan on July 25, 2007 with the acquisition of certain oil, gas,
and mineral leases to approximately 35,000 gross acres located in Bourbon
County, Kansas (“Uniontown project”). The assets were purchased for a
total purchase price of $2.2 million.
On
January 16, 2008, JayHawk purchased a 65% working interest in 5 producing oil
wells located in the Williston Basin of North Dakota, along with the right to
develop the oil, gas and mineral resources on 15,500 acres of leases in this
same area. In consideration for these properties JayHawk paid JED Oil
$3.5 million in cash. The cash used to complete this transaction was
raised in the private placement transaction more fully described in Note 9 of
the Consolidated Notes to Financial Statements.
On March
31, 2008, JayHawk closed a transaction, initiated with an agreement dated
February 18, 2008, whereby JayHawk acquired a 16 mile pipeline, associated
easements, oil, gas and mineral leases to approximately 6,500 gross acres, 34
gas wells, compressor, and other field equipment. In consideration
for these assets JayHawk exchanged $1 million in cash and 1 million shares of
our common stock (See Note 8 of the "Notes to Financial
Statements").
On April
18, 2008, JayHawk entered into an agreement to acquire oil and natural gas
rights to 1,336 gross acres and 14 completed but non-producing gas wells, in
exchange for $300 thousand in cash and 50,000 shares of the Registrants common
stock (See Note 8 of the Consolidated Notes to Financial
Statements).
On June
30, 2008, the Company agreed to purchase oil, gas and mineral leases on 11,462
gross acres, located in Crawford and Bourbon counties Kansas, and 5 completed
and cased gas wells. In consideration for these assets JayHawk paid
$140 thousand in cash and was obligated to issue 286,550 shares of its common
stock as the leases were assigned at the rate of 25 shares per acre (See Note 8
of the "the Consolidated Notes to Financial Statements").
On July
22, 2008, the former purchaser of our North Dakota crude oil production,
SemCrude, L.P, filed a Chapter 11 bankruptcy proceeding in the United States
Bankruptcy Court, District of Delaware. At the time of their filing
we had not been paid for the crude oil they had taken from our properties for
the months of June and July 2008. As a consequence, we have an
outstanding receivable exceeding $283 thousand and offsetting allowance for
doubtful accounts of $119,763.
During
the 4th
quarter of the year ending September 30, 2009 the Company completed a signed
letter agreement with DK True Energy Development Limited ("DKTED”) which allows
DKTED to earn up to an 85% working interest in JayHawk's Coal Bed Methane
("CBM") project in southeast Kansas (the Girard project). This
interest can be earned by True Energy after paying the Company $500,000 and
spending a minimum of $1,300,000 over a three year period. DKTED has
the option to cap its participation and working interest at 42.5 percent after
paying the Company $250,000 and spending $300,000 on workovers of existing wells
during the first year, in what is described as the “Primary
Program”. As at September 30, 2009, DKTED had paid JayHawk $125,000
of the initial $250,000 obligation. See Note 14, Subsequent Events,
and Note 15, Commitments and Contingencies.
We
have not entered into commodity swap arrangements or hedging transactions, and
although we have no current plans to do so, we may enter into commodity swap
and/or hedging transactions in the future in conjunction with oil and gas
production. We have no off-balance sheet arrangements.
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. Our future financial results
continue to depend primarily on (1) our ability to discover hase commercial
quantities of oil and gas; (2) the market price for oil and gas; (3) our ability
to continue to source and screen potential projects; and (4) our ability to
fully implement our exploration and development program with respect to these
and other matters. We cannot assure that we will be successful in any of these
activities or that the prices of oil and gas prevailing at the time of
production will be at a level allowing for profitable production.
11
Results
of Operations
For the
years ending September 30, 2009 and 2008 we report gross revenues of $588,410
and $1,199,837, respectively, from the sales of oil and natural
gas. Details of these two revenue components
follow:
Oil Revenues: For
the years ended September 30, 2009 and 2008 JayHawk’s gross working interest in
the revenues generated from the five North Dakota oil wells were $479,598 and
$1,108,055 respectively. The Company’s revenues are determined after
deducting volumes and amounts attributable to outside working and royalty
interests. Computation of JayHawk’s distributable share of the gross
sales values for the periods ending September 30, 2009 and 2008 are reflected in
the following table:
Description |
Year End
Sept. 30, 2009
|
Year End
Sept. 30,
2008
|
||||||
Gross
Sales Value
|
$ | 898,950 | $ | 2,079,523 | ||||
Less:
Distributable to Outside Interests
|
(419,352 | ) | (971,468 | ) | ||||
JayHawk’s
Gross Revenues
|
$ | 479,598 | $ | 1,108,055 |
The steep
decline in gross revenues evidenced here is attributable to the equivalent
decline between the two periods in the average price received for a barrel of
oil. For the year ending September 30, 2009 the average price we
received for a barrel of oil was $46.30. During the comparable period
ending September 30, 2008 the average price received per barrel was in excess of
$100.00.
Gas
Revenues: Revenues derived from gas sales for the years ending
September 30, 2009 and 2008 were $108,812 and $91,782. Average
monthly prices received for each thousand cubic feet (mcf) of gas sold during
the period end September 30, 2009 have remained volatile, ranging from a high of
$4.54, received for the sale of December 2008 production, to a low of
$2.58 received for March 2009 production. The average price received
for the 12 month period ending September 30, 2008 was $3.06 per
mcf.
Exploration
Expenses: There were no exploration expenses incurred during
the years ending September 30, 2009 or 2008.
Production
Expenses: Production expenses are comprised of production
taxes, field labor, maintenance, chemicals, fuel, and salt water disposal, less
amounts charged other working interests in the particular
wells. These expenses associated with the Company’s North Dakota oil
operations decreased approximately 24 percent from $280,689 for the year ending
September 30, 2008 to $211,507 for the year ending September 30,
2009. The Kansas gas operations saw production expenses declining
approximately 17 percent, from $226,552 to $187,638, between the same
periods.
Depreciation, depletion,
amortization, and asset impairment expense: The aggregate of these
expenses for the years ending September 30. 2009 and 2008 are detailed
below. The total for the 2008 fiscal year end includes a provision of
$1,474,000 as a valuation allowance for those leases associated with the
unproved properties described as the Uniontown project (Note 4) and the annual
accretion of the asset retirement obligation, explained in Note 8.
Year
End
Sept.
30, 2009
|
Year
End
Sept.
30, 2008
|
|||||||
Asset
Impairment Expense
|
$ | --- | $ | 1,474,000 | ||||
Unproved
Property Amortization Expense (Note 4)
|
291,396 | 114,535 | ||||||
Proved
Property Depreciation and Depletion (Note 5)
|
753,406 | 613,158 | ||||||
Accretion
in annual Asset Retirement Obligation (Note 8)
|
12,804 | 11,640 | ||||||
Depreciation
of Office Furniture & Equipment
|
11,971 | 1,431 | ||||||
Total
|
$ | 1,069,577 | $ | 2,214,764 |
As
discussed generally in Note 2, and specifically in Note 5, of "Notes to the
Consolidated Financial Statements," JayHawk periodically reviews and assesses
its unproved properties to determine if they have been
impaired. During the year ending September 30, 2008, 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 allow
approximately half of the original Uniontown leases acquired, to
expire. Further, given the Company's inability at this time to fund
development of any acreage, we have provided a valuation for potential loss
equal to two-thirds, 67%, of the original cost of this leased acreage. Under
U.S. Generally Accepted Accounting Principles, losses on write-downs of assets
are not considered extraordinary losses. Accordingly, this amount is
included in operating expenses.
12
General and Administrative
Expenses: General and administrative expenses have been
reduced to $612,105 for the 12 months ending September 2009 from $1,541,691 for
the comparable period end September 30, 2008.
Description |
Year End
Sept. 30,
2009
|
Year End
Sept. 30,
2008
|
||||||
Salaries,
Wages and Compensation
|
$ | 242,500 | $ | 558,443 | ||||
Consulting,
Legal & Professional Fees
|
114,560 | 414,837 | ||||||
All
other operating expenses combined
|
302,653 | 568,411 | ||||||
Total
General and Administrative Expenses
|
$ | 659,713 | $ | 1,541,691 |
Other Income and Expense:
Detail of the aggregate of this classification is disclosed in the
following table:
Description |
Year
Ended
Sept.
30, 2009
|
Year
Ended
Sept.
30, 2008
|
||||||
Net
Interest Expense
|
$ | 101,890 | $ | 6,271 | ||||
Bad
Debt Expense (Note 3)
|
27,001 | 105,311 | ||||||
Capital
Raising Costs
|
91,958 | --- | ||||||
Note
Discount & Accretion Expense
|
522,248 | --- | ||||||
Interest
and other income
|
(5,490 | ) | (47,099 | ) | ||||
Total
Other Income and Expense
|
$ | 737,607 | $ | 64,483 |
The
increase in interest expense for the year ending September 30, 2009 is
attributable to the fact that it reflects a full year of interest on the Note
Payable whereas in the year ending September 30, 2008, interest was accrued on
the note for only two months, August and September. Additionally,
interest expense is reported net of interest income, of which there was a
minimal amount in the more recent year end than in the year ending September 30,
2008. Likewise, during the period end September 30, 2008 no note
discount or accretion expense was recorded.
Liquidity and Capital
Resources: At September 30, 2009 and 2008, the balances of our cash
and cash equivalents were $5,658 and $82,683, respectively. Our
accounts receivable and other current assets, (net of an allowance for doubtful
accounts) totaled $296,051 and $429,889, respectively. Subsequent to
year-end, in October, we received $115,029 from the current purchasers of our
crude oil and gas production, representing proceeds of September sales, included
in accounts receivable at September 30, 2009.
Our
current liabilities exceed our current assets by $1,129,159, whereas at
September 30, 2008, our working capital, defined as current assets less current
liabilities was a negative $593,766. As discussed under Item 3, Legal
Proceedings, the purchaser of our June and July 2008 crude oil production,
SemCrude, LLC, took that period’s production just prior to filing for bankruptcy
protection, and without paying, for the product taken.
To fully
carry out our business plans we need to raise a substantial amount of additional
capital, or obtain industry joint venture financing, which we are currently
seeking. We can give no assurance that we will be able to raise such capital. We
have limited financial resources until such time that we are able to
generate such additional financing or cash flow from operations. Our ability to
establish profitability and positive cash flow is dependent upon our ability to
exploit our mineral holdings, generate revenue from our planned business
operations and control our exploration cost. Should we be unable to raise
adequate capital or to meet the other above objectives, it is likely that we
would have to substantially curtail our business activity, and that our
investors would incur substantial losses of their investment.
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As reflected in the accompanying
consolidated financial statements we are an independent oil and gas company with
a limited operating history and losses since inception. These factors, among
others, may indicate that the Company will be unable to continue as a going
concern for reasonable period of time.
The
financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going
concern. Our continuation as a going concern is dependent upon our
ability to obtain additional operating capital, and ultimately, to attain
profitability. We intend to acquire additional operating capital through equity
offerings to fund our business plan. There is no assurance that we
will be successful in raising additional funds.
13
Cash Flows: Net
cash provided by operations decreased primarily due to less cash being received
for the Company’s crude oil sales. In both fiscal years ending at
September 30, 2009 and 2008 cash used in operating activities exceeded cash
provided by operating activities by $246,054 and $745,528,
respectively.
During
the year ending September 30, 2009 we used $30,971 in investment activities as
compared to $9,465,948 during the comparable period ending September 30,
2008. Cash flows provided from financing activities were $200,000 and
$9,769,042 for the year ended September 30, 2009 and 2008,
respectively.
Commitments: At
September 30, 2009 the Company has no commitments to make any capital
expenditures. Any potential future capital expenditures will be
dependent on concluding adequate and successful financing
arrangements.
The
Company was obligated under its original office lease agreement, expiring July
1, 2011, to make payments of $1,500 per month. Management was
successful in renegotiating this to $1,000 per month beginning in April
2009. The total commitment by year is $12,000 for the period ending
September 30, 2010 and $7,000 in 2011.
ITEM
7A. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The Registrant has no investments in
any market risk sensitive instruments either held for trading purposes or
entered into for other than trading purposes.
14
ITEM
8. FINANCIAL STATEMENTS.
JAYHAWK
ENERGY, INC.
INDEX
TO FINANCIAL STATEMENTS
Page
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Report of Independent Registered Public Accounting
Firm – BehlerMick PS
|
16
|
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Report of Independent Registered Public Accounting
Firm – Meyers Norris Penny LLP
|
17
|
||
Consolidated Balance Sheets
|
18
|
||
Consolidated Statements of
Operations
|
19
|
||
Consolidated Statements of Changes in
Stockholder’s Equity
|
20
|
||
Consolidated Statements of Cash
Flows
|
21
|
||
Notes to Consolidated Financial
Statements
|
22
|
15
BEHLERMICKPS
Bank of
America Financial Center
601 W
Riverside.
Suite 430
Spokane.
WA 99201
United
States of America
To the
Board of Directors and
Stockholders
of JayHawk Energy, Inc.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
We have
audited the accompanying consolidated balance sheet of JayHawk Energy, Inc. and
subsidiaries as of September 30, 2009, and the related consolidated statements
of operations and comprehensive loss, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of JayHawk Energy, Inc. and
subsidiaries as of September 30, 2009 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's accumulated deficit and lack of
revenues raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding the resolution of this issue are also
discussed in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BehlerMick
PS
Spokane,
Washington
December
17, 2009
T: +1
509 838 5111
F: +1
509 838 5114
16
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and the Stockholders of
JayHawk
Energy, Inc.
We have
audited the accompanying consolidated balance sheet of JayHawk Energy, Inc.
("the Company”) as of September 30, 2008, and the statements of operations,
stockholder’s equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluation of the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of September 30,
2008, and the results of its operations and its cash flows for the years then
ended in accordance with accounting principles generally accepted in the United
States of America.
As
discussed in Note 2 to the consolidated financial statements, the Company’s
ability to continue as a going concern is dependent on obtaining sufficient
working capital to fund future operations. Management’s plan in
regard to these matters is also described in Note 2. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Chartered
Accountants
Calgary,
Canada
December
23, 2008
17
JayHawk
Energy, Inc.
Consolidated
Balance Sheets
Assets
|
September
30,
2009
|
September
30,
2008
|
||||||
Cash
and cash equivalents
|
$ | 5,658 | $ | 82,683 | ||||
Trade accounts receivable, less allowance for doubtful accounts | ||||||||
of
$119,763 and $95,800 at September 30, 2009 and 2008, respectively (Note
3)
|
293,507 | 413,862 | ||||||
Other
current assets
|
2,544 | 16,027 | ||||||
Total
Current Assets
|
301,709 | 512,572 | ||||||
Plant,
Property and Equipment
|
||||||||
Unproved oil and gas properties, net of allowances for impairment of $1,474,000 | ||||||||
and accumulated amortization of $405,931 and 14,535, at September 30, 2009 and | ||||||||
2008,
respectively. (Note 4).
|
2,265,673 | 2,555,910 | ||||||
Proved and developed oil & gas properties, net of accumulated DD&A of $1,366,204 | ||||||||
and
$613,158 at September 30, 2009 and 2008, respectively (Note
5)
|
6,256,238 | 6,991,043 | ||||||
Computers, office equipment, furniture and leasehold improvements, net of allowance | ||||||||
for
Depreciation of $1,335 and $nil, respectively.
|
31,605 | 32,366 | ||||||
Total
Net Plant, Property and Equipment
|
8,553,516 | 9,579,319 | ||||||
Other
Long-Term Assets (Note 6)
|
55,100 | 247,586 | ||||||
Total
Assets
|
$ | 8,910,325 | $ | 10,339,477 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 172,166 | $ | 381,197 | ||||
Due
to other Working and Royalty Interests
|
107,905 | 106,003 | ||||||
Other
Payables, Interest & Taxes Accrued
|
350,797 | 147,100 | ||||||
Note
Payable in less than one year (Note 7)
|
800,000 | 472,038 | ||||||
Total
Current Liabilities
|
1,430,868 | 1.106.338 | ||||||
Asset
Retirement Obligations (Note 8)
|
140,844 | 128,040 | ||||||
Total
Liabilities
|
1,571,712 | 1,234,378 | ||||||
Commitments
and Contingencies (Note 15)
|
--- | --- | ||||||
Stockholders'
Equity
|
||||||||
Preferred Stock, $.001 par value; 10,000,0000 shares authorized, no shares issued | ||||||||
and
outstanding.
|
--- | --- | ||||||
Common Stock, $.001 par value; 200,000,000 shares authorized; 44,509,496 shares | ||||||||
issued and outstanding at September 30, 2009 and 42,810,929 shares issued and | ||||||||
outstanding
at September 30, 2008 (Note 9)
|
44,509 | 42,811 | ||||||
Additional
paid-in capital
|
12,821,792 | 12,400,784 | ||||||
Stock
issuance obligation (Notes 7 and 9)
|
136,000 | 47,559 | ||||||
Accumulated
deficit
|
(5,663,688 | ) | (3,386,055 | ) | ||||
Total
Stockholders' Equity
|
7,338,613 | 9,105,099 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 8,910,325 | $ | 10,339,477 |
“See
Accompanying Notes to the Consolidated Financial Statements”
18
JayHawk
Energy, Inc.
Consolidated Statements
of Operationsand
Comprehensive Loss
Year
Ended
September
30, 2009
|
Year
Ended
September
30, 2008
|
|||||||
Revenue
|
||||||||
Oil
Sales
|
$ | 479,598 | $ | 1,108,055 | ||||
Gas
Sales
|
108,812 | 91,782 | ||||||
Total
Gross Revenues
|
$ | 588,410 | $ | 1,199,837 | ||||
Costs
and Operating Expenses
|
||||||||
Exploration Costs | --- | --- | ||||||
Production
Costs – North Dakota
|
211,507 | 280,689 | ||||||
Production
Costs – Kansas
|
187,638 | 226,552 | ||||||
Depreciation,
depletion, amortization and asset impairment expense
|
1,069,577 | 2,214,764 | ||||||
General
and Administrative
|
659,714 | 1,541,691 | ||||||
Other
Income and Expense
|
737,607 | 64,483 | ||||||
Total
Costs and Expenses
|
2,866,043 | 4,328,179 | ||||||
Loss
from continuing operations before income tax
|
$ | (2,277,633 | ) | $ | (3,128,342 | ) | ||
Provision
for income taxes
|
--- | --- | ||||||
Deferred
tax benefit
|
--- | --- | ||||||
Net
loss from continuing operations
|
$ | (2,277,633 | ) | $ | (3,128,342 | ) | ||
Net
loss and total comprehensive loss
|
$ | (2,277,633 | ) | $ | (3,128,342 | ) | ||
Basic
and diluted loss per share (Note 10)
|
$ | (0.05 | ) | $ | (0.08 | ) | ||
Basic
weighted average number shares outstanding
|
43,699,043 | 40,266,335 |
“See
Accompanying Notes to the Consolidated Financial Statements”
19
JayHawk
Energy, Inc.
Statements
of Changes in Stockholders'
Equity
Common
Shares
|
Stock
Par
Value
|
Additional
Paid-In
Capital
|
Retained
Earnings
or
(Deficit)
|
Stock
Issuance
Obligation
|
Total
|
|||||||||||||||||||
Balance
at September 30, 2007
|
36,882,659 | $ | 36,882 | $ | 2,904,982 | (257,713 | ) | $ | --- | $ | 2,684,151 | |||||||||||||
Jan. 16,
2008 Private placement
|
2,666,667 | 2,667 | 3,997,333 | 4,000,000 | ||||||||||||||||||||
March 13,
2008 issue for services
|
50,000 | 50 | 109,950 | 110,000 | ||||||||||||||||||||
March 31,
2008 issuance
|
1,024,727 | 1,025 | 2,325,105 | 2,326,130 | ||||||||||||||||||||
April 16,
2008 exercise warrants
|
900,000 | 900 | 899,100 | 900,000 | ||||||||||||||||||||
April 15,
2008 exercise warrants
|
599,939 | 600 | 599,339 | 599,939 | ||||||||||||||||||||
May 5- 7,
2008 issue for services
|
75,000 | 75 | 171,925 | 172,000 | ||||||||||||||||||||
May 9,
2008 exercise warrants
|
399,962 | 400 | 399,562 | 399,962 | ||||||||||||||||||||
May 14,
2008 issue obligation
|
519,011 | 519,011 | ||||||||||||||||||||||
July 3,
2008 issuance
|
211,975 | 212 | 471,240 | (471,452 | ) | --- | ||||||||||||||||||
September
30, 2008 Convertible Note Warrant Valuation
|
522,248 | 522,248 | ||||||||||||||||||||||
Loss for year ending
September 30,
2008
|
(3,128,342 | ) | (3,128,342 | ) | ||||||||||||||||||||
Balance
at September 30, 2008
|
42,810,929 | $ | 42,812 | $ | 12,400,784 | $ | (3,386,055 | ) | $ | 47,559 | $ | 9,105,099 | ||||||||||||
October
31, 2008 issuance for services
|
25,000 | 25 | 16,725 | 16,750 | ||||||||||||||||||||
January 12, 2009 issuances for non renewed leases | ||||||||||||||||||||||||
and
services
|
74,575 | 74 | 74,184 | (47,559 | ) | 26,699 | ||||||||||||||||||
Jan. 12,
2009 issue for services
|
51,000 | 51 | 20,859 | 20,910 | ||||||||||||||||||||
February
5, 2009 Private placement
|
1,000,000 | 1,000 | 199,000 | 200,000 | ||||||||||||||||||||
March 2,
2009 issue obligation
|
14,555 | 14,555 | ||||||||||||||||||||||
April
20,2009 issue for services
|
85,400 | 85 | 14,470 | (14,555 | ) | --- | ||||||||||||||||||
May 20,
2009 issue for services
|
40,000 | 40 | 7,960 | 8,000 | ||||||||||||||||||||
June 4,
2009 issue for services
|
49,800 | 50 | 7,420 | 7,470 | ||||||||||||||||||||
July 31,
2009 issue for services
|
139,167 | 139 | 28,199 | 28,338 | ||||||||||||||||||||
July 31, 2009 issue obligation in lieu of extension fee | ||||||||||||||||||||||||
and
interest
|
136,000 | 136,000 | ||||||||||||||||||||||
August 5,
2009 issue for services
|
203,625 | 204 | 40,521 | 40,725 | ||||||||||||||||||||
Sept. 3,
2009 issue for services
|
30,000 | 30 | 11,670 | 11,700 | ||||||||||||||||||||
Loss for year ending
September 30,
2009
|
(2,277,633 | ) | (2,277,633 | ) | ||||||||||||||||||||
Balance
at September 30, 2009
|
44,509,496 | $ | 44,509 | $ | 12,821,792 | $ | (5,663,688 | ) | $ | 136,000 | $ | 7,338,613 |
“See
Accompanying Notes to the Consolidated Financial Statements”
20
JayHawk
Energy, Inc.
Statement of Consolidated Cash Flows
Year
Ended
September
30, 2009
|
Year
Ended
September
30, 2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss from operations
|
$ | (2,277,633 | ) | $ | (3,128,342 | ) | ||
Adjustments
to reconcile net loss to net cash used
|
||||||||
by
operating activities:
|
||||||||
Depreciation,
depletion and amortization
|
1,249,259 | 729,028 | ||||||
Provisions
for doubtful collection of receivables
|
23,953 | 105,311 | ||||||
Provision
for lease impairments
|
--- | 1,474,000 | ||||||
Accretion
in annual asset retirement obligation
|
12,804 | 11,640 | ||||||
Common
stock issued in consideration for services
|
311,147 | 58,000 | ||||||
Loss
on disposition of asset
|
--- | 573 | ||||||
(Increase)
decrease in accounts receivable
|
96,402 | (509,672 | ) | |||||
(Increase)
decrease in other current assets
|
13,483 | (78,827 | ) | |||||
Increase
(decrease) in accounts payable
|
(209,030 | ) | 381,197 | |||||
Increase
in accruals and other current liabilities
|
533,561 | 211,564 | ||||||
Provision
(benefit) for deferred income taxes
|
||||||||
Net
cash used by operating activities
|
(246,054 | ) | (745,528 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Proved
oil and gas property additions
|
(18,600 | ) | (7,487,803 | ) | ||||
Unproved
oil and gas property additions
|
( 1,160 | ) | (1,944,444 | ) | ||||
Other
property additions
|
(11,211 | ) | (33,701 | ) | ||||
Net
cash used in investing activities
|
(30,971 | ) | (9,465,948 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from the sale of common stock
|
200,000 | 8,969,042 | ||||||
Borrowings
with note payable
|
0 | 800,000 | ||||||
Net
cash provided by financing activities
|
200,000 | 9,769,042 | ||||||
NET
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(77,025 | ) | (442,434 | ) | ||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
82,683 | 525,117 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 5,658 | $ | 82,683 |
Supplemental Disclosure of Cash Flow and Non-cash Investing and Financing Activity: | ||||||||
Income taxes paid | $ | --- | $ | --- | ||||
Interest paid with common stock | $ | 96,000 | $ | --- | ||||
Property
acquisitions paid in common stock
|
$ | 3,069,140 |
“See
Accompanying Notes to the Consolidated Financial Statements”
21
JayHawk
Energy, Inc.
Notes
to the Consolidated Financial Statements
September
30, 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, organizational
infrastructure development, and the acquisition of oil and gas
properties. To date, we have acquired three main properties, the
Uniontown in Kansas, the 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. The
accompanying financial statements as of and for the periods ended September 30,
2009 and 2008 are presented in accordance with generally accepted accounting
principles in the United States of America (“US GAAP”).
Note
2 – Summary of Significant Accounting Policies
Basis of Presentation – The
accompanying financial statements of the Company have been prepared pursuant to
the rules of the Securities and Exchange Commission (the “SEC”). The
financial statements and notes herein are a fair presentation of the Company’s
financial position, results of operations, and cash flows for the periods
presented.
Going Concern – As shown in
the accompanying financial statements, we have incurred operating losses since
inception. As of September 30, 2009, we have limited financial
resources with which to achieve our objectives and obtain profitability and
positive cash flows. Achievement of our objectives will be dependent
upon our ability to obtain additional financing, to locate profitable mineral
properties and generate revenue from our current and planned business
operations, and control costs. We plan to fund our future operation
by joint venturing, obtaining additional financing from investors, and attaining
additional commercial production. However, there is no assurance that
we will be able to achieve these objectives.
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. Management changed, between quarters of the year ending
September 30, 2008, the estimate of the lives of some assets acquired during
this same 12-month period. The change has no effect on the
depreciation computed and reported for the twelve month period.
Income or loss per common share -
Basic income per share is calculated based on the weighted average number
of common shares outstanding. Diluted income per share assumes
exercise of stock options and warrants and conversion of convertible debt and
preferred securities, and preferred securities, provided the effect is not
antidilutive. As each of the two fiscal periods covered by these
financial statements reflect net losses from operations, all of our warrants
have an anti-dilutive effect on per common share amounts.
Revenue Recognition - 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.
Cash equivalents - We consider
all highly liquid debt instruments purchased with maturity of three months or
less to be cash equivalents.
Property, plant and equipment -
JayHawk follows the 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.
22
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
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 (see Note 8).
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 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).
Impairment of Unproved
(Non-Producing) Property - Unproved properties will be assessed
periodically, to determine whether or not they have been impaired. We
provide an impairment allowance on unproved property at any time we determine
that a property will not be developed. At September 30, 2008, we
decided, based on geology and proximity to our pipeline to permit approximately
one-third of the original leases acquired in the Uniontown acquisition of July
25, 2007, to expire without renewal. Accordingly, an allowance for
impairment in the amount of $1,474,000 was made (see Note 4 for further
detail).
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 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. 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 (see specifically, Note
8).
Income Tax and Accounting for
Uncertainty - Income taxes are determined using the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. This is now ASC topic 740. 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.
23
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
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. The guidance
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 assiociated 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).
New Accounting Pronouncements –
In June 2008, the Financial Accounting Standards Board (FASB) Staff
Position EITF 03-6-1, Determining Whether Instruments Granted in Share Based
Payment Transactions are Participating Securities, was issued. Under
FSP 03-6-1, share based payment awards that contain nonforfeitable rights to
dividends, are “participating securities” as defined by EITF 03-6 and therefore
should be included in computing earnings per share using the two-class method
described in SFAS No. 128, Earnings per Share. FSP 03-6-1 is not
expected to have a significant effect on our reported financial position or
earnings.
In
December 2008, the Securities and Exchange Commission (SEC) released Final Rule,
Modernization of Oil and Gas Reporting. The new disclosure
requirements include provisions that permit the use of new technologies to
determine proved reserves if those technologies have been demonstrated
empirically to lead to reliable conclusions about reserve
volumes. The new requirements also will allow companies to disclose
their probable reserves to investors. In addition, the new disclosure
requirements require companies to (a) report the independence and qualifications
of its reserves engineer preparer; (b) file reports when a third party is relied
upon to prepare reserve estimates or conducts a reserve audit, and (c) report
oil and gas reserves using an average price based upon the prior 12 month period
rather than year-end prices. The new disclosure requirements are
effective for financial statements for fiscal years ending on or after December
31, 2009. The effect of adopting this SEC rule has not been
determined, but is not expected to have a significant effect on our reported
financial position or earnings.
In May
2009, the FASB issued ASC 855, Subsequent Events which establishes principles
and requirements for reporting subsequent events. In accordance with
the provisions of ASC 855, the Company currently evaluates subsequent events
through the date of the financial statements.
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets
– an amendment of FASB Statement No. 140. This Statement removes the
concept of a qualifying special purpose entity established in SFAS No. 140 and
removes the exception from applying Interpretation No. 46, Consolidation of
Variable Interest Entities, to qualifying special-purpose
entities. SFAS No. 166 has not yet been codified and in accordance
with ASC 105, remains authoritative guidance until such time that it is
integrated in the FASB ASC. SFAS No. 166 is effective for financial
asset transfers occurring after the beginning of an entity’s first fiscal year
that begins after November 15, 2009, and early adoption is
prohibited. The adoption of this statement will have no material
effect on the Company’s financial condition or results of
operations.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
which amends the consolidation guidance applicable to variable interest
entities. The amendments will significantly affect the overall
consolidation analysis under FASB ASC 810, Consolidation and requires an
enterprise to perform an analysis to determine whether the enterprises variable
interest or interests give it a controlling financial interest in a variable
interest entity. SFAS No. 167 has not yet been codified, and in
accordance with ASC 105, remains authoritative guidance until such time that it
is integrated in the FASB ASC. SFAS No. 167 is effective as of the
beginning of the first fiscal year that begins after November 15, 2009 and early
adoption is prohibited. The adoption of this update will have no
material effect on the Company’s financial position or results of
operations.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
(ASC) and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162, which codified in FASB ASC 105, Generally
Accepted Accounting Principles (ASC 105). ASC 105 establishes that
the Codification as the source of authoritative GAAP in the United States
recognized by the FASB. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. Once
the Codification is in effect, all of its content will carry the same level of
authority and the GAAP authority will be modified to include only two levels of
GAAP, authoritative and non-authoritative. ASC 105 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. We adopted the requirements of ASC 105 in our
quarter ending September 30, 2009. The adoption had no material
effect on the Company’s financial position or earnings.
24
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
In
September 2009, the FASB issued Accounting Standard Update 2009-12, Fair Value
Measurements and Disclosures (Topic 820): Investments in Certain Entities that
Calculate Net Asset Value per Share (or its Equivalent). This update
provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures
– Overall, for the fair value measurement of investments in certain entities
that calculate net asset value per share (or its equivalent). The amendments in
this update are effective for interim and annual periods ending after December
15, 2009. The adoption of this update will have no material effect on
the Company’s financial position or earnings.
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
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, the total of which was
received subsequent to the respective year ends. Specifically, it is
detailed as follows:
Year Ended
September 30,
2009
|
Year Ended
September
30,
2008
|
|||||||
Due
for crude oil delivered in June & July – SemCrude
|
$ | 283,486 | $ | 283,486 | ||||
Less:
Allowance for doubtful collections
|
( 119,763 | ) | ( 95,810 | ) | ||||
Due
for crude oil delivered in September 2009 and 2008
|
109,074 | 181,340 | ||||||
Due
for natural gas delivered in September 2009 and 2008
|
5,954 | 19,356 | ||||||
Due
from joint operating agreement working interests
|
14,756 | 25,490 | ||||||
Total:
|
$ | 293,507 | $ | 413,862 |
The
previous purchaser of our North Dakota crude oil, SemCrude, took delivery of
JayHawk's 2008 June and July production and before compensating the Company
filed a Chapter 11 bankruptcy proceeding. Management believes that
the Company will receive all the proceeds for the July sales but has established
an allowance for 100% of the value of the June deliveries, equivalent to
$119,763, charging bad debt expense for an equal amount. Since August
of 2008 all crude oil production was delivered to a new
purchaser. Proceeds for the September 2009 deliveries, valued at
$109,074, were subsequently received in October 2009. Amounts
receivable for September natural gas deliveries, $5,954 were also received in
October.
Note
4 – Unproved Properties and Impairment
The total of JayHawk's investment in
unproved properties at September 30, 2009 and 2008 consists of the following
capitalized costs respectively:
Name
|
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
||||||
Kansas
Uniontown Project
|
$ | 2,494,479 | $ | 2,494,479 | ||||
Less:
allowance for impairment
|
(1,474,000 | ) | (1,474,000 | ) | ||||
Less:
accumulated amortization
|
(162,734 | ) | ( 64,575 | ) | ||||
Net
investment in Uniontown Project
|
$ | 857,745 | $ | 955,904 | ||||
Kansas
Girard Project
|
$ | 1,651,125 | $ | 1,649,966 | ||||
Less:
accumulated amortization
|
( 243,197 | ) | ( 49,960 | ) | ||||
Net
investment in Girard Project
|
$ | 1,407,928 | $ | 1,600,006 | ||||
Total
Unproved Oil and Gas Properties
|
$ | 2,265,673 | $ | 2,555,910 |
As
discussed in Note 1, Summary of Principle Accounting Polices, we amortize the
lease bonuses paid to acquire specific acreage over the life of the lease,
generally three years, through the lease expiration date.
25
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
Impairment of Uniontown
Project: In addition to amortizing the capitalized lease
costs, JayHawk periodically reviews and assesses its' unproved properties to
determine whether or not they have been impaired. A property is
considered impaired if it will not or cannot be developed. At that
time an allowance is established to revalue the capitalized cost and a provision
of equal amount is provided as an operating expense. Management made
a review of the portfolio of leases acquired in the Uniontown transaction of
July 2007 and decided, based on geology and proximity to our pipeline, to permit
approximately one-third of the original leases acquired to expire without
renewal. Further, given the Company's inability at that time to fund development
of any acreage, justification existed at the time for the creation of an
impairment valuation. The impairment allowance was estimated at
two-thirds, 67 percent, of the original investment.
Note
5 – Proved and Developed Oil & Gas
The
capitalized cost, net of depreciation, depletion and amortization (DD&A) of
the proved oil and gas properties was $6,256,238, at September 30, 2009, and
$6,991,043 at September 30, 2008. These net capitalized costs are
comprised of the following; detailed by property:
September
30,
2009
|
September
30,
2008
|
|||||||
Candak,
North Dakota Properties
|
||||||||
Proved
Reserves
|
$
|
2,357,752
|
$
|
2,357,752
|
||||
Field
Equipment
|
1,200,248
|
1,200,248
|
||||||
Less
accumulated DD&A
|
(1,117,265
|
)
|
(538,042
|
)
|
||||
Net
Capitalized Costs
|
2,440,735
|
3,019,958
|
||||||
Girard,
Kansas Properties
|
||||||||
Field
Equipment
|
796,033
|
634,705
|
||||||
Capitalized
Drilling Costs
|
662,899
|
807,227
|
||||||
Less
accumulated DD&A
|
(76,402
|
)
|
(18,076
|
)
|
||||
Net
Capitalized Costs
|
1,382,530
|
1,423,856
|
||||||
JayHawk
Gas Transportation
|
||||||||
Field
Equipment
|
2,605,870
|
2,604,270
|
||||||
Less
accumulated Depreciation
|
(172,897
|
)
|
(57,041
|
)
|
||||
Net
Capitalized Costs
|
2,432,973
|
2,547,229
|
||||||
Total
Net Proved Oil & Gas Properties
|
$
|
6,256,238
|
$
|
6,991,043
|
Ceiling Test – The Company has
performed ceiling tests to determine that the carrying amounts in our financial
statements do not exceed the net present value of the reserve estimates for the
respective properties, of Candak, North Dakota and Girard,
Kansas. For both properties management determined that the net values
reflected in the financial statements did not exceed the net discounted present
value of the reserves estimated by the independent reserve
engineers.
Note 6 – Other Long-Term Assets –
Other assets consist of various deposits and the unamortized portion of
the discount on the convertible promissory note. Detail is disclosed
in the following table:
September
30,
2009
|
September
30,
2008
|
|||||||
Rental
Security Deposit
|
$ | 1,500 | $ | 1,500 | ||||
Bond
Deposit– State of Kansas
|
3,600 | 1,800 | ||||||
Bond
Deposit – State of North Dakota
|
50,000 | 50,000 | ||||||
Unamortized
Note Discount (see Notes 6 and 9)
|
-- | 194,286 | ||||||
Totals
|
$ | 55,100 | $ | 247,586 |
26
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
Note
7 - Note Payable
On July
30, 2008 JayHawk signed a convertible promissory note in the amount of $800,000
for cash received of an equal amount. The 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. On July
30, 2009, the note was amended to extend the maturity date to July 30,
2010. Accrued interest to that date of $96,000 was converted to
shares of the Company’s restricted common stock, at the rate of $0.25 per
share. Additionally, the Company paid a 5 percent extension fee of
$40,000 to effect this amendment. The total amount of $136,000 was
reflected as a stock issuance obligation as at September 30, 2009 (see Note 9 –
Common Stock, for additional detail on this transaction). Under
the amended agreement interest continues to be accrued at the rate of 12 percent
per annum. The holder of the note has the right, at its sole
discretion, to convert the outstanding principal balance and unpaid accrued
interest to shares of the Company's common stock, at any time at the conversion
price of $1.75.
Under a
separate warrant agreement issued with the original note the holder was
permitted to convert 400,000 warrants, at an exercise price of $2.10 per share,
to shares of the Company’s common stock. In accordance with SFAS 133
(now ASC topic 815) we allocated the proceeds of the note between Notes Payable
and Stockholder’s equity based on the respective fair values as of the original
agreement date. The fair values were determined using the
Black-Scholes option model more fully described in Note 10 – Share Purchase
Warrants. Monthly, over the original life of the note, the
original discount recorded was ratably amortized and charged to expense, as was
an amount sufficient to accrete the note back to the original
$800,000. As at September 30, 2009 the note payable reflects the
original full undiscounted principal and face value of the note.
Note
8 - Asset Retirement Obligation
In the period in which an asset retirement obligation is incurred
or becomes reasonably estimable, JayHawk Energy recognizes the fair value of the
liability if there is a legal obligation to dismantle the asset and reclaim or
remediate the property at the end of its useful life. We estimate the timing of
the asset retirement based on an economic life determined by reference to
similar properties and/or reserve reports. The liability amounts are
based on future retirement cost estimates and incorporate many assumptions such
as expected economic recoveries of oil and gas, time to abandonment, future
inflation rates and the adjusted risk-free rate of interest. When the liability
is initially recorded, the Company capitalizes the cost by increasing the
related property balances. This initial capitalized cost is depreciated or
depleted over the useful life of the asset.
The Company has identified potential
asset retirement obligations at the Girard, Kansas and Candak, North Dakota
operating sites. These retirement obligations are determined based on
the estimated cost to comply with abandonment regulations established by the
Kansas Corporation Commission and the State of North Dakota. The
Company's engineers have estimated the cost, in today's dollars, to comply with
these regulations. These estimates have been projected out to the
anticipated retirement date 15 years in the future, at an assumed inflation rate
of 1.5 percent. The anticipated future cost of remediation efforts in
North Dakota, and Kansas, are $204,685, and $281,547,
respectively. These amounts were discounted back at an assumed
interest rate of 10 percent, to arrive at a net present value of the obligation.
The amount of the annual increase in the obligation is charged to "accretion
expense" and for the period ending September 30, 2009 and 2008, was computed to
be $12,804 and $11,640, respectively.
The
ending balance of the asset retirement obligation at September 30, 2009 is
$140,844. The asset retirement obligation is included in the Balance
Sheet classification "Deferred Credits and Other Liabilities." The
following table summarizes the change in the asset retirement
obligation since the beginning of the fiscal
year ending September 30, 2008:
September
30,
2009
|
September
30,
2008
|
|||||||
Beginning
balance
|
$ | 128,040 | $ | --- | ||||
Liabilities
incurred
|
--- | 116,400 | ||||||
Liabilities
settled
|
--- | --- | ||||||
Accretion
expense
|
12,804 | 11,640 | ||||||
Revision
to estimated cash flows
|
--- | --- | ||||||
Ending
balance
|
$ | 140,844 | $ | 128,040 |
27
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
Note
9 - Common Stock
Issuances and Private
Placements: The following transactions reflect issuances of
shares of the Company’s common stock and are presented by date of completion in
chronological order. Transactions described as private placements
were 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.
Fiscal
Year End September 30, 2009
October 31, 2008 – The Company
issued 25,000 shares valued at $0.67 for consulting services
rendered.
January 12 2009 – The Company
issued 74,575 shares of its common stock to Missouri Gas
Partners. Of this amount 22,225 shares represented the total "Stock
Issuance Obligation" of $47,559 existing at December 31, 2008. This
represented the residual from the June 30, 2008 transaction, wherein JayHawk
agreed to release 25 shares per acre as individual oil and gas mineral leases
were renewed. The remaining 52,350 shares were issued in recognition
of the Company's obligation to issue 25 shares per acre for 2,094 acres in lieu
of lease renewal. These shares were valued at $0.51 per share, the
fair market value of a share on the day the obligation was
recognized.
Also on
January 12, 2009, an additional 51,000 shares were issued to two individual
consultants, in exchange for services provided. These shares
were all valued at $0.41 per share; the fair market value on the date of the
transaction. This approximates the value of the services
provided.
February 5, 2009 - A private
placement of 1,000,000 common shares was completed. The shares were
issued to one private investor in consideration for $200,000 in cash that
was used as working capital. The private placement was completed in
reliance upon that certain exemption from the registration and prospectus
delivery requirements of the Securities Act of 1933, which exemption is
specified by the provisions of Section 4 of that Act.
April 20, 2009 - The Company
issued 85,400 shares of its common stock to three vendors as compensation
for services rendered. These shares were valued at $0.20 per share;
the fair market value on the date of the transaction for two of the vendors, and
at $0.15 per share for the third. This approximated the value of the
services provided.
May 20, 2009 - 40,000 shares
of common stock were issued to one vendor in lieu of cash payment for services
provided. These shares were valued at $0.20 per share; with the fair
value of the aggregate issuance approximating the value of the services
rendered.
June 4, 2009 – 49,800 shares
of common stock were issued to one vendor for services
rendered. These shares were valued at $0.15 per share. The
fair value of the aggregate issuance approximated the value of the services
rendered.
July 30, 2009 – As discussed
in Note 6, on July 30, 2009 the Note Payable in the amount of $800,000
matured. A stock issuance obligation to the note holder was created
for the accrued interest of $96,000 and a fee, of $40,000, for extending the
date for payment of the principal amount. The total $136,000 was
recorded as a stock issuance obligation at September 30, 2009. The
number of shares of common stock applicable to the issuance obligation was
computed by converting the $136,000 obligation at a $0.25 per share,
representing 544,000 of common stock. These shares were actually
issued on November 16, 2009 (see Note 14, Subsequent Events).
July 31, 2009 - The Company
issued 49,800 shares of its common stock to two vendors as compensation for
services rendered. These shares were valued at $0.20 per share; the
fair market value on the date of the transaction for each of the
vendors.
August 4, 2009 - The Company
issued 203,625 shares to a vendor for settlement of past due
obligations. These shares were also valued at $0.20 per share to
approximate the value of the services previously provided.
September 3, 2009 – The
Company issued 30,000 shares of its common stock, valued at $0.39 to a vendor
for services rendered.
28
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
Fiscal
Year End September 30, 2008
January 16, 2008 - The Company
completed a private placement valued at approximately $4 million, selling
2,666,667 Units, comprised of (a) one share of common stock, $.001par value per
share, and (b) one warrant, granting the holder the right to purchase one share
of Registrant's common stock at a purchase price of $1.60. Each unit
was sold for $1.50 and the warrants have expired, having had a one year from the
date of the subscription expiration date. This private placement was
done concurrent with the acquisition of the Candak, North Dakota properties and
the funds received were used for consideration given in the
exchange.
March 13, 2008 - The Company
issued 50,000 shares valued at $2.20 per share for services
rendered.
March 31, 2008 - In
consideration for the acreage and assets acquired from Galaxy Energy, Inc., the
Registrant paid $1 million in cash and issued 1,024,727 shares of common
stock. These shares were valued at $2.27. Simultaneously
with this transaction a stock issuance obligation was recognized, for the
issuance of 900,000 shares of our common stock, representing the exercise of
certain warrants to purchase shares of common stock at an exercise price of
$1.00 per share (see Note 10). The proceeds of this warrant exercise
of $900,000 was used to close the purchase of the Galaxy assets. The
900,000 shares were physically issued April 16, 2008.
April 15, 2008 - The Company
issued 599,939 shares to shareholders who exercised an equivalent number of
warrants at an exercise price of $1.00 per share (see Note 10). The
proceeds of this warrant exercise were used for general working
capital.
May 05, 2008 - JayHawk issued
25,000 shares of its common stock to a consultant in exchange for services
provided. The shares were valued at $2.32 as of the date of the
agreement.
May 07, 2008 - The Company
issued 50,000 shares of its common stock to Titan West Energy, Inc. for the
acquisition certain oil and natural gas rights and interests in other related
operating assets. These shares were valued at $2.28 per
share.
May 09, 2008 - We issued
399,962 shares of our common stock to a shareholder who exercised certain
warrants to purchase shares at an exercise price of $1.00 per
share. We used the proceeds for working capital.
June 30, 2008 - The Company
recorded a stock issuance obligation to Missouri Gas Partners for 234,200 shares
of common stock, computed at 25 shares per acre for 9,368 acres of oil, gas and
mineral leases. These shares were to be physically issued as the
individual leases were renewed by Missouri Gas Partners. The shares were valued
at $2.22 per share and a stock issuance obligation was recorded in the amount of
$519,011.
July 03, 2008 - The Company
physically issued 211,975 shares of common stock to Missouri Gas Partners for
renewal of oil, gas and mineral leases covering 8,479 acres at 25 shares per
acre. The stock issuance obligation was reduced by a corresponding
$471,452, representing the 211,975 shares valued at the $2.22 per share used in
computing the original obligation. At September 30, 2008, the
remaining stock issuance obligation is $47,559.
Note
10 - Share Purchase Warrants
When
warrants to purchase common stock at a specified exercise price are sold the
proceeds received are allocated between the value of the stock and the value of
the warrants. To make this allocation we use the Black-Scholes option
pricing model. This is a subjective exercise involving the use of
various estimates, including the risk-free interest rate, the option or contract
life, and the expected volatility of the underlying security.
In
conjunction with the issuance of the $800,000 note payable, described in Note 7,
the Company issued the holder of the note a warrant agreement whereby, for a
period of two years (expiring July 30, 2010) the holder could convert the note
principal amount to shares of the Company’s common stock at an exercise price of
$2.10 per share, equivalent to 382,952 shares. Accounting Standards
Codification (ASC) Topics 480 and 815 prescribe accounting for
warrants. It was determined that these warrants were not derivatives,
but were indexed in the Company’s own stock, freestanding, and would be
classified in stockholder’s equity. We assigned a fair value to these
warrants of $327,962 based on the Black-Scholes option model assuming a
risk-free interest rate of 4.14 percent and a volatility of 99.34
percent.
29
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
Note
11 – Loss per Common Share
We follow
ASC 260, Earnings Per Share which requires the reporting of basic and diluted
earnings/loss per share. We calculate basic loss per share by
dividing the 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 periods ending September 30, 2009 and 2008 the weighted average number of
shares was 43,699,043and 40,266,335, respectively. Additionally, all
of our outstanding warrants have an anti-dilutive effect on our per common share
amounts.
Note 12
- Related Party Transactions
On July
1, 2008, we subleased office space for $1,500 per month from Marlin Property
Management, LLC an entity owned by the spouse of our CEO. 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. In April 2009, the Company
renegotiated the monthly payment to $1,000 per month.
Note
13 - Income Tax
The
Company follows the guidance of Topic 740, Income Taxes, to account for income
taxes, which requires the establishment of deferred tax assets and liabilities
for the recognition of future deductions or taxable amounts and operating loss
and tax credit carry forwards. Deferred federal income tax expense or benefit is
recognized as a result of the change in the deferred tax asset or liability
during the year using the currently enacted tax laws and rates that apply t4o
the period in which they are expected to affect taxable income. Valuation
allowances are established, if necessary, to reduce deferred tax assets to the
amounts that will more likely than not be realized. Additionally, the
Company follows the guidance provided by ASC Topic 740 which recognizes that the
ultimate deductibility of positions taken or expected to be taken on a tax
return is often uncertain. It provides guidance on when tax positions
claimed by an entity can be recognized (See Note 2, Summary of Significant
Accounting Policies – Income Tax Accounting for Uncertainty).
The
Company's provision for income taxes reflects the U.S. federal income taxes
calculated at the minimum federal corporate statutory rate of 15%, U.S. state
taxes calculated at the statutory rate of 4.15% net of any federal income tax
benefit calculated at their combined rates of 19.15% net of any U.S. federal
income tax benefits. These rates are our effective tax rates.
At
September 30, 2009, we have available for federal income tax purposes a net
operating loss carry-forward of approximately $3,019,849, expiring at various
times from 2025 through 2028 that may be used to offset future taxable income.
Therefore, we have provided no provision for income tax. The
computation and reconciliation with the operating losses from inception is
disclosed in the following table for the fiscal years ending September 30, 2007,
2008, and 2009:
2007
|
2008
|
2009 | Cumulative | |||||||||||||
Net
operating loss before taxes
|
$ | (257,713 | ) | $ | (3,128,342 | ) | $ | (2,277,632 | ) | $ | (5,663,687 | ) | ||||
Add
back temporary differences:
|
||||||||||||||||
Allowance
for impairment
|
--- | 1,474,000 | --- | 1,474,000 | ||||||||||||
Excess
depreciation and amortization
|
--- | 129,106 | 370,776 | 499,882 | ||||||||||||
Expenses
not deducted currently
|
--- | --- | 102,804 | 102,804 | ||||||||||||
Add
back permanent differences:
|
||||||||||||||||
Accretion
& amortization of note discount
|
--- | --- | 522,248 | 522,248 | ||||||||||||
Other
|
40,000 | 4,154 | 750 | 44,904 | ||||||||||||
Net
operating loss to carry-forward
|
$ | (217,713 | ) | $ | (1,521,082 | ) | $ | (1,281,054 | ) | $ | (3,019,849 | ) |
30
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
Deferred
tax assets have been recognized for this net operating loss carry-forward of
approximately $578,300 at September 30, 2009. This has been
calculated using effective tax rates of 4.15% and 15% for State and Federal
(total 19.15%). We have not recorded a benefit from our net operating loss
carryforward because realization of the benefit is uncertain and, therefore, a
valuation allowance of $578,300 has been provided for the deferred tax
assets. The following table reports our carry forward by year and the related
deferred tax assets by year from April 5, 2004 (inception) through September 30,
2008:
Tax
Year End
|
NOL
Carry-forward
|
Deferred
Tax
Asset
|
||||||
September
30, 2006 (from inception)
|
$ | 32,433 | $ | 6,211 | ||||
September
30, 2007
|
185,280 | 35,481 | ||||||
September
30, 2008
|
1,521,082 | 291,287 | ||||||
September
30, 2009
|
1,281,054 | 245,321 | ||||||
Total
Available
|
$ | 3,019,849 | $ | 578,300 | ||||
Less: Valuation Allowance | (578,300) | |||||||
Net Deferred Tax Asset | $ | --- |
The Company analyzed its tax positions
taken on it Federal and State tax returns for the open tax years ending
September 30, 2007, 2008 and 2009. Based on our analysis, the Company
determined that there are no uncertain tax positions and that the Company should
prevail upon examination by the taxing authorities.
Note
14 - Subsequent Events
On
October 2, 2009 the Company issued 30,000 shares of its common stock in exchange
for consulting services. Again, this same consultant was issued
another 30,000 shares on November 1, 2009 in exchange for services
rendered.
The
Company made payments of $22,500 on November 3, 2009 and $20,000, on November 5,
2009 in settlement of the L&S Well Service breach of contract
claim.
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 and more fully
discussed in Note 7, concerning the Note Payable and Note 8, Common Stock (July
30, 2009).
The
Company received two payments of $62,500 each, on the first of November and
December 2009 from DKTED in payment for the right to receive a 42.5 percent
working interest in the Girard, Kansas gas properties and
assets. DKTED still has the obligation verify the fulfillment of the
work and spending commitment of $300,000 on workover activities in Girard,
Kansas before this interest is earned.
On
November 20, 2009 the Company filed a Registration Statement on Form S-8 with
the Securities and Exchange Commission to register 4,000,000 shares issuable
under the Company’s 2009 Stock Incentive Plan for employees, contractors and
consultants of the Company for services rendered to the Company.
On
December 9, 2009 the Company entered into a Securities Purchase Agreement
wherein the company agreed to sell and investors agreed to purchase up to $1.5
million of Convertible Debentures. The aggregate $1.5 million will be
invested in stages. Funds from the initial tranche, received on
December 14, 2009, total $300,000. The Convertible Debentures provide
for interest to be paid quarterly, at the rate of 10 percent per annum, and are
due two years from the date of the initial closing (December 9,
2009).
Subsequent
events have been evaluated through December 17, 2009, the date that the
consolidated financial statements were available to be issued.
31
Note
15 – Commitments and Contingencies
There is
no pending litigation or proceeding involving any director or officer of the
Company for which indemnification is being sought. On July 1, 2008,
we leased our office space for a period of three years for a fixed monthly
rental of $1,500. In March of 2009 the lease was renegotiated and the
monthly rental amount reduced to $1,000. Accordingly, our commitment
to make these lease payments for the years ending September 30, 2010 and 2011,
is $12,000 and $6,000, respectively.
During
the 4th
quarter of the year ending September 30, 2009 the Company completed a signed
letter agreement with DK True Energy Development Limited ("DKTED”) which allows
DKTED to earn up to an 85% working interest in JayHawk's Coal Bed Methane
("CBM") project in southeast Kansas (the Girard project). The
“Primary Program” permits DKTED complete its participation and working interest
at 42.5 percent after paying the Company $250, 000 and spending $300,000 on
workovers of existing wells during the first year. As at September
30, 2009, DKTED had paid JayHawk $125,000 of the initial $250,000 cash payment
obligation. Subsequently (see Note 14, Subsequent Events) DKTED paid
the Company the remaining $125,000 of the initial $250,000 cash payment
obligation. Upon presenting evidence of having performed the work and
spent the $300,000 in the initial workover budget, the Company will be committed
to transfer to DKTED a 42.5 percent working interest in the Girard, Kansas
assets and operations.
On
September 1, 2009 the Company hired its current President. Terms of
employment include a bonus of two percent of the amounts received from each
tranche of the Convertible Debentures, described above in Note 14, Subsequent
Events, and a stock option award of 400,000 shares of the Company’s common stock
at such time as the Company can issue such options, and which will vest over a
three year period.
32
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
SUPPLEMENTARY
OIL AND GAS DISCLOSURES
The
following unaudited information regarding the Company’s oil and natural gas
activities and reserves is presented pursuant to the disclosure requirements
promulgated by the Securities Exchange Commission (SEC) and the FASB, and
includes (I) costs incurred, capitalized costs and results of operations
relating to oil and gas activities, (II) net proved oil and gas reserves, and
(3) a standardized measure of discounted future net cash flows relating to
proved oil and gas reserves, including reconciliation of changes
therein.
I
- COSTS INCURRED, CAPITALIZED COSTS, AND RESULTS OF OPERATIONS
RELATING
TO OIL AND GAS OPERATIONS (UNAUDITED)
Costs
Incurred in Oil and Gas Producing Activities (in $000’s)
Costs incurred in oil and natural gas
property acquisitions, exploration and development are summarized as follows, in
$000’s:
|
12
Months End
September
30,
|
|||||||
2009
|
2008
|
|||||||
Property
acquisitions
|
||||||||
Unproved
properties
|
$ | --- | $ | 1,944 | ||||
Proved
properties (includes wells, equipment and
|
||||||||
related
facilities acquired with proved reserves)
|
--- | 6,161 | ||||||
Exploration
|
--- | --- | ||||||
Production
and development capital expenditures
|
--- | 1,327 |
Capitalized
Costs Relating to Oil and Gas Producing Activities
Evaluated
and unevaluated capitalized costs related to JayHawk’s oil and natural gas
producing activities are summarized as follow in $000’s.
12
Months End
September
30,
|
||||||||
2009
|
2008
|
|||||||
Unproved
Properties
|
$ | 4,145 | $ | 4,144 | ||||
Proved
Properties
|
2,358 | 2,358 | ||||||
Wells,
equipment and related facilities
|
5,265 | 5,246 | ||||||
Total
capitalized costs
|
$ | 11,768 | $ | 11,748 | ||||
Less:
Allowance for depreciation, depletion, amortization and lease
impairment
|
(3,246 | ) | (2,202 | ) | ||||
Net
capitalized costs
|
$ | 8,522 | $ | 9,546 |
We will continue to evaluate our
unevaluated properties; however, the timing of the ultimate evaluation and
disposition of the properties has not been determined.
Results
of Operations for Oil and Gas Producing Activities
The
results of operations shown below exclude non-oil and gas producing activities,
corporate overhead items, interest expense and other income, expense, gains and
losses. Therefore, these results are on a different basis than
results of operations reported upon in the consolidated statement of
operations.
All
operations were conducted in the United States. The Company produces
crude oil in North Dakota and natural gas in southeast
Kansas. Because of limited funding, exploration activities were not
conducted during the years ended September 30, 2009 and 2008:
33
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
Results
of Operations for Oil and Gas Producing Activities – (continued)
|
Year
Ended
September
30,
|
|||||||
2009 | 2008 | |||||||
Operating revenue | $ | 588,410 | $ | 1,199,837 | ||||
Costs and expenses | ||||||||
Exploration expenses | --- | --- | ||||||
Production
expenses
|
399,145 | 507,241 | ||||||
General
and administrative expenses
|
30,000 | 333,319 | ||||||
Depreciation,
depletion and amortization
|
1,044,803 | 727,693 | ||||||
Total
costs and expenses
|
$ | 1,473,948 | $ | 1,568,253 | ||||
Results
of operations before income taxes
|
$ | (885,538 | ) | $ | (368,416 | ) | ||
Provision
for income taxes
|
--- | --- | ||||||
Net
results of operations
|
$ | (885,538 | ) | $ | (368,416 | ) |
II
– OIL AND GAS RESERVE QUANTITIES (UNAUDITED)
The
Company’s oil and gas reserves are calculated in accordance with SEC standards
and definitions as set forth in Rule 4-10 of Regulation S-X. Proved
developed reserves are defined as estimated quantities of oil, natural gas and
natural gas liquids which upon analysis of geological and engineering data,
appear with reasonable certainty to be recoverable in the future from
known oil and gas reservoirs under existing economic and operating
conditions. Proved undeveloped reserves are those reserves which can
be expected to be recovered from new wells with existing equipment and operating
methods.
The
Company’s reserve estimation and reporting process involves an annual
independent third party reserve determination and appraisal. The
reserve estimates reported below are determined independently by the consulting
firm of McDaniel & Associates Consultants, Ltd. and are consistent with
internal estimates. The Company provided McDaniel & Associates
with engineering, geological and geophysical data, actual production histories
and other information necessary for the reserve determination. The
reserve estimates were prepared based on economic and operating conditions
existing at September 30, 2009 and 2008.
All of
JayHawk Energy’s oil and gas reserves are within the continental United States
in the states of North Dakota and Kansas. Based on the evaluation
described in the preceding paragraph, presented below (in barrels) is a summary
of changes to the Company’s net interest in proved developed and proved
undeveloped reserves for the years ending September 30, 2009 and
2008:
|
Proved
Developed
|
Proved
Undeveloped
|
Total
Proved
Reserves
|
|||||||||
At September 30, 2007 | --- | --- | --- | |||||||||
Revisions of previous estimates | ||||||||||||
Purchases
of minerals in place
|
79,700 | --- | 79,700 | |||||||||
Production
|
(13,000 | ) | --- | (13,000 | ) | |||||||
At
September 30, 2008
|
66,700 | --- | 66,700 | |||||||||
Revisions
of previous estimates
|
6,560 | 88,500 | 95,060 | |||||||||
Purchases
of minerals in place
|
--- | --- | --- | |||||||||
Production
|
(12,860 | ) | --- | (12,860 | ) | |||||||
At
September 30, 2009
|
60,400 | 88,500 | 148,900 |
34
JayHawk
Energy, Inc.
Notes
to Consolidated Financial Statements – (Continued)
III
– STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING
TO PROVED OIL AND GAS RESERVES (UNAUDITED)
Future
net cash flows are calculated by applying year-end oil and gas prices (adjusted
for price changes provided by contractual arrangements) to estimated future
production of proved oil and gas reserves, less estimated future development and
production costs, which are based on year-end costs and existing economic
assumptions. The discounted future net cash flow estimates do not
include exploration expenses, interest expense or corporate general and
administrative expenses. The selling prices of crude oil and natural
gas are highly volatile. The year-end prices, which are required to
be used for the discounted future net cash flows may not be representative of
future selling price. For the fiscal year September 30, 2010 the
discounted net cash flow estimates will use selling price estimates based on the
average selling price of the prior twelve months (this year ending September 30,
2009, as discussed under the topic “New Accounting
Pronouncements”. The following table presents the estimated future
cash flows related to the Company’s proved oil reserves.
Reserves
In
Barrels
|
Present
Value of
Future
Cash Flows
|
|||||||
Proved
developed reserves
|
60,400 | $ | 1,666,000 | |||||
Proved
undeveloped reserves
|
88,500 | 1,338,000 | ||||||
Total
proved reserves
|
148,900 | $ | 3,004,000 |
35
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
We
engaged Meyers Norris Penny LLP as our independent auditors, effective as of
November 28, 2007, to audit our financial statements for the year ended
September 30, 2008, and to perform procedures related to the financial
statements included in our current reports on Form 8-K and quarterly reports on
Form 10-QSB. On October 7, 2009 the Company’s board of directors
approved terminating the services of Meyers Norris Penny LLP of
Calgary, Canada and approved the appointment of BehlerMick PS of
Spokane, Washington, as the Company’s new independent,
registered, certifying public accounting firm.
For each
of the years ended September 30, 2007 and 2008, the opinions expressed by Meyers
Norris Penny, LLP contained an explanatory paragraph relating to our ability to
continue as a going concern. Other than this report modification, the reports on
our financial statements of Meyers Norris Penny, LLP for each of the
past two fiscal years did not contain any adverse opinion or disclaimer of
opinion, and were not modified as to uncertainty, audit scope, or accounting
principles.
During
our two most recent fiscal years and the subsequent interim period through
October 7, 2009, the date of dismissal, there were no disagreements with Meyers
Norris Penny LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of Meyers Norris Penny LLP, would have caused it to make
reference to the subject matter in connection with its reports. There were no
“reportable events” as that term is described in Item 304(a)(1)(v) of
Regulation S-K during our two most recent fiscal years and the subsequent
interim period through October 7, 2009, the date of dismissal.
Other
than in connection with the engagement of BehlerMick PS by us, during our most
recent fiscal year, and the subsequent interim period prior to October 7, 2009,
we did not consult BehlerMick PS regarding either: (i) the application of
accounting principles to a specified transaction, completed or proposed, or the
type of audit opinion that might be rendered on our financial statements, or
(ii) any matter that was either the subject of a disagreement as defined in
Item 304(a)(1)(iv) of Regulation S-B or the related instructions thereto or
a “reportable event” as described in Item 304(a)(1)(v) of Regulation
S-K.
36
ITEM
9A. CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
In
connection with the preparation of this annual report on Form 10-K, an
evaluation was carried out by JayHawk’s management, with the participation of
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(“Exchange Act”)) as of September 30, 2009. Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC rules and
forms and that such information is accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, to allow
timely decisions regarding required disclosures.
Based on
that evaluation, JayHawk’s management concluded, as of the end of the period
covered by this report, that the Company’s disclosure controls and procedures
were not effective in recording, processing, summarizing, and reporting
information required to be disclosed, within the time periods specified in the
Securities and Exchange Commission’s rules and forms.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management
of JayHawk Energy, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal
control over financial reporting is a process, under the supervision of the
Chief Executive Officer and the Chief Financial Officer, designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external purposes in
accordance with United States generally accepted accounting principles
(GAAP). Internal control over financial reporting includes those
policies and procedures that:
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the Company’s
assets;
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures are
being made only in accordance with authorizations of management and the
Board of Directors; and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
The
Company’s management conducted an assessment of the effectiveness of the
Company’s internal control over financial reporting as of September 30, 2009,
based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). As a result of this assessment,
management identified a material weakness in internal control over financial
reporting.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The
material weakness identified is described below.
Communication
failures between individuals executing transactions and individuals accounting
for transactions led to the identification of certain required disclosures to
the financial statements. Additionally, due to insufficient staffing, it was not
possible to ensure appropriate segregation of duties between incompatible
functions, and formalized monitoring procedures have not been established or
implemented.
As a
result of the material weakness in internal control over financial reporting
described above, the Company’s management has concluded that, as of September
30, 2009, the Company’s internal control over financial reporting was not
effective based on the criteria in Internal Control – Integrated Framework
issued by COSO.
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. We were not required to have, nor have we, engaged our
independent registered public accounting firm to perform an audit of internal
control over financial reporting pursuant to the rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.
37
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of the
end of the period covered by this report, there have been no changes in internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act) during the quarter ended September 30, 2009, that materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM
9B – OTHER INFORMATION
None.
38
PART III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS.
DIRECTORS
AND EXECUTIVE OFFICERS
Name
|
Age
|
Position
|
||
Lindsay
E. Gorrill
|
47
|
Chief
Executive Officer and Director
|
||
Thomas
G. Ryman
|
61
|
Chief
Financial Officer
|
||
Marshall
D. Goldberg
|
55
|
President,
Director & Chairman of Reserve Reporting
|
||
Mathew
J. Wayrynen
|
46
|
Chairman
of the Board and of Compensation Committee
|
||
Jeffrey
W. Bright
|
44
|
Director,
Chairman of Nominating Committee
|
||
Tyrone
Docherty
|
49
|
Director,
Chairman of Audit Committee
|
Directors
are elected to serve until the next annual meeting of stockholders and until
their successors are elected and qualified. Directors are compensated
at the rates of $8,000 per year. The Chairmen of the Audit Committee
is compensated an additional $4,000 per year. Each other committee
chairman is compensated an additional $2,000 per year. Officers are
elected by the Board of Directors and serve until their successors are appointed
by the Board of Directors. Biographical resumes of each officer and director are
set forth below.
Lindsay
E. Gorrill - CEO
Mr.
Lindsay Gorrill is a C.A. and has university degrees in Finance and Marketing.
Mr. Gorrill has a background in acquisitions, company building, financial
markets and world exposure. Previously he was the president and CEO of Berkley
resources, an oil and gas company based in Vancouver, BC. Mr. Gorrill has 18
years experience in the resource sector and 15 years experience in successful
international company building.
Thomas
G. Ryman - Chief Financial Officer
Mr. Ryman
was appointed Chief Financial Officer on September 30, 2008, subsequent to the
resignation of Mr. Joseph Young, our previous Chief Financial
Officer. Mr. Ryman is a Certified Public Accountant with over 20
years experience in the financial reporting and management functions, formerly
serving with Aviation Group, Inc., as Controller, and Cities Service Oil
Company, as International Controller. Mr. Ryman served as an auditor
with Arthur Andersen & Co. after earning his BS in Accounting from the
University of Baltimore.
Mathew
J. Wayrynen - Director
Mr.
Wayrynen was appointed to the Board of Directors on April 30,
2008. Mr. Wayrynen is a citizen of Canada. He also serves
as a director of Quinto Technology (since 2002), as a director of Avino Silver
& Gold Mines, Ltd. (since 2004) and as CEO of Berkley Resources, Inc. (since
2003). Prior to these positions Mr. Wayrynen was a broker with Golden
Capital Securities, located in Vancouver, British Columbia. Mr.
Wayrynen is not an officer or director of any other U.S. reporting
company.
Tyrone
Docherty - Director
Mr.
Docherty was appointed to the Board of Directors on July 10,
2008. Mr. Docherty is a citizen of Canada and is presently the CEO
and a director of Golden Odyssey Mining. Prior to this position he
was president and CEO of Quinto Mining Corporation from June 1977 to June
2008.
39
Jeffrey
W. Bright - Director
Mr.
Bright was appointed to the Board of Directors on April 30, 2008. Mr.
Bright is a citizen of Canada. Mr. Bright has worked as an attorney
since 2003, with the firm of Gowling, Lafleur, & Henderson, LLP, located in
Calgary Alberta, Canada. He is a member of the Association of
International Petroleum Negotiators, the Canadian Association of Petroleum
Producers, and the Canadian and American Bar Associations. Mr. Bright
is not an officer or director of any other U.S. reporting entity.
Marshall
D-Goldberg – President and Director
Mr.
Goldberg was appointed to the Board of Directors on July 29,
2008. Mr. Goldberg is a citizen of Canada. He has been
employed as a geologist and consultant providing related services in Calgary,
Alberta, Canada since 1980. Since 1997, Mr. Goldberg has been the
President of Marlin Consulting Corporation (not to be confused with Marlin
Property Management) providing services to oil and gas companies. Mr.
Goldberg is a member of the Canadian and American Societies of Professional
Geologists, as well as the Association of Professional Engineers, Geologists and
Geophysicists of Alberta.
COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section
16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Commission initial reports of ownership and reports of changes in ownership
of the Company's Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
the Commission's regulations to furnish the Company with copies of all Section
16(a) forms they filed.
We have
been provided with copies of all forms (3, 4 and 5) filed by officers,
directors, or ten percent shareholders within three days of such filings. Based
on our review of such forms that we received, or written representations from
reporting persons that no Forms 5s were required for such persons, we believe
that, during all prior fiscal periods, all Section 16(a) filing requirements
have been satisfied on a timely basis for members of the Board of Directors and
Executive Officers.
Code
of Ethics
Our Board
of Directors has adopted a Code of Business Conduct and Ethics Compliance
Program and an Insider Trading Policy providing guidelines with respect to
transactions in Company securities and is applicable to all directors, officers,
employees and consultants who receive or have accesses to material non-public
Company information.
Corporate
Governance
On June
30, 2008 JayHawk established an audit committee of its Board of Directors,
appointed Mr. Don Siemens as its Chairman, and adopted a "Code of Ethics" to
promote honest and ethical conduct, proper disclosure of financial information
and compliance with applicable laws, rules and regulations by all of the
Company's employees and members of the board of directors. On June
15, 2009 the Company accepted the resignation Mr. Siemens. This was
not the result of any disagreement as to policy, practices, or
procedures. Simultaneously with the resignation of Mr. Siemens the
Company appointed Mr. Tyrone Docherty to the board of directors and Chairman of
the Audit Committee.
ITEM 11. EXECUTIVE
COMPENSATION.
During
the 12 months ending September 30, 2009 none of our executive officers earned
more than $100,000. Each individual's total compensation consisted
only of cash paid as salary or as a monthly fee to an independent
contractor. The following amounts were paid to the respective
individuals.
Lindsay
E. Gorrill
|
Chief
Executive Officer
|
$90,000
|
Thomas
G. Ryman
|
Chief
Financial Officer
|
$79,000
|
Employment
Agreements with Executive Officers
The Company’s president, Mr. Marshall
Goldberg entered into an employment agreement with the company to be compensated
initially at a rate of $5,000 per month, increasing to $8,000 per month upon
completion of the $1.5 million funding under the Securities Purchase Agreement
dated December 11, 2009 disclosed in Note 14, Subsequent
Events. Additionally, he will receive 2 percent of the funds received
with each tranche of the aggregate $1.5 million, and a stock option award of
400,000 shares of the Company’s common stock at such time the Company can issue
such options (also see Note 15, Commitments and Contingencies).
40
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information regarding beneficial ownership of
our common stock as of September 30, 2009:
· by each
person who is known by us to beneficially own more than 5% of our common
stock;
· by each of
our officers and directors; and
· by all of
our officers and directors as a group.
|
TITLE OF |
NUMBER
OF
|
PERCENTAGE
OF
|
||||
NAME
AND ADDRESS OF OWNER
|
CLASS
|
SHARES
OWNED
(1)
|
CLASS
(2)
|
||||
Lindsay
E. Gorrill
370
Interlocken Blvd Suite 400
Broomfield,
CO 800021
|
Common
Stock
|
4,000,000
|
9.0%
|
||||
Marshall
Diamond Goldberg
Box
34 Site 5 RR2
Okotoks,
Alberta T1S 1A2
|
Common
Stock
|
49,800
|
0.1%
|
||||
|
|||||||
All
Officers and Directors
|
Common
Stock
|
4,049,800
|
9.1%
|
||||
|
|||||||
(1) Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of September 30, 2009 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. | |||||||
(2) Percentage based on 44,509,496 shares of common stock outstanding as of September 30, 2009. |
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since the
beginning of our prior fiscal year, there have been no transactions, or proposed
transactions, which have materially affected or will materially affect us in
which any director, executive officer or beneficial holder of more than 10% of
the outstanding common stock, or any of their respective relatives, spouses,
associates or affiliates, has had or will have any direct or material indirect
interest. We have no policy regarding entering into transactions with affiliated
parties.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit
Fees
The
aggregate fees billed by our predecessor auditors, for professional services
rendered for the audit of the Company's annual financial statements for the
years ended September 30, 2009 and 2008, and for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-QSB during the
fiscal years were $93,009 and $85,918, respectively. These amounts do
not include any fees billed by our current auditors, BehlerMick.
All
Other Fees
No other
fees have been billed in the last two years for products and services provided
by the principal accountant other than the services reported pursuant to the
above portions of this Item 14.
Our board
of directors acts as the audit committee and had no “pre-approval policies and
procedures” in effect for the auditors’ engagement for the audit years 2009 and
2008.
41
PART
IV
ITEM
15. EXHIBITS.
Exhibit
No.
|
Description
|
3.1
|
Articles
of Incorporation, filed as an exhibit to the registration statement on
Form SB-2 filed with the Securities and Exchange Commission (the
"Commission") on December 7, 2004, and incorporated herein by
reference.
|
3.2
|
Certificate
of Amendment to Articles of Incorporation, filed as an exhibit to the 8-K
filed with the Commission on June 25, 2007, and incorporated herein by
reference.
|
3.3
|
Bylaws,
filed as an exhibit to the registration statement on Form SB-2 filed with
the Commission on December 7, 2004, and incorporated herein by
reference.
|
10.1
|
Promissory
Note of April 12, 2007 with Berrigan Portfolio, Inc., filed as an exhibit
to the 8-K filed with the Commission on April 17, 2007, and incorporated
herein by reference.
|
10.2
|
Asset
Purchase and Sale agreement of July 25, 2007 with Armstrong Investments,
Inc., filed as an exhibit to the 8-K filed with the Commission on July 26,
2007, and incorporated herein by
reference.
|
10.3
|
Form
of Warrant Agreement of July 25, 2007 with Armstrong Investments, Inc. and
Berrigan Portfolio, Inc., filed as an exhibit to the 8-K filed with the
Commission on July 26, 2007, and incorporated herein by
reference.
|
31.1
|
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
amended
|
31.2
|
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
amended
|
32.1
|
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)
|
42
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
JAYHAWK ENERGY, INC. | |||
Date: December
17, 2009
|
By:
|
/s/ LINDSAY E. GORRILL | |
Lindsay
E. Gorrill
Chief
Executive Officer, President, and Chairman of the
Board
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name
|
Position
|
Date
|
||
By:
/s/ LINDSAY E. GORRILL
|
Chief
Executive Officer and Chairman of the Board
|
December
17, 2009
|
||
Lindsay
E. Gorrill
|
||||
By:
/s/ MARSHALL
DIAMOND GOLDBERG
|
President
|
December
17, 2009
|
||
Marshall
Diamond Goldberg
|
||||
By:
/s/ THOMAS G. RYMAN
|
Chief
Financial Officer
|
December
17, 2009
|
||
Thomas
G. Ryman
|
Directors: