Attached files
file | filename |
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EX-32.1 - CERTIFICATION CEO - Jayhawk Energy, Inc. | ex32-1.htm |
EX-31.1 - CERTIFICATION CEO - Jayhawk Energy, Inc. | ex31-1.htm |
EX-31.2 - CERTIFICATION CFO - Jayhawk Energy, Inc. | ex31-2.htm |
EX-32.2 - CERTIFICATION CFO - Jayhawk Energy, Inc. | ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECMBER 31,
2009
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from to
Commission
File Number: 000-53311
JayHawk Energy,
Inc.
(Exact
name of small business issuer as specified in its charter)
Colorado
|
20-0990109
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer
Identification
No.)
|
6240 E. Seltice Way, Suite C, Post Falls, Idaho
83854
|
(Address
of principal executive offices)
|
(208) 667-1328
|
(Issuer’s
Telephone Number)
|
Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. x Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated file, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer (Do not check if a smaller reporting company)
|
o
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes x No
APPLICABLE
ONLY TO CORPORATE ISSUERS
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practical date. As of February 11, 2010, there were
47,224,884 shares of the issuer's $.001 par value common stock issued and
outstanding.
1
JAYHAWK
ENERGY, INC.
Quarterly
Report on Form 10-QSB for the
Quarterly
Period Ending December 31, 2009
TABLE OF
CONTENTS
PART
I. FINANCIAL INFORMATION
|
|
Item
1. Financial Statements
|
|
Balance Sheets:
|
|
December
31, 2009 (Unaudited) and September 30, 2009
|
3
|
Statements
of Operations:
|
|
Three Months Ended December 31, 2009 and 2008
(Unaudited)
|
4
|
Statements of Cash Flows:
|
|
Three Months Ended December 31, 2009 and 2008
(Unaudited)
|
5
|
Notes
to Unaudited Financial Statements:
|
|
December 31, 2009
|
6
|
Item
2. Management Discussion and Analysis
|
11
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
12
|
Item
4. Controls and Procedures
|
12
|
PART
II. OTHER INFORMATION
|
|
Item
1. Legal Proceedings
|
13
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
13
|
Item
3. Defaults Upon Senior Securities
|
13
|
Item
4. Submission of Matters to a Vote of Security Holders
|
13
|
Item
5. Other Information
|
13
|
Item
6. Exhibits
|
13
|
Exhibit
31.1 and Exhibit 31.2
|
Attached
|
Exhibit 32.1 and Exhibit 32.2
|
Attached
|
Signatures
|
14
|
2
PART
I - FINANCIAL INFORMATION
|
||||||||
Item
1. Financial Statements
|
||||||||
JAYHAWK
ENERGY, INC.
|
||||||||
Consolidated
Balance Sheets
|
||||||||
December
31, 2009
|
September
30, 2009
|
|||||||
Assets
|
(Unaudited)
|
|||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 952,892 | $ | 5,658 | ||||
Trade
accounts receivable, less allowance for doubtful accounts (Note
3)
|
277,554 | 293,507 | ||||||
Other
current assets
|
1,454 | 2,544 | ||||||
Total
Current Assets
|
1,231,900 | 301,709 | ||||||
Plant,
Property and Equipment
|
||||||||
Unproved
oil and gas properties, net of allowance for impairment
and
|
||||||||
and
accumulated amortization (Note 4)
|
2,213,083 | 2,265,673 | ||||||
Proved
and developed oil and gas properties net of accumulated
|
||||||||
depreciation,
depletion and amortization (Note 5)
|
5,790,279 | 6,256,238 | ||||||
Computers,
office equipment, furniture and leasehold improvements,
|
||||||||
net
of accumulated depreciation
|
28,608 | 31,605 | ||||||
Total
Net Plant, Property and Equipment
|
8,031,970 | 8,553,516 | ||||||
Other
Long-Term Assets
|
55,100 | 55,100 | ||||||
Total
Assets
|
$ | 9,318,970 | $ | 8,910,325 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Accounts
Payable
|
$ | 269,182 | $ | 172,166 | ||||
Working
and royalty interests payable
|
139,845 | 107,905 | ||||||
Other
payables, interest and taxes accrued
|
141,720 | 350,797 | ||||||
Convertible
promissory notes maturing in less than 1 year
|
800,000 | 800,000 | ||||||
Total
Current Liabilities
|
1,350,747 | 1,430,868 | ||||||
Long-Term
Liabilities (Note 6)
|
144,045 | 140,844 | ||||||
Total
Liabilities
|
1,494,792 | 1,571,712 | ||||||
Stockholders'
Equity
|
||||||||
Preferred
Stock, $.001 par value; 10,000,000 shares authorized,
|
||||||||
no
shares issued and outstanding.
|
-- | -- | ||||||
Common
Stock; $.001 par value; 200,000,000 shares authorized,
|
||||||||
45,113,496
issued and outstanding at December 31, 2009, and
|
||||||||
44,509,496
shares issued and outstanding at September 30, 2009. (Note
7)
|
45,113 | 44,509 | ||||||
Additional
paid-in capital
|
13,880,587 | 12,821,792 | ||||||
Stock
issuance obligation
|
-- | 136,000 | ||||||
Accumulated
deficit
|
(6,101,522 | ) | (5,663,688 | ) | ||||
Total
Stockholders' Equity
|
7,824,178 | 7,338,613 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 9,318,970 | $ | 8,910,325 | ||||
"See
Accompanying Condensed Notes to the Consolidated Financial
Statements"
|
3
JAYHAWK
ENERGY, INC.
|
||||||||
Consolidated
Statement of Operations (Unaudited)
|
||||||||
For
the three
|
For
the three
|
|||||||
months
ended
|
months
ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Revenue
(Net Working Interest)
|
||||||||
Oil
Sales
|
$ | 170,307 | $ | 123,333 | ||||
Gas
Sales
|
24,094 | 33,700 | ||||||
Total
Net Revenues
|
$ | 194,401 | $ | 157,033 | ||||
Cost
and Operating Expenses
|
||||||||
Production
Costs – North Dakota
|
71,815 | 71,505 | ||||||
Production
Costs – Kansas
|
6,510 | 81,133 | ||||||
Depreciation,
depletion and amortization
|
291,926 | 312,139 | ||||||
General
and Administrative
|
209,781 | 221,574 | ||||||
Other
(Income) and Expense
|
52,203 | 158,844 | ||||||
Total
Costs and Expenses
|
632,235 | 845,195 | ||||||
Net
loss and total comprehensive loss
|
$ | (437,834 | ) | $ | (688,162 | ) | ||
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | (0.02 | ) | ||
Basic
weighted average number of shares outstanding
|
44,825,148 | 42,827,505 | ||||||
"See
Accompanying Condensed Notes to the Consolidated Financial
Statements"
|
4
JAYHAWK
ENERGY, INC.
|
||||||||
Consolidated
Statement of Cash Flows (Unaudited)
|
||||||||
For
the three
|
For
the three
|
|||||||
months
ended
|
months
ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss from operations
|
$ | (437,834 | ) | $ | (688,162 | ) | ||
Adjustments
to reconcile net loss to net cash used in operations
|
||||||||
Depreciation,
depletion and amortization
|
291,926 | 312,139 | ||||||
Amortization
of Discount on Note Payable
|
- | 58,286 | ||||||
Accretion
of convertible promissory note
|
- | 98,389 | ||||||
Accretion
of annual asset retirement obligation
|
3,201 | 3,201 | ||||||
Common
stock issued in consideration for services
|
23,400 | 16,750 | ||||||
(Increase)
decrease in accounts receivable
|
15,952 | 155,723 | ||||||
(Increase)
decrease in other current assets
|
1,090 | 11,555 | ||||||
Increase
(decrease) in accounts payable
|
97,016 | 56,249 | ||||||
Increase
(decrease) in accruals and other current liabilities
|
72,863 | 6,798 | ||||||
Net
cash provided by operating activities
|
67,614 | 30,928 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Unproved
oil and gas property additions
|
(20,380 | ) | - | |||||
Proved
oil and gas property additions
|
- | (18,600 | ) | |||||
Other
property additions
|
- | (11,212 | ) | |||||
Net
cash used in investing activities
|
(20,380 | ) | (29,812 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Proceeds
from the sale of common stock
|
- | - | ||||||
Borrowings
with convertible notes payable
|
900,000 | - | ||||||
Net
cash provided by financing activities
|
900,000 | - | ||||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
947,234 | 1,116 | ||||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
5,658 | 82,683 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 952,892 | $ | 83,799 |
Supplemental
Disclosure of Cash Flow and Non-cash Investing and Financing
Activity:
Income taxes paid | $ | -- | $ | -- | ||||
Interest
paid
|
$ | -- | $ | -- |
"See
Accompanying Condensed Notes to the Consolidated Financial
Statements"
5
JAYHAWK
ENERGY, INC.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
For
the Three Months ended December 31, 2009 and December 31, 2008
Note
1 – Organization and Description of Business
Nature of Operations – JayHawk
Energy, Inc. (the Company, we, or JayHawk) and its wholly owned subsidiary, is
engaged in the acquisition, exploration, development, production and sale of
natural gas, crude oil and natural gas liquids primarily from conventional
reservoirs within North America. We incorporated in Colorado on April
5, 2004 as Bella Trading Company, Inc. During the second quarter
ending June 30, 2007, we changed management and entered the oil and gas
business, and ceased all activity in retail jewelry. On June 21,
2007, we changed our name to JayHawk Energy, Inc. Since then, we have
devoted our efforts principally to the raising of capital, development of
organizational infrastructure, and the acquisition of oil and gas
properties. To date, we have acquired three main properties, the
Uniontown in Kansas, the Crosby (formerly referred to as Candak) in North
Dakota, and Girard in Kansas. We also formed a wholly owned
subsidiary to transport our gas in Kansas, called Jayhawk Gas Transportation
Company. This is the basis for which our financial statements are
consolidated.
Note
2 - Summary of Significant Accounting Policies
Basis of Presentation – These
consolidated financial statements, including notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange Commission
(the “SEC”) and do not include all of the information and disclosures required
by accounting principles generally accepted in the United States ("U.S. GAAP")
for complete financial statements. These consolidated financial
statements are unaudited but, in the opinion of management, reflect all
adjustments necessary for a fair presentation of the results for the periods
reported. All such adjustments are of a normal recurring nature
unless disclosed otherwise. JayHawk reports on operations using a
fiscal year end of September 30. This report on Form 10-Q is for the
first quarter of the fiscal year to end September 30, 2010, the quarter ending
December 31, 2009, and comparable quarter ended December 31,
2008. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto,
included in the Company’s Form 10-K for the year ended September 30, 2009 as
filed with the SEC. Interim operating results are not necessarily
indicative of operating results for any future interim period or for the full
year.
Going Concern – As shown in
the accompanying financial statements, we have incurred operating losses since
inception. As of December 31, 2009 our ability to achieve our
objectives and obtain profitability and positive cash flows will be dependent on
our ability to locate profitable mineral properties and generate revenue from
our current and planned business operations, and control costs. We
plan to fund our future operations by drilling new wells and attaining
additional commercial production, thereby increasing our operating income, and
raising additional capital in the public and private
markets. However, there is no assurance that we will be able to
achieve these objectives.
Joint Venture Operations – In
instances where the Company’s oil and gas activities are conducted jointly with
others, the Company’s accounts reflect only its proportionate interest in such
activities.
Use of estimates - The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. A change in accounting estimate is
accounted for prospectively over the current and future years.
Loss per common share - Basic
loss per share is calculated based on the weighted average number of common
shares outstanding. Diluted loss per share assumes exercise of stock
options and warrants and conversion of convertible debt and preferred
securities, provided the effect is not antidilutive. As each of the
two fiscal periods covered by these financial statements reflects net losses
from operations, all of our warrants have an anti-dilutive effect on per common
share amounts.
Revenue Recognition – We use
the sales method of accounting for oil and gas revenues. Under this
method revenues are recognized based on the actual volumes of gas and oil sold
to purchasers. The volume sold may differ from the volumes we are entitled to,
based on our individual interest in the property. Revenues reflected
in these financial statements are the Company's net working interest after
deduction of amounts attributable to other working and royalty interest
owners. See note above, "Joint Venture Operations".
6
JAYHAWK
ENERGY, INC.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
For
the Three Months ended December 31, 2009 and December 31, 2008
Note
2 – Summary of Significant Accounting Policies (continued)
Property, plant and equipment -
JayHawk follows the successful efforts method of accounting for oil and
gas property as promulgated in Accounting Standards Codification (ASC) Topic
932, Extractive Activities – Oil and Gas. Under this method of
accounting, costs to acquire mineral interests in oil and natural gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells, are capitalized. Costs to drill
exploratory wells that do not find proved reserves, geological and geophysical
costs and costs of carrying and retaining unproved properties are
expensed.
We
calculate depletion, depreciation and amortization (DD&A) of capitalized
cost of proved oil and gas property on a field-by-field basis using the
units-of-production method based upon proved reserves. In computing DD&A we
will take into consideration restoration, dismantlement and abandonment cost and
the anticipated proceeds from equipment salvage. When applicable, we
will apply the provisions of ASC Topic 410, Accounting for Asset Retirement
Obligations, which provides guidance on accounting for dismantlement and
abandonment cost.
Support
equipment and other property, plant and equipment related to oil and gas
production are depreciated on a straight-line basis over their estimated useful
lives which range from 5 to 35 years. Property, plant and equipment
unrelated to oil and gas producing activities is recorded at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets, which range from 3 to 25 years.
We review
our long-lived assets for impairment annually or when events or changes in
circumstances indicate that impairment may have occurred. In the
impairment test we compare the expected undiscounted future net revenue on a
field-by-field basis with the related net capitalized cost at the end of each
period. Should the net capitalized cost exceed the undiscounted future net
revenue of a property, we will write down the cost of the property to fair
value, which we will determine using discounted future net revenue. We will
provide an impairment allowance on a property-by-property basis when we
determine that the unproved property will not be developed (also see
specifically, Note 4).
Asset Retirement Obligation –
We follow ASC topic 410, “Accounting for Asset Retirement Obligations”,
which requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement
costs will be capitalized as part of the carrying amount of the long-lived
asset. The carrying value of a property associated with the capitalization
of an asset retirement cost will be included in proved oil and gas property in
the balance sheets. The future cash outflows for oil and gas property
associated with settling the asset retirement obligations will be accrued in the
balance sheets, and will be excluded from ceiling test calculations. The
asset retirement obligation, consists of costs related to the plugging of wells
and removal of facilities and equipment on its oil and gas properties, and is
included in Long-term Liabilities (Note 6).
Income Taxes - The Company
follows the guidance of ASC Topic 740, Income Taxes (previously the FASB has
issued interpretation No. 48 (FIN-48) “Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement 109”. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date. In addition, a valuation allowance is established to reduce
any deferred tax asset for which it is determined that it is more likely than
not that some portion of the deferred tax asset will not be
realized.
ASC Topic
740 recognizes that the ultimate deductibility of positions taken or expected to
be taken on tax returns is often uncertain. It provides guidance on
when tax positions claimed by an entity can be recognized and guidance on the
dollar amount at which those positions are recorded. In order to
recognize the benefits associated with a tax position taken the entity must
conclude that the ultimate allowability of the deduction is more likely than
not. If the ultimate allowability of the tax position exceeds 50%
(more likely than not), the benefit associated with the position is recognized
at the largest dollar amount that has more than a 50% likelihood of being
realized upon ultimate settlement. Differences between tax positions
taken in a tax return and recognized in accordance with the guidance will
generally result in (1) an increase in income taxes currently payable or a
reduction in an income tax refund receivable or (2) an increase in a deferred
tax liability or a decrease in a deferred tax asset, or both (1) and
(2).
7
JAYHAWK
ENERGY, INC.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
For
the Three Months ended December 31, 2009 and December 31, 2008
Note
3 - Trade Accounts Receivable
Trade
accounts receivable represents those amounts the Company is owed for its' oil
and gas production delivered during the months of June, July of 2008, and
December and September 2009, less an allowance for doubtful
accounts. Also included in the aggregate is an amount receivable from
other working interests billed for their percentages of joint operating
costs. Specifically, it is detailed as follows at December 31, and
September 30, 2009:
December
31, 2009 |
September
30, 2009 |
|||||||
Due
for crude oil delivered in June & July 2008 – SemCrude
|
$ | 283,486 | $ | 283,486 | ||||
Less:
Allowance for doubtful collections
|
( 119,763 | ) | ( 119,763 | ) | ||||
Due
for crude oil delivered in December and September 2009
|
78,037 | 109,074 | ||||||
Due
for natural gas delivered in December and September 2009
|
12,333 | 5,954 | ||||||
Due
from joint operating working interests
|
23,462 | 14,756 | ||||||
Total
|
$ | 277,555 | $ | 293,507 |
The
previous purchaser of our North Dakota crude oil, SemCrude, took delivery of
JayHawk's June and July 2008 production and before compensating the Company
filed a Chapter 11 bankruptcy proceeding. Management believes that
the Company will receive all the proceeds for the July sales but has established
an allowance for 100% of the value of the June deliveries, equivalent to
$119,763, charging bad debt expense for an equal amount. Since August
of 2008 all crude oil production has been delivered to a new
purchaser. Proceeds for the December 2009 deliveries valued at
$78,037, were subsequently received in January 2010. Amounts
receivable for the natural gas delivered in December 2009 we also received in
January 2010.
Note
4 – Unproved Properties and Impairment
The total
of JayHawk's investment in unproved properties at December 31, and September 30,
2009 consists of the following capitalized costs respectively:
December
31,
2009
|
September
30,
2009
|
|||||||
Kansas
Uniontown Project
|
$ | 2,494,479 | $ | 2,494,479 | ||||
Less:
Allowance for impairment
|
(1,474,000 | ) | ( 1,474,000 | ) | ||||
Less:
Accumulated amortization
|
( 187,275 | ) | ( 162,734 | ) | ||||
Net
investment in Uniontown Project
|
$ | 833,204 | $ | 857,745 | ||||
Kansas
Girard Project
|
$ | 1,651,125 | $ | 1,651,125 | ||||
Less:
accumulated amortization
|
( 291,626 | ) | ( 243,197 | ) | ||||
Net
investment in Girard Project
|
$ | 1,359,499 | $ | 1,407,928 | ||||
Crosby
Project Capitalized New Lease Costs
|
$ | 20,380 | $ | - | ||||
Total
Unproved Oil and Gas Property
|
$ | 2,213,083 | $ | 2,265,673 |
Impairment of Uniontown
Project: A property is considered impaired if it will not or cannot
be developed. At that time an allowance is established to revalue the
capitalized cost and a provision of equal amount is provided as an operating
expense. Management made a review of the portfolio of leases acquired
in the Uniontown transaction of July 2007 and decided based on geology and
proximity to our pipeline, to permit approximately one-third of the original
leases acquired to expire without renewal. The Company's inability at September
30, 2008 to fund development of any acreage, justified the creation of an
impairment valuation. The management has estimated the allowance at
two-thirds, 67 percent, of the original investment equaling
$1,474,000.
8
JAYHAWK
ENERGY, INC.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
For
the Three Months ended December 31, 2009 and December 31, 2008
Note
5 – Proved and Developed Oil & Gas Properties
The
capitalized cost, net of depreciation, depletion and amortization (DD&A) of
the proved oil and gas properties was $5,790,279, at December 31, 2009, and
$6,256,238 at September 30, 2008. These net capitalized costs are
comprised of the following; detailed by property:
December
31, 2009 |
September
30, 2009 |
|||||||
Crosby
North Dakota Properties:
|
||||||||
Proved
Reserves
|
$ | 2,357,752 | $ | 2,357,752 | ||||
Field
Equipment
|
1,200,248 | 1,200,248 | ||||||
Less:
Accumulated DD&A
|
( 1,288,567 | ) | ( 1,117,265 | ) | ||||
Net
Capitalized Costs
|
$ | 2,269,433 | $ | 2,440,735 | ||||
Girard,
Kansas Properties:
|
||||||||
Field
Equipment
|
$ | 796,033 | $ | 796,033 | ||||
Capitalized
Drilling Costs
|
662,899 | 662,899 | ||||||
Less:
investment from Joint Venture Partner
|
( 250,000 | ) | -- | |||||
Less:
accumulated DD&A
|
( 92,096 | ) | ( 76,402 | ) | ||||
Net
Capitalized Costs
|
$ | 1,116,836 | $ | 1,382,530 | ||||
JayHawk
Gas Transportation
|
||||||||
Field
Equipment
|
$ | 2,605,870 | $ | 2,605,870 | ||||
Less:
accumulated Depreciation
|
( 201,860 | ) | ( 172,897 | ) | ||||
Net
Capitalized Costs
|
$ | 2,404,010 | $ | 2,432,973 | ||||
Total
Net Proved Oil & Gas Properties
|
$ | 5,790,279 | $ | 6,256,238 |
Note
6 – Long-term Liabilities
Long-term liabilities at December 31,
2009 are comprised of an asset retirement obligation of $144,045, and
convertible debentures of $900,000 net of discounts as follows:
December
31, 2009 |
September
30, 2009 |
|||||||
Asset
retirement obligation
|
$ | 144,045 | $ | 140,844 | ||||
Long-term
notes (debentures) payable face value
|
900,000 | -- | ||||||
Less:
Imputed fair value of common stock purchase warrants
|
( 430,435 | ) | -- | |||||
Imputed
fair value of beneficial conversion feature
|
( 469,565 | ) | -- | |||||
Total
long-term liabilities
|
$ | 144,045 | $ | 140,844 |
Long-term Notes Payable – In
December 2009 the Company issued 10 percent convertible debentures with a face
value of $900,000, and a two year maturity. These debentures were
issued with attached common stock purchase warrants. The debentures
are convertible at any time after the original issue date into a number of
shares of the Company’s common stock, determined by dividing the amount to be
converted by a conversion price of $0.30 per share. The attached
common share purchase warrants, expire in 42 months from the original issue date
and permit the holders two exercise options. The warrants may be
exercised by purchase of the Company’s common stock for cash at an exercise
price of $0.45, or alternatively, in a cashless exercise, the number of shares
being determined in accordance with a predetermined formula based upon the
Company’s then current stock price. All of the common stock purchase
warrants issued with these convertible debentures were exercised in a cashless
exercise in January 2010, which is more fully described in Note 8, Subsequent
Events.
9
JAYHAWK
ENERGY, INC.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
For
the Three Months ended December 31, 2009 and December 31, 2008
Note
6 – Long-term Liabilities (cont.)
Long-term Notes Payable (cont.)
- In accordance with ASC Topic 470, the Company allocated the proceeds to
the two elements (detachable warrants and convertible instrument) based upon
their relative fair values of the debt instrument without the warrants and the
warrants themselves at the time of issuance. The fair value of the
warrants was determined following the guidance of the guidance of ASC Topic 718;
using the Black-Scholes option model (using a risk free interest rate of .06
percent and volatility of 99.3 percent) with the value allocated to the warrants
reflected in Stockholders’ Equity and a debt discount. Based upon the
respective fair values as of the original agreement dates, we allocated $430,435
to the common stock purchase warrants.
Additionally,
the Company determined that the convertible notes contain a beneficial
conversion feature. Following the guidance provided by ASC 470, after
first allocating proceeds of the convertible debt to the warrants, an additional
amount of $469,565, was recorded as a discount for the beneficial conversion
feature of the debentures. The aggregate of the two discount
components is $900,000, the full maturity amount of the
debentures. This essentially is a deferred cost of financing, and as
such, will be amortized over the life of the debentures in the amount of $37,500
per month.
Note
7 - Common Stock
The
Company made two issuances of 30,000 shares each of its common stock on October
2 and November 1, 2009, in exchange for consulting services
rendered.
On November 16, 2009 the
Company issued the 544,000 shares of its common stock to fulfill the stock
issuance obligation recognized on July 30, 2009. This
obligation was recognized as the result of amending the original $800,000
short-term convertible promissory note, signed in July
2008. The original note had a one-year maturity, maturing July 30,
2009, and provided for interest to be paid upon maturity, computed at a rate of
12 percent per annum. The amendment extended the maturity date to
July 30, 2010. Accrued interest to the date of the amendment was
$96,000. This along with a 5 percent extension fee of $40,000 was
converted to shares of the Company’s restricted common stock, at the rate of
$0.25 per share. The total amount of $136,000 was reflected as a
stock issuance obligation as at September 30, 2009.
Note
8 – Subsequent Events
Holders of the debentures and the
common stock purchase warrants, more fully described in the preceding Note 6,
exercised their rights under those warrants to acquire 2,111,388 shares of the
Company’s common stock in two separate cashless exercises on January 6, and
January 27, 2010, in the amount of 1,398,066 shares, and 713,322 shares, in each
of the respective transactions.
Effective January 01, 2010 the
Board of Directors approved increasing the Chief Executive Officer’s and
President’s compensation to $15,000 and $10,000, per month,
respectively.
Subsequent
events have been evaluated through February 4, 2009, the date that the
consolidated financial statements were available to be issued.
10
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements and
supplemental information presented in our Annual Report for the period ending
September 30, 2009, on Form 10-K, and the Forms 8-K issued in the period
subsequent to September 30, 2009. Certain sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations include
forward-looking statements concerning trends or events potentially affecting our
business. These statements typically contain words such as
"anticipates," "believes," "estimates," "expects," "plans," "probable,"
"should," "could," "would," or similar words indicating that future outcomes are
uncertain. In accordance with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors, though not all
such factors, which could cause future outcomes to differ materially from those
set forth in the forward-looking statements.
Results
of Operations for the three months ended December 31, 2009 and 2008
Revenues - For the three
months ending December 31, 2009 and 2008, revenues, reported as JayHawk's net
working interest, were $194,401 and $157,033, respectively. The
comparative volumes of oil and gas delivered and the average prices received
during each of the two respective three month periods of 2009 and 2008, are
disclosed in the following table:
Volumes
|
Average
Prices
|
Gross
Revenue
|
||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
Oil
Sales (in barrels)
|
4,928 | 4,601 | $ | 60.97 | $ | 42.10 | $ | 300,492 | $ | 193,699 | ||||||||||||||
Gas
Sales (in thousand cubic feet)
|
8,459 | 10,710 | $ | 3.98 | $ | 3.15 | 33,377 | 33,700 | ||||||||||||||||
Total
Gross Receipts
|
$ | 333,869 | $ | 227,399 | ||||||||||||||||||||
Less: working
& royalty interests
|
( 139,468 | ) | ( 70,366 | ) | ||||||||||||||||||||
Net
Revenues to JayHawk
|
$ | 194,401 | $ | 157,033 |
Volumes
of oil delivered during the three month period ending December 31, 2009 are
slightly higher than the same period end in 2008 due to production operations
being temporarily stopped by weather conditions during the 2008
period. Field prices for the oil (after delivery charges) fluctuated
from a low of $57.52 to a high of $63.46 during the three month period ending
December 31, 2009. During the quarter ending December 31, 2008 these
same field prices, after delivery charges, fluctuated between a low of
$20.60/Bbl. and high of $59.22/Bbl. Beginning in November of 2009,
the gross gas revenues are reduced by a 42.5 percent interest distributed to our
joint venture partner in Girard, Kansas.
Operating Expenses - Total
operating expenses for the three months ended December 31, 2009 and 2008 were
$632,235, and $845,195, respectively. These expenses are segregated
as follows:
Quarter
End
December
31, 2009
|
Quarter
End
December
31, 2008
|
|||||||||||||||||||
Crosby,
N.D
|
Girard,
KS.
|
G&A
|
Total
|
Total
|
||||||||||||||||
Direct
regional costs
|
$
|
71,815
|
$
|
6,510
|
-
|
$
|
78,325
|
$
|
152,638
|
|||||||||||
Depreciation,
depletion, and amortization
|
172,505
|
116,424
|
2,997
|
291,926
|
312,139
|
|||||||||||||||
General
and administrative expenses
|
-
|
-
|
209,781
|
209,781
|
221,574
|
|||||||||||||||
Other
net (income) and expense
|
52,203
|
52,203
|
158,844
|
|||||||||||||||||
Totals
|
$
|
244,320
|
$
|
122,934
|
$
|
264,981
|
$
|
632,235
|
$
|
845,195
|
The
direct regional costs above for the three months ending December 31, 2009 and
2008, represent direct production costs, including, production and severance
taxes, labor, supplies and materials, maintenance, chemicals, and salt water
disposal for both the North Dakota and Kansas properties.
General
and administrative expenses incurred for the corporate office
and management, for the period ending December 31, 2009 was
significantly lower when compared to the same period ending December 31, 2008,
primarily due to focused attention to cost reduction efforts.
11
Cash
Flows, Liquidity and Capital Resources
Net cash
provided by operating activities totaled $67,614 in the
quarter ending December 31, 2009, compared to $30,928 provided in operating
activities for the three month period ending December 31, 2008. This
increase in cash provided by operations is primarily attributable to the
significant reduction in the quarterly net operating loss, for the comparable
quarters.
Net cash
used in investing activities totaled $20,380 in the three months ending December
31, 2009 as compared to $29,812 in the same period ending December 31,
2008.
Cash in
the amount of $900,000 was provided by financing activities during the quarter
ending December 31, 2009. There were no financing activities during
the same period of 2008.
The net
change in cash and cash equivalents is the sum of cash provided by operating and
financing activities and used in investing activities, or a net total of
$947,234 which is the increase in the Company's cash balance of $5,658 existing
at September 30, 2009, to the cash balance at December 31, 2009 of
$952,892. Generally, our main sources of liquidity are cash and
internally generated cash flow from the sale of crude oil and natural
gas. In this quarter ending December 31, 2009 the cash position was
significantly augmented by the issuance of the debentures in the amount of
$900,000. Our current assets at December 31, 2009 totaled $1,231,900
and our current liabilities totaled $1,350,747.
As
clearly demonstrated in this current quarter ending December 31, 2009, our
revenue and operating cash flows, are highly dependent on the prices we receive
for crude oil and natural gas. A substantial and continued decline in
these prices will further reduce our operating results and cash flows, and will
impact our rate of growth and the carrying values of our assets.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
We have
no investments, trading or non-trading, that would be sensitive to market
risk.
Item 4. Controls and
Procedures
(a) Evaluation of disclosure controls and
procedures - We maintain controls and procedures designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon the evaluation of those controls
and procedures performed as of December 31, 2009, the date of this report, our
chief executive officer concluded that our disclosure controls and procedures
were effective.
(b) Changes in internal controls –
There have been no changes in internal control over financial reporting (as
defined in Rule 13(a)-15(f) of the Exchange Act) during the period ended
December 31, 2009, that materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting. Subsequent to December 31, 2009 the Company has, through
its CEO and Board of Directors, implemented a more rigorous and timely review
its financial reporting process, including scheduled quarterly audit committee
meetings and direct communication with the field staff. This change will likely
materially affect the Company’s internal control over financial reporting for
the quarter to end March 31, 2010.
12
PART
II — OTHER INFORMATION
Item 1. Legal
Proceedings.
None.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults
Upon Senior Securities
None.
Item
4. Submission of Matters to Vote of Security
Holders
None.
Item 5. Other
Information
None.
Item
6. Exhibits
31.1 Rule
13a - 14(a) / 15d - 14(a) Certification of CEO
31.2 Rule
13a - 14(a) / 15d - 14(a) Certification of CFO
32.1 Section
1350 Certification of CEO
32.2
Section 1350 Certification of CFO
13
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
JayHawk
Energy, Inc.,
a
Colorado corporation
|
|||
Date:
February 11, 2010
|
By:
|
/s/ Lindsay
E. Gorrill
|
|
Lindsay
E. Gorrill
Chief
Executive Officer and Chief
Financial Officer
|
14