Jayhawk Energy, Inc. - FORM 10-Q/A

Attached files

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EX-31 - CERTIFICATION - Jayhawk Energy, Inc.	exhibit31.htm
EX-32 - CERTIFICATION - Jayhawk Energy, Inc.	ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q-A


x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2014.


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.)

611 E. Sherman Avenue, Coeur d’Alene, ID 83814

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes 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 19, 2014, there were 80,375,841 shares of the issuer's $.001 par value common stock issued and outstanding.

JAYHAWK ENERGY, INC.

Quarterly Report on Form 10-Q-A for the

Quarterly Period Ended December 31, 2014

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

Item 4. Mining Safety Disclosures

Item 5. Other Information

Item 6. Exhibits

SIGNATURES


CONTENTS

FINANCIAL STATEMENTS (unaudited):	Page

Consolidated Balance Sheets	4

Consolidated Statements of Operations	5

Consolidated Statements of Cash Flows	6

Notes to Consolidated Financial Statements	7

JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	December 31, 2014		September 30, 2014
ASSETS		(unaudited)
CURRENT ASSETS
Cash	$	81,790	$	177,260
Trade accounts receivable		41,821		55,528
Other current assets		18,556		19,490
TOTAL CURRENT ASSETS		142,167		252,278
PROPERTY AND EQUIPMENT
Unproved properties, net (NOTE 4)		186,332		196,144
Proved properties, net (NOTE 5)		60,555		82,012
NET PROPERTY AND EQUIPMENT		246,887		278,156
RECLAMATION BONDS AND OTHER LONG TERM ASSETS (NOTE 6)		151,870		151,846
TOTAL ASSETS	$	540,924	$	682,280
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable	$	709,337	$	775,227
Due to working and royalty interests		412,499		596,442
Other payables, interest and taxes accrued		494,241		446,321
Current portion of promissory note payable (NOTE 14)		31,642		30,814
Convertible debenture (NOTE 7)		918,687		1,038,687
TOTAL CURRENT LIABILITIES		2,566,406		2,887,491
LONG TERM LIABILITIES
Convertible debentures, net of discount (NOTE 7)		190,000		40,000
Accounts payable, long term (NOTE 16)		34,162		-
Due to working and royalty interests, long term (NOTE 16)		175,425		-
Promissory note payable (NOTE 14)		-		5,828
Conversion option derivative liability (NOTE 8)		244,515		676,533
Warrant derivative liability (NOTE 8)		9,257		24,697
Asset retirement obligation (NOTE 9)		164,652		160,636
TOTAL LONG TERM LIABILITIES		818,011		907,694
TOTAL LIABILITIES		3,384,417		3,795,185
COMMITMENTS AND CONTINGENCIES (NOTE 15)		-		-
STOCKHOLDERS' DEFICIT
Preferred Stock, $.001 par value; 10,000,0000 shares authorized, none issued and outstanding		-		-
Common Stock, $.001 par value; 200,000,000 shares authorized; 80,375,841 shares issued and outstanding		80,375		80,375
Additional paid-in capital		22,313,609		22,313,609
Accumulated deficit		(25,237,477)		(25,506,889)
TOTAL STOCKHOLDERS' DEFICIT		(2,843,493)		(3,112,905)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	540,924	$	682,280

JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three months ended December 31,
	2014		2013
REVENUE
Oil sales	$	68,792	$	70,027
Gas sales		-		-
TOTAL REVENUE		68,792		70,027
OPERATING EXPENSES
Production costs-oil		29,835		31,785
Production costs-natural gas		4,127		2,014
Depreciation, depletion and amortization		31,269		58,719
Accretion of asset retirement obligation		4,016		3,651
North Dakota reclamation		2,306		-
General and administrative		107,800		90,951
TOTAL OPERATING EXPENSES		179,353		187,120

OPERATING LOSS		(110,561)		(117,093)

OTHER INCOME (EXPENSE)
Interest and financing costs		(37,485)		(31,297)
Amortization of discount on debentures		(30,000)		-
Gain on conversion of debt		-		15,336
Gain on change in fair value of conversion option derivative		432,018		62,459
Gain on change in fair value of warrant derivative		15,440		3,503
TOTAL OTHER INCOME		379,973		50,001

INCOME (LOSS) BEFORE INCOME TAX		269,412		(67,092)

Provision for income taxes		-		-
NET INCOME (LOSS)	$	269,412	$	(67,092)

Basic and diluted loss per share	$	Nil	$	Nil

Basic weighted average number shares routstanding		80,375,841		78,778,015
Diluted weighted average number shares outstanding		81,936,817		78,778,015

JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	2014		2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	269,412	$	(67,092)

Adjustments to reconcile net income (loss) to cash used by operating activities:
Depreciation, depletion and amortization		31,269		58,719
Accretion of asset retirement obligation		4,016		3,651
Amortization of discount on debt		30,000		-
Gain on conversion of debt		-		(15,336)
Gain on change in fair value of conversion option derivative		(432,018)		(62,459)
Gain on change in fair value of warrant derivative		(15,440)		(3,503)
Stock based compensation		-		9,360
Changes in operating assets and liabilities:
Trade accounts receivable		13,707		12,723
Other current assets		934		774
Accounts payable		(31,728)		(23,533)
Accrual for North Dakota reclamation		-		(55,246)
Due to working and royalty interest holders		(13,518)		32,153
Other payables, interest and taxes accrued		47,920		37,209
Net cash used by operating activities		(95,446)		(72,580)
CASH FLOWS FROM INVESTING ACTIVITIES:
Reclamation bonds and other long term assets		(24)		-
Net cash used by investing activities		(24)		-
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by financing activities		-		-

Net decrease in cash		(95,470)		(72,580)

CASH AT BEGINNING OF PERIOD		177,260		96,833

CASH AT END OF PERIOD	$	81,790	$	24,253

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

JayHawk Energy, Inc. (the Company or JayHawk) and its wholly owned subsidiary, Jayhawk Gas Transportation Company, are engaged in the acquisition, exploration, development, production and sale of natural gas, crude oil and natural gas liquids primarily from conventional reservoirs within North America. The Company incorporated in Colorado on April 5, 2004 as Bella Trading Company, Inc. During the third quarter ending June 30, 2007, the Company changed management and entered the oil and gas business, and ceased all activity in retail jewelry. On June 21, 2007, the Company changed its name to JayHawk Energy, Inc. Since then, the Company has devoted its efforts principally to the raising of capital, organizational infrastructure development, the acquisition of oil and gas properties and exploration activities. To date, the Company has acquired three properties, the Uniontown in Kansas, the Crosby in North Dakota, and Girard in Kansas. The Company also formed a wholly owned subsidiary to transport natural gas in Kansas called JayHawk Gas Transportation Corporation.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the three months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2015.

For further information, refer to the financial statements and footnotes thereto in the Company’s Annual Report on Form 10-K for the year ended September 30, 2014.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary JayHawk Gas Transportation Company after elimination of the intercompany accounts and transactions.

Going Concern

As shown in the accompanying consolidated financial statements, the Company has incurred operating losses since inception. As of December 31, 2014, the Company has limited financial resources with which to achieve the objectives and obtain profitability and positive cash flows. As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $25,237,477, and as of that date the Company's current liabilities exceeded its current assets by $2,424,239. Achievement of the Company's objectives will be dependent upon the ability to obtain additional financing, to locate profitable energy properties and generate revenue from current and planned business operations, and control costs. The Company plans to fund its future operations by joint venturing, obtaining additional financing from investors, and/or lenders, and attaining additional commercial production. However, there is no assurance that the Company will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists. The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implications of associated bankruptcy costs should the Company be unable to continue as a going concern.

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

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

respective reporting periods. Significant areas requiring the use of management assumptions and estimates relate to asset impairments, asset retirement obligations, stock-based compensation, income taxes and derivatives. Actual results may differ from these estimates and assumptions which could have a material effect on the Company's reported financial position and results of operations.

Income or Loss Per Common Share

Basic earnings per share ("EPS") is computed as net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities.

The dilutive effect of convertible and outstanding securities as of December 31, 2014 and 2013, would be as follows:


	December 31, 2014	December 31, 2013
Stock options	4,000,000	4,000,000
Convertible debt	110,028,675	34,028,675
Warrants	3,777,778	5,833,113
Total Possible Dilution	117,806,453	43,861,788

At December 31, 2013, the effect of the Company's outstanding options and common stock equivalents would have been anti-dilutive. At December 31,2014, the effect of the Company’s stock options added 1,560,976 common stock equivalents to the diluted weighted average shares outstanding figure, which affected earnings per share by $Nil.

Revenue and Cost Recognition

The Company uses 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 the Company may be entitled to, based on the Company's 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 when determined. Costs associated with production are expensed in the period in which they are incurred.

Cash Equivalents

The Company considers all highly liquid instruments purchased with maturity of three months or less when acquired to be cash equivalents.

Trade Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate for doubtful accounts. There was no allowance for doubtful accounts at December 31, 2014 and 2013. Management determines the allowance by regularly evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded as income when received.

Concentrations

All of the Company’s direct operating revenues originate from oil production from its property in Crosby, North Dakota. Each revenue stream is sold to a single customer through month to month contracts. While this creates a customer concentration, there are alternate buyers of the production in the event the sole customer is unable or unwilling to purchase.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

Property, Plant and Equipment

Acquisition costs associated with the acquisition of leases are capitalized when incurred. These consist of costs incurred in obtaining a mineral interest or right in the property, such as a lease, concession, license, production sharing agreement, or other type of agreement granting such rights. In addition, options to lease, brokers' fees, recording fees, legal costs, and other similar costs related to activities in acquiring property interests are capitalized.

The Company follows the successful effort 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, acquisition costs for proved and unproved properties are capitalized when incurred. Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed. Development costs, including the costs to drill and equip development wells, and successful exploratory drilling costs to locate proved reserves are capitalized. Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves. A determination of whether a well has found proved reserves is made shortly after drilling is completed. The determination is based on a process that relies on interpretations of available geologic, geophysics and engineering data. If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well. If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made. If an exploratory well requires a major capital expenditure before production can begin, the cost of drilling the exploratory well will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made and ii) drilling of the additional exploratory wells is under way or firmly planned for the near future. If drilling in the area is not under way or firmly planned, or if the well has not found a commercially producible quantity of reserves, the exploratory well is assumed to be impaired and its costs are charged to expense.

In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well is not carried as an asset for more than one year following completion of drilling. If, after that year has passed, a determination that proved reserves exist cannot be made, the well is assumed to be impaired, and its capitalized costs, net of salvage value are charged to expense. Its costs can, however, continue to be capitalized if sufficient quantities of reserves are discovered in the well to justify its completion as a producing well and sufficient progress is made in assessing the reserves and the well's economic and operating feasibility.

The Company calculates depletion, depreciation and amortization (DD&A) of capitalized cost of proved oil properties on a field-by-field basis using the units-of-production method based upon proved reserves. In computing DD&A the Company will take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage. When applicable, the Company will apply the provisions of ASC Topic 410, "Accounting for Asset Retirement Obligations", ("ASC 410") which provides guidance on accounting for dismantlement and abandonment cost (see Note 9).

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.

The Company recognizes a gain or loss on sales or retirement of property, plant and equipment and includes the gain or loss in the results of operations.

Impairment of Long-Lived Assets

The Company performs separate impairment tests for proved and unproved properties.

Proved properties - The Company evaluates its proved properties for impairment when circumstances or events occur that may impact the fair value of the assets. The fair value of property is primarily evaluated based upon the present value of expected revenues

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

directly associated with those assets. An impairment loss would be recognized if the carrying amount of a capitalized asset is not recoverable and exceeds its fair value.

Unproved properties - Unproved properties are assessed periodically to determine whether they have been impaired. An undeveloped property may be considered impaired as the expiration of a lease term approaches and the Company has not begun drilling on the property or nearby properties and the possibility of partial or total impairment of the property increases. If the property is found to be impaired, an impairment allowance is provided and a loss is charged to operations. However, if the property is surrendered or the lease expires without identifying proved reserves, the cost of the property is charged against the impairment allowance already to the extent impairment has been recognized. Any remaining cost is charged to operations.

In the case of unproved developed properties, the fair value of property is primarily evaluated based upon the present value of expected revenues directly associated with those assets. An impairment loss would be recognized if the carrying amount of a capitalized asset is not recoverable and exceeds its fair value.

Fair Value Measures

ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC 820") requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1: Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2: Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quote prices for similar assets or liabilities in active markets; quoted prices for identical assets in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3: Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Derivative Instruments

The Company has financing arrangements that contain freestanding derivative instruments or hybrid instruments that contained embedded derivative features. In accordance with U.S. GAAP, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the Company’s balance sheet and are measured at fair value with gains or losses recognized in earnings depending on the nature of the derivative or hybrid instruments. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and recognized at fair value with changes in fair value recognized as either a gain or loss in earnings if they can be reliably measured. When the fair value of embedded derivative features cannot be reliably measured, the Company measures and reports the entire hybrid instrument at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using a Black Scholes model, giving consideration to all of the rights and obligations of each instrument and precluding the use of “blockage” discounts or premiums in determining the fair value of a large block of financial instruments. Fair value under these conditions does not necessarily represent fair value determined using valuation standards that give consideration to blockage discounts and other factors that may be considered by market participants in establishing fair value.

Income Tax and Accounting for Uncertainty

Income taxes are determined using the liability method in accordance with ASC Topic 740 "Income Taxes" ("ASC 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

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

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 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).

Stock Options Granted to Employees and Non-Employees

The Company follows financial accounting standards that require the measurement of the value of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Non-employee stock-based compensation is granted at the Board of Director’s discretion to award select consultants for exceptional performance. Prior to issuance of the awards, the Company is not under any obligation to issue the stock options. Subsequent to the award, the recipient is not obligated to perform any services. Therefore, the fair value of these options is expensed on the grant date, which is also the measurement date.

The Company estimates the fair value of employee stock option awards on the date of grant using a Black-Scholes valuation model which requires management to make certain assumptions regarding: (i) the expected volatility in the market price of the Company's common stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold the award prior to exercised (referred to as the expected holding period). The expected volatility under this valuation model is based on the current and historical implied volatilities of the Company's common stock. The dividend yield is based on the approved annual dividend rate in effect and current market price of the underlying common stock at the time of grant. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities ranging from one month to five years. The expected holding period of the awards granted is estimated using the historical exercise behavior of employees. In addition, the Company estimates the expected impact of forfeited awards and recognize stock-based compensation cost only for those awards expected to vest. The Company utilizes historical experience to estimate projected forfeitures. If actual forfeitures are materially different from estimates, stock-based compensation expense could be significantly different from what we have recorded in the current period. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in the period of the revision.

Stock Granted to Employees and Non-Employees in Lieu of Cash Payments

The Company periodically issues shares of its common stock in lieu of cash payments to certain consultants, vendors and employees. The Company follows financial accounting standards that require the measurement of the value of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award.

Reclassifications

Certain reclassifications have been made to the 2013 financial statements in order to conform to the 2014 presentation. These reclassifications have no effect on net loss, total assets or accumulated deficit as previously reported.

New Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15—Presentation of Financial Statements—Going Concern. The guidance requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). If conditions or events exist that raise substantial doubt about an entity’s ability to continue as a going concern, the guidance requires disclosure in the financial statements. The guidance will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the new standard and its impact on the

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

Company’s consolidated financial statements.

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, reclamation bonds and promissory note payable approximate fair value due to their limited time to maturity or ability to immediately convert them to cash in the normal course. The carrying values of convertible debentures is net of a discount and does not reflect fair value of similar instruments. The approximate fair value of the convertible debentures based upon the number of shares into which the debentures are convertible is $1,100,287 using the current market price per share of stock at December 31, 2014.

The table below sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2014 and September 30, 2014, respectively, and the fair value calculation input hierarchy that the Company has determined has applied to each asset and liability category.


	December 31, 2014		September 30, 2014		Input Hierarchy level
Assets:
Cash	$	81,790	$	177,260		Level 1
Reclamation bonds and other long term assets		150,370		150,346		Level 1
Liabilities:
Conversion option derivative liability	$	244,515	$	676,533		Level 2
Warrant derivative liability		9,257		24,697		Level 2

NOTE 4 - UNPROVED PROPERTIES AND IMPAIRMENT

The total of the Company's investment in unproved properties and equipment at December 31, 2014 and September 30, 2014, consists of the following capitalized costs respectively:


	December 31, 2014		September 30, 2014
UNPROVED AND DEVELOPED PROPERTIES
Kansas Girard Project
Field equipment - Jayhawk Gas Transport Company	$	2,605,871	$	2,605,871
Field equipment - Girard		579,027		579,027
Capitalized drilling costs		614,756		614,756
Subtotal		3,799,654		3,799,654
Less impairments		(2,432,087)		(2,432,087)
Less accumulated depreciation, depletion and amortization		(1,221,560)		(1,211,748)
Unproved and developed properties, net		146,007		155,819

UNPROVED AND UNDEVELOPED PROPERTIES
North Dakota Project, net		40,325		40,325
Unproved and undeveloped properties, net		40,325		40,325

TOTAL UNPROVED PROPERTIES	$	186,332	$	196,144

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

NOTE 5 - PROVED PROPERTIES AND IMPAIRMENT

For the three months ended December 31, 2014 and 2013, respectively, the Company performed an analysis to determine whether the carrying amounts in its financial statements exceeded the present value of the expected revenues directly associated with the Crosby, North Dakota property. Management determined that the net value reflected in the financial statements did not exceed the present value of such revenues.

The total of the Company's investment in proved properties and equipment at December 31, 2014 and September 30, 2014, consists of the following capitalized costs respectively:


	December 31, 2014		September 30, 2014
Crosby, North Dakota Properties
Proved reserves	$	2,381,962	$	2,381,962
Field equipment		1,200,247		1,200,247
Capitalized drilling costs		427,957		427,957
Subtotal		4,010,166		4,010,166
Less impairments		(1,092,302)		(1,092,302)
Less accumulated depreciation, depletion and amortization		(2,857,309)		(2,835,852)
Total Proved Oil and Gas Properties	$	60,555	$	82,012

For the year ended September 30, 2014, the Company performed an analysis to determine whether the carrying amounts in its financial statements exceeded the net present value of the reserve estimates for the Crosby, North Dakota property. Management determined that the net value reflected in the financial statements did not exceed the net discounted present value of the reserves estimated by the independent reserve engineer.

NOTE 6 – RECLAMATION BONDS AND OTHER LONG-TERM ASSETS

Reclamation bonds and other long-term assets consists of various deposits and reclamation bonds. Detail is disclosed in the following table:


	December 31, 2014		September 30, 2014
Rental security deposit	$	1,500	$	1,500
Reclamation bonds		150,370		150,346
TOTAL	$	151,870	$	151,846

NOTE 7 - CONVERTIBLE DEBENTURES

Modification of debt

On November 5, 2013, an investor converted $35,000 in convertible debentures at $0.01 per share. Pursuant to this conversion, the Company issued 3,500,000 shares of common stock.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

On June 3, 2014, the Company entered into a Partial Reset of Conversion Price for the 10% Senior Secured Convertible Debentures agreement (the “2014 Partial Reset”) with one of the Investors. Under the terms of the 2014 Partial Reset, the Investor and the Company agreed to the following terms:

The Investor has the right to convert, into common stock of the Company, up to two hundred thousand dollars ($200,000) (in addition to the principal amount of the Debentures rest in the 2013 Partial Reset) of the principal amount of the Debentures outstanding at a Conversion Price equal to $0.01.

The Company considered the impact of ASC 470-50 “Debt Modifications and Extinguishments” of the 2014 Partial Reset and concluded it constituted a substantial modification and therefore should be accounted for as an extinguishment of debt. During the year ended September 30, 2014, the Company recognized a loss on extinguishment of $399,287 representing the change in fair value of the embedded conversion option because of the modification.

Fiscal year ended September 30, 2014

On or about June 3, 2014, the Company entered into Securities Purchase Agreements with an institutional investor, and accredited investor and the Chairman of the Board of Directors of the Company (each an “Investor” and together the “Investors”), wherein the Company agreed to sell and the Investors agreed to purchase $600,000 (total) of Secured Convertible Debentures. The Debentures are due sixty (60) months from the date of closing. The Debentures are secured by a security agreement granting the Investors a security interest in and to all of the Company’s assets located in the State of Kansas. At closing, the Company also entered into a Stock Pledge Agreement pledging to each Investor, as additional security, all of the Company’s right, title and interest in and to the capital stock of JayHawk Gas Transportation Corporation (a wholly owned subsidiary of the Company and the owner of the Company’s gas transmission pipeline in Kansas).

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 $0.01 per share, or an aggregate of 60,000,000 shares.

Additionally, each Investor will receive: 1) a Wastewater Disposal Fee; and 2) a Royalty Interest.

Wastewater Disposal Fee: the Company agrees to pay each Investor a per barrel fee (the "Disposal Fee") for each barrel of wastewater, which emanates from the Company's five currently producing, as of the original issue date of the Debentures, oil wells located in North Dakota, which is disposed of in the Company's proposed wastewater disposal well to be located in North Dakota (the "Disposal Well"). For a period commencing on the original issue date of the Debentures and continuing for five years or until the Debenture is repaid by the Company, whichever is sooner, the Disposal Fee will be equal to one and no/I 00 dollars ($1.00) per barrel of wastewater disposed of in the Disposal Well. After year five and continuing until each respective Debenture repaid by the Company the Disposal Fee shall be equal to fifty cents ($.50) per barrel of wastewater, emanating from the Company's five currently producing, as of the date the Debenture is issued, oil wells located in North Dakota, disposed of in the Disposal Well.

Royalty Interest: beginning on the original issue date of the Debentures and continuing thereafter so long as the Company owns the subject wells, the Company agrees to pay each Investor a one percent (1 %) overriding royalty interest, calculated monthly, on all proceeds received by the Company from sales of crude oil produced from the Company's five (5) then producing, as of the date the Debentures were issued, oil wells located in North Dakota

On June 3, 2014, the price for the Company’s common stock exceeded the $0.01 conversion price stated in the debentures. Management determined that the favorable exercise price represented a beneficial conversion feature. Using the intrinsic value method at the debenture date, a total discount of $600,000 was recognized on the debentures. The discount is being amortized over the term of the debentures using the straight-line method, which approximated the effective interest method. The Company recorded $40,000 in interest expense related to the amortization of the discount for the year ended September 30, 2014. The remaining discount balance was $560,000 at September 30, 2014.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

At December 31, 2014, principal payments on debt are due as follows:


Year ending December 31,
2015	$	1,069,501
2016		5,828
2017		-
2018		-
2019		600,000
	$	1,675,329

NOTE 8 - DERIVATIVE LIABILITIES

The Company entered into three separate issuances of convertible debentures, dated December 14, 2009, April 23, 2010, and October 20, 2010, which contained provisions allowing holders of the debentures to convert outstanding debt to shares of the Company's common stock. The debentures contain anti-dilution provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions. Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting. As such, management has valued them at fair value at the date of issuance.

Conversion option derivative

For the three months ended December 31, 2014 and 2013, the fair value of conversion options was estimated at the period’s end using the Black-Scholes option pricing model using the following weighted average assumptions.


		December 31, 2014		December 31, 2013
Stock price	$	0.01	$	-
Risk-free interest rate		0.12%		0.08% to 0.10%
Expected term		.50 years		.50 years
Expected volatility		227.40%		248.6% to 326.8%
Fair value of conversion option derivative units		$0.002 to $0.006		$.002 to $0.047

Below is detail of the change in conversion option liability balance for the three months ended December 31, 2014 and 2013, respectively.


		2014		2013

Beginning balance	$	676,533	$	177,553
Loss on conversion of debt		-		(15,336)
Net change in fair value of conversion option liability		(432,018)		(62,459)
Ending balance	$	244,515	$	99,758

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

Warrant derivative

For the three months ended December 31, 2014 and 2013, respectively, the fair value of warrant derivative liability was estimated using the Black-Scholes option pricing model using the following weighted average assumptions:


	December 31, 2014	December 31, 2013
Risk-free interest rate	0.03% to 0.67%	0.07% to 0.78%
Expected term	1 month to 2 years	3 months to 1 year
Expected volatility	263.2% to 282.9%	206.3% to 297.7%
Fair value of warrant derivative units	$0.0001 to $0.009	$ 0.0065

Below is detail of the change in warrant derivative liability balance for three months ended December 31, 2014 and 2013, respectively:


	Three months ended December 31,
	2014		2013

Beginning balance	$	24,697	$	41,553
Net change in fair value of warrant derivative liability		(15,440)		(3,503)
Ending balance	$	9,257	$	38,050

NOTE 9 - ASSET RETIREMENT OBLIGATIONS

The Company has identified asset retirement obligations at the Girard, Kansas and Crosby, 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 7 to 15 years in the future, at an assumed inflation rate of 1.5 percent. 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 three months ended December 31, 2014 and 2013, was computed to be $4,016 and $3,651, respectively.

The following table summarizes the change in the asset retirement obligation for the three months ended December 31, 2014 and December 31, 2013, respectively:


	Three months ended December 31,
	2014		2013
Beginning balance	$	160,636	$	146,033
Liabilities incurred		-		-
Accretion expense		4,016		3,651
Ending balance	$	164,652	$	149,684

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

NOTE 10 - COMMON STOCK

Three months ended December 31, 2014 and 2013

None

NOTE 11 - STOCK BASED COMPENSATION

The Company’s board of directors approved a stock and option plan on August 11, 2009 (the “Plan”). The purpose of the Plan is to provide employees and consultants of the Corporation and its Subsidiaries with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Corporation and its Subsidiaries, to join the interests of employees and consultants with the interests of the shareholders of the Corporation, and to facilitate attracting and retaining employees and consultants of exceptional ability. The total number of shares available for grant under the terms of the Plan is 4,000,000. The number of shares subject to the Plan and any outstanding awards will be adjusted appropriately by the Board of Directors if the Company’s common stock is affected through a reorganization, merger, consolidation, recapitalization, restructuring, reclassification dividend (other than quarterly cash dividends) or other distribution, stock split, spin-off or sale of substantially all of the Company’s assets.

On October 10, 2013, the Board of Directors rescinded, from various officers and directors, 2,040,000 options to purchase shares of the Company’s common stock. The rescinded options had a strike price of $0.20 based on the closing price of the Company’s common stock on the date of grant. Also on October 10, 2013, the Board of Directors authorized the grant, to various officers and directors, of 4,000,000 options to purchase shares of the Company’s common stock. The options have a strike price of $0.01 based on the closing price of the Company’s common stock on the date of grant and vest over 9 months. The concurrent grant of a replacement award was accounted for as a modification of terms and resulted in an offset to compensation expense of $20,151.

The Company recognizes compensation expense straight-line over the vesting term. Historically, the Company has issued new shares to satisfy exercises of stock options and the Company expects to issue new shares to satisfy any future exercises of stock options.

The outstanding options have a weighted average remaining term of 3.78 years. No options were exercised during the three months ended December 31, 2014. At December 31, 2014 and 2013, the Company had 4,000,000 options granted and outstanding.

The following table reflects the summary of changes during the three months ended December 31, 2014 and 2013:


	Number of shares under options	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value

Balance outstanding, September 30, 2013	2,040,000	$	0.20	$	-
Issued	4,000,000		0.01		-
Exercised	-		-		-
Forfeited or rescinded	(2,040,000)		(0.20)		-
Balance outstanding and exercisable, September 30, 2014 and December 31, 2014	4,000,000	$	0.01	$	-

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

A summary of the status of the Company’s nonvested stock options outstanding at September 30, 2014 is presented as follows:


NONVESTED
	Number of options	Weighted Average Fair Value Per Share
Nonvested, September 30, 2012	80,000	$	0.16
Granted	-		-
Vested	(80,000)		0.16
Forfeited	-		-
Nonvested, September 30, 2013	-		-
Granted	4,000,000		0.01
Vested	(4,000,000)		(0.01)
Forfeited	-		-
Nonvested, September 30, 2014 and December 31, 2014	-	$	0.01

(a) Weighted average exercise price per share

As of December 31, 2014, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. The Company recognized $Nil and $9,360 of compensation cost related to options vested during the three months ended December 31, 2014 and 2013, respectively. These costs are classified under management and administrative expense.

The aggregate intrinsic value of options exercisable at December 31, 2014 and 2013, respectively, was $Nil and $Nil based on the Company’s closing price of $0.01 per common share.

NOTE 12 - BROKER AND SHARE PURCHASE WARRANTS

A summary of activity of the Company's share purchase and broker warrants outstanding at December 31, 2014 is presented as follows:


	Broker Warrants		Weighted Average Exercise Price	Share Purchase Warrants		Weighted Average Exercise Price
Balance outstanding, September 30, 2013	1,055,335	$	0.06	4,777,778	$	0.05
Forfeited or expired	(55,335)		(0.05)	(2,000,000)		(0.05)
Exercised	-		-	-		-
Granted	-		-	-		-
Balance outstanding, September 30, 2014 and December 31, 2014	1,000,000	$	0.06	2,777,778	$	0.05

As revised by the Partial Reset (Note 7), the Share Purchase Warrants expire January 26, 2015 and have an exercise price of $0.05. The Broker Warrants expire February 15, 2017 and have an exercise price of $0.06.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

NOTE 13 - RELATED PARTY TRANSACTIONS

On or about December 1, 2011, the Company entered into a four year lease with Marlin Property Management, LLC, an entity owned by the spouse of the Company's former President/CEO and current chairman of the board of directors. Under the terms of the lease the Company is required to pay $2,500 per month for office space in Coeur d'Alene, Idaho. For the three months ended December 31, 2014 and 2013, $7,500 and $7,500, respectively, were due under the terms of the lease. The balance due to the related party including common area expenses as of December 31, 2014 was $11,314.

On or about June 3, 2014, the Company entered into a Securities Purchase Agreement with the chairman of the board of directors of the Company to sell $200,000 of Secured Convertible Debentures (Note 7). For the three months ended December 31, 2014, the Company paid $3,382 pursuant to the terms of the agreement. The balance due to the related party as of December 31, 2014 was $xxx which was subsequently paid in January 2015.

The balance attributable to the related party as of December 31, 2014 is $200,000 which is 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 $0.01 per share, or an aggregate of 20,000,000 shares.

NOTE 14 – PROMISSORY NOTE PAYABLE

On or about July 12, 2014, the Company entered into a promissory note for $46,642 with a working interest partner. The Company will make seven monthly payments in the amount of $2,500 and subsequently make ten monthly payments in the amount of $2,914. At December 31, 2014, the balance due on the note was $31,642, of which $31,642 is due in the subsequent twelve months of the balance sheet date.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

On December 1, 2011, the Company entered into an office space lease with a related party for a term of four years, at the fixed monthly rental amount of $2,500. Accordingly, the Company's commitment to make these lease payments for each successive year is $30,000.

The Company is obligated to pay royalties to holders of oil and natural gas interests in both North Dakota and Kansas operations. The Company also is obligated to pay working interest holders a pro-rata portion of revenue in oil operations net of shared operating expenses. The amounts are based on monthly oil and natural gas sales and are charged monthly net of oil and gas revenue and recognized as "Due to royalty and working interest holders" on the Company's balance sheet.

On August 1, 2013, the North Dakota Industrial Commission (“NDIC”) submitted an administrative complaint to the State of North Dakota related to plugging and remediation of the Company’s Jenks 1 and Knudsen 1 wells in Crosby, ND. The administrative complaint alleged the Company violated certain portions of the North Dakota Century Code and requested administrative relief against Jayhawk Energy, Inc. for violation of sections of the North Dakota Administrative Code governing the oil and gas industry.

On or about August 12, 2013, the Company responded to the administrative complaint and entered into settlement negotiations with the NDIC. As a good faith effort, the Company began plugging the Knudsen 1 well on or about December 20, 2013. The work required to plug the Knudsen 1 well was completed in January 2014. The range of associated penalties as proposed by the NDIC was $100,000 to $525,000 for failure to comply.

As September 30, 2013, the Company accrued $330,000 as an estimate of total liability related to the Jenks and Knudsen reclamation. For the year ended September 30, 2014, the Company revised the estimate related to the Jenks and Knudsen reclamation and paid an additional $190,947 for completion of remaining remediation.

On February 18, 2014, the Company entered into a Consent Agreement with the State of North Dakota whereby the Company was required to finish reclamation work on the two waste water storage pits adjacent to the Jenks 1 and Knudsen 1 wells respectively. Further, the Consent Agreement allows that the Company must plug the “production zone” of the Jenks 1 well and then may apply for a permit to convert the Jenks 1 well to a salt water disposal well. As a part of the Consent Agreement the Company agreed to pay a

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2014

civil penalty of no less than $105,000, consisting of $25,000 due and payable upon execution of the Consent Agreement and a $16,000 installment per month for five successive months thereafter.

The Company made the initial $25,000 payment and each subsequent monthly installment payment of $16,000 with the final installment paid to the State of North Dakota on June 26, 2014. As of September 30, 2014 the Company has completed substantially all reclamation work and has paid all fines assessed.

On July 12, 2014, the Company completed reclamation work on both the Jenks 1 and Knudsen 1 waste water storage pits. Unseasonably heavy rains which saturated the soil and limited safe access to the site by heavy equipment delayed scheduled reclamation until such time as ground conditions improved. The Company also completed plugging of the ‘production zone’ on the Jenks 1 well and set a balance plug on the Knudsen 1 well bore.

With respect to the Knudsen 1 site reclamation, under North Dakota statute, the Company is required to re-vegetate the disturbed area with native species or with crops according to reasonable specifications of the surface owner. The Company intends to plant native grass in the Spring of 2015 and believes it has substantially complied with the standards set for reclamation of the site. Management does not believe the cost of replanting to be material at this time and, therefore, accrues no additional contingent liability.

NOTE 16– SUBSEQUENT EVENTS

On or about January 27, 2015, the Company entered into a promissory note for $189,790 with a working interest partner. The Company will make nineteen monthly payments in the amount of $9,542 and subsequently make one monthly payments in the amount of $19,016. At December 31, 2014, the balance due on the note was $175,425 and is included in “due to working and royalty interests, long term”. $92,830 is due in the subsequent twelve months of the balance sheet date.

On or about February 12, 2015, the Company entered into a promissory note for $34,162 with a vendor. The Company will make one payment of $5,000, thirty-eight monthly payments in the amount of $1,500 and subsequently make one monthly payments in the amount of $1,378. At December 31, 2014, the balance due on the note was $34,162, and is included in “accounts payable, long term”. $34,774 is due in the subsequent twelve months of the balance sheet date.

On February 12, 2015, the Company entered into a settlement agreement with the Staff of the Corporation Commission of the State of Kansas with respect to a Penalty Order served by the Company for failure to comply with certain portions of the Kansas Administrative Regulations. The Company was found in violation of failure to plug, return to service or temporarily abandon 71 wells and assessed a $7,100 penalty, of which $3,100 is payable immediately, a $2,000 payment due by April 1, 2015 and the final $2,000 payment by May 1, 2015. The Company has subsequently submitted 71 temporary abandonment applications, of which 63 applications were approved. The Company has up to one year to plug the wells, return them to service or file additional temporary abandonment applications. The remaining 6 wells were found to be out of compliance and the Company has been granted until June 15, 2015 to bring the wells into compliance by either plugging the wells, returning them to service or obtaining temporary abandonment status by such date. If the Company fails to meet this deadline, the Company shall be assessed an additional $5,000 penalty.

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

Results of Operations for the three months ended December 31, 2014 and 2013

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, 2014, on Form 10-K, and the Forms 8-K and Forms 10-Q issued in the periods subsequent to December 31, 2013. 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.

Oil and Gas Properties

During the three months ended December 31, 2014, declining oil prices adversely affected the Company’s net revenue total. The Kearney well encountered mechanical issues and subsequent sourcing of replacement motor parts took longer than anticipated. This limited production at the Kearney site to only 5 days during the quarter. The well was returned to service on or about January 3, 2015. The Erickson well produced significantly more water volumes relative to oil volume which consequently resulted in non-economic operations from the Erickson site due to the cost of water disposal.. The Company shut-in the Erickson well temporarily for the quarter until such time as sufficient capital resources are available to perform a complete workover on the unit.

The natural gas pipeline near Girard, Kansas owned by the Company’s subsidiary, Jayhawk Gas Transport Company remains dormant until such time as sufficient capital resources are available to upgrade calibration units and equipment required by the purchaser of gas transported by said pipeline. The Company’s joint interest partner, Vast Petroleum, is currently seeking bids on costs to complete the necessary upgrades and the Company expects to upgrade the pipeline sometime before the end of the fiscal year ending September 30, 2015.

The Company was notified of an order by the Kansas Corporation Commission which oversees oil and gas production in the State of Kansas, whereby the Company was ordered to plug eight inactive wells in the property adjacent to the pipeline. The Company is currently seeking relief from the order and requesting additional time to consider whether resumption of production from those wells are economic or if they should be plugged and permanently abandoned. The Company subsequently submitted 71 temporary abandonment applications, of which 63 applications were approved. The Company has up to one year to plug the wells, return them to service or file additional temporary abandonment applications. The Company is currently evaluating economics and restoration of production from those temporarily abandoned wells and expects to determine a course of action within the next six months.

There has been no revision of estimate to the Company’s asset retirement obligation for the period ended December 31, 2014 as management has not reasonably determined a probability of imminent retirement of the asset at this time.

Revenues – For the three months ending December 31, 2014 and 2013, revenues reported as JayHawk's net working interest were $68,792 and $70,027 respectively. The comparative volume of oil and gas delivered and the average prices received during each of the two respective three month periods of 2014 and 2013, are disclosed in the following table:


	Volumes		Average Prices				Gross Revenue
	2014	2013	2014		2013		2014		2013
Oil Sales (in barrels)	2,661	1,937	$	50.34	$	68.20	$	133,965	$	132,111
Gas Sales (in thousand cubic feet)	-	-		-	$	-		-		-
Total Gross Receipts								133,965		132,111
Less: working & royalty interests								(62,062)		(59,016)
Less: severance taxes								(3,111)		(3,068)
Net Revenues to JayHawk							$	68,792	$	70,027

Oil Revenues – As commented in Note 2 of the Notes to Consolidated Financial Statements above, the Company recognizes revenues only to the extent of its net working interest, which is the remainder after deduction of the outside working and royalty interests.

For the three month period ending December 31, 2014, JayHawk sold a gross 2,661 barrels (Bbls). Field prices (after delivery charges) fluctuated from a low of $34.27 to a high of $66.91 during the three month period ending December 31, 2014. This production was sold at average prices of $50.34/Bbl. During the comparable period ending December 31, 2013 the quarterly sales volumes were 1,937 Bbls. Field prices (after delivery charges) fluctuated from a low of $60.58 to a high of $77.72/Bbl. Average prices received per barrel of crude oil were $68.21 for the three months ending December 31, 2013.

Volumes of oil delivered during the three month period ending December 31, 2014 increased by 724 barrels (37%) over the same timeframe in 2013. The Company operated three of five wells intermittently in the three months ended December 31, 2014 for an aggregate of 258 production days of 460 days available for production (56.1%) compared to 125 production days of 460 days available for production (27.2%) for the three months ended December 31, 2013.


	Three months ended December 31,
	2014	2013	2014	2013	2014	2013
	Days producing		Pct Days producing		Barrels produced
Burner	91	68	98.9%	73.9%	631	517
Erickson	-	22	0.0%	23.9%	-	160
Kearney	5	5	5.4%	5.4%	12	18
Landstrom	73	-	79.3%	0.0%	759	129
Schutz	89	30	96.7%	32.6%	1,277	1,324
	258	125	56.1%	27.2%	2,679	2,148

The Company encountered mechanical issues on its Landstrom well which limited production to 759 barrels from that site for the three months ended December 31, 2013. The Kearney well was also adversely affected by both mechanical and weather-related accessibility issues and produced only 12 barrels of oil in 5 days of production for the quarter (5% of days available). The Erickson well also encountered mechanical issues during the quarter and only produced 0 of 92 days available. The Schutz well produced 89 of 92 days available and produced 1,277 barrels of oil. The Burner wells produced 91 out of 92 available days and produced 631 barrels for the three months ended December 31, 2014. Overall production increased 531 barrels for the three months ended December 31, 2014 compared to the three months ended December 31, 2014.

Gas Revenues – There was no gas production during the quarter ended December 31, 2014. The Company is currently in discussion with joint venture partners to repair certain measurement and calibration equipment which should allow for resumption of production within the next three to six months.

Production and Operating Expenses (Income) – Total operating expenses for the three months ended December 31, 2014 and 2013 were $179,353 and $187,120 respectively. The expenses are segregated as follows:


	Three months ended December 31,								Three months ended December 31

	Crosby, ND		Girard, KS		G&A		Total		Total
Direct Regional Costs	$	29,835	$	4,127	$	-	$	33,962	$	33,799
Depreciation, depletion and amortization		21,457		9,812		-		31,269		58,719
General and administrative		-		-		107,800		107,800		90,951
North Dakota reclamation		2,306		-		-		2,306		-
Accretion of asset retirement obligation		3,053		963		-		4,016		3,651
Total	$	56,651	$	14,902	$	107,800	$	179,353	$	187,120

Total production expenses for the North Dakota oil operations were $29,835 (43.4% of oil revenue) for the three months ended December 31, 2014 compared to $31,785 (45.4% of oil revenue) for the three months ended December 31, 2013.

Production Expenses – include direct costs and expenses such as field labor, fuel, power, well repair and maintenance, and saltwater disposal. The direct production expenses are reported net of amounts charged to our non-operating partners for their working interest share of applicable costs and expenses.

General and Administrative Expenses – include the cost of head office administration and the salaries and wages paid senior management and administrative staff. A comparative analysis of the general and administrative expense for the three month period ending December 31, 2014 and 2013 is provided in the following table:


	Three months ended December 31,
	2014		2013		$$ Change		Pct change

Compensation and payroll taxes	$	22,607	$	22,690	$	(83)	-0.4%
Directors fees		13,000		-		13,000	-
Stock option expense		-		9,360		(9,360)	-100.0%
Legal, professional and consulting		1,829		8,905		(7,076)	-79.5%
Audit and public company expense		40,151		23,154		16,997	73.4%
Insurance		18,225		16,822		1,403	8.3%
Office and other general and administrative		11,988		10,020		1,968	19.6%
Total	$	107,800	$	90,951	$	16,849	18.5%

Total general and administrative expense has increased $16,849 (1.6%) during the three month period ending December 31, 2013 compared to the prior year.

Compensation and payroll expense has decreased $83 for the three months ended December 31, 2014 compared to the same date in 2013. The Company’s Chief Financial Officer is currently maintaining the President and Chief Executive Officer roles on an interim basis.

Legal, professional and consulting fees decreased $7,076 (96.3%) for the three months ended December 31, 2014 compared to the prior year. This decrease is primarily due to legal fees related to the State of North Dakota complaint on reclamation of the Jenks and Knudsen wells for the period ended December 31, 2013, which did not subsequently recur during the three months ended December 31, 2014. The Company also incurred additional consulting expense related to administrative hearings before the North Dakota Industrial Commission relative to its salt water disposal permit application.

Audit and public company expense increased $16,997 for the three months ended December 31, 2014 compared to the three months ended December 31, 2013. The increase in audit expense was a result of recognition of annual audit fees earlier in the fiscal period than in years past due to the Company filing its annual report. Management expects a proportionate decrease in the upcoming three months ended March 31, 2015.

All other general and administrative expense of $11,988 for the three months ended December 31, 2014, was an increase of $1,968 from the same period ending December 31, 2013, of which insurance expense increased $4,611 over the prior year due to rise in annual premium costs.

Management believes general and administrative expenses have stabilized and expects to maintain the current overhead structure for the foreseeable future.

The Company is aggressively pursuing opportunities to increase shareholder value by, among other possibilities, raising capital; seeking merger candidates, joint venture partners or interested parties in sale or trade of business operations; and otherwise increasing revenues. Given the significant decline in oil prices during the three months ended December 31, 2014, the Company cannot sustain operations at its current production level and therefore is seeking interested parties to participate in business reorganization and/or combination.

Other income (expense) – for the three month period ending December 31, 2014 and 2013, are detailed below. Interest expense, financing costs and the non-cash costs of debt conversion and derivatives are more fully discussed in Note 8 to the Notes to the Financial Statements.


	Three months ended December 31,
	2014		2013		$$ Change		Pct change
Gain on change in fair value of conversion option derivative	$	432,018	$	62,459	$	369,559	591.7%
Gain on change in fair value of warrant derivative		15,440		3,503		11,937	340.8%
Gain on extinguishment and conversion of debt		-		15,336		(15,336)	(100.0%)
Net interest and financing costs		(37,485)		(31,297)		(6,188)	19.8%
Amortization of debt discount		(30,000)		-		(30,000)	0.0%
Total other income	$	379,973	$	50,001	$	329,972	659.9%

On or about May 3, 2013, the Company modified the terms of its debentures (Notes 7 and 8) and warrants (Note 8), changing the conversion and exercise price from $0.05 to $0.01 per share for up to 25% of the outstanding debenture balance. Consequently the Company recognizes gain or loss to the extent the fair value of the derivative instrument exceeds or is below the share price at the end of each reporting period.

Cash Flows, Liquidity and Capital Resources

As of December 31, 2014 current assets totaled $142,617 consisting of cash, $81,790, accounts receivable of $41,821 and other current assets of $18,556. At the same date, the Company's current liabilities were $2,566,406, of which $916,687 are debentures with maturity of less than one year. Consequently, management has classified the debentures as current liabilities. This working capital shortage of $2,424,239 impairs the Company's ability to continue operating as a going concern. Future success and independence will be dependent upon the Company's ability to obtain sufficient additional financing and upon achieving profitable future operations. At this time there is no assurance that the Company will be able to achieve these objectives. Management is aggressively seeking joint venture partners, merger, acquisition or other means of financing to grow the Company.

Net cash used by operating activities totaled $95,446 for the three months ending December 31, 2014, compared to $72,580 used by operating activities for the three month period ending December 31, 2013.

Net cash used by investing activities totaled $24 during the three months ending December 31, 2014 as compared to $Nil in the same period ending December 31, 2013. The Company negotiated a promissory note to a working interest partner for past due amounts in the amount of $175,425.

The net change in cash is the sum of cash used in operating activities and provided by investing and financing activities, or a net decrease of $95,470 which is a decrease in the Company's cash balance of $177,260 existing at September 30, 2014, to the cash balance at December 31, 2014 of $81,790.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company has 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 – In connection with the preparation of this quarterly report on Form 10-Q, 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 March 31, 2015. 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 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 December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) 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:

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 December 31, 2014, the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework (2013) issued by COSO.

This quarterly report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. The Company was not required to have, nor has it, engaged its 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 quarterly report

(b) Changes in internal controls – Our management, including the CEO and CFO, identified no change in our internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On March 7, 2012, Gross Capital, Inc. (“Gross”) filed suit against the Company (Civil Action No. 4:12-cv-00714) in the United States District Court for the Southern District of Texas, Houston Division (the “Gross Lawsuit”) alleging breach of provisions of two contracts entered into between the Company and Gross. The Gross Lawsuit requested monetary relief in excess of $132,000 plus attorneys, fees, interest and costs. Prior to the filing of the Gross Lawsuit the Company had offered to settle the dispute for $42,000.

On July 16, 2013, the Company and Gross entered into a Mediated Settlement Agreement (the “Agreement”). Under the terms of the Agreement, the Company agreed to pay Gross a total of $60,000 (the “Settlement Amount”) in four monthly installments of $15,000 each. The first payment of the Settlement Amount was paid on July 19, 2013 with each additional payment made on the 19^th day of each successive month and the final payment being made on October 19, 2013. Following the final payment being made on October 19, 2013 the Gross Lawsuit was dismissed with prejudice.

On or about August 12, 2013, the Company responded to the administrative complaint and entered into settlement negotiations with the NDIC. As a good faith effort, the Company began plugging the Knudsen 1 well on or about December 20, 2013. The work required to plug the Knudsen 1 well was completed on or about January 1, 2014. The range of associated penalties as proposed by the NDIC was $100,000 to $525,000 for failure to comply.

On February 18, 2014, the Company entered into a Consent Agreement with the State of North Dakota whereby the Company is required to finish reclamation work, by June 30, 2014, on the two waste water storage pits adjacent to the Jenks 1 and Knudsen 1 wells respectively. Further, the Consent Agreement allows that the Company must plug the “production zone” of the Jenks 1 well and then may apply for a permit to convert the Jenks 1 well to a salt water disposal well. As a part of the Consent Agreement the Company agreed to pay a civil penalty of no less than $105,000, consisting of $25,000 due and payable upon execution of the Consent

Agreement and a $16,000 installment per month for five successive months thereafter. Should the Company fail to comply with the terms of the Consent Agreement, the Company is subject to penalties of up to an additional $420,000 (over and above the $105,000 penalty agreed to in the Consent Agreement).

The Company made the initial $25,000 payment and subsequently made each monthly payment with the final installment of $16,000 paid to the State of North Dakota on June 26, 2014.

Although reclamation work was to have been completed by June 30, 2014, unseasonably heavy rains which saturated the soil and limited safe access to the site by heavy equipment delayed scheduled reclamation until such time as ground conditions improved. On July 12, 2014, the Company completed reclamation work on both the Jenks 1 and Knudsen 1 waste water storage pits. The Company also completed plugging of the ‘production zone’ on the Jenks 1 well and set a balance plug on the Knudsen 1 well bore. The Company has submitted an application for conversion of the Jenks 1 well to a saltwater disposal well which is currently under consideration by the North Dakota Industrial Commission. The Company is performing additional engineering surveys and cost estimates related to construction of the salt water disposal well to address considerations requested by the North Dakota Industrial Commission.

With respect to the Knudsen 1 site reclamation, under North Dakota statute, the Company is required to revegetate the disturbed area with native species or with crops according to reasonable specifications of the surface owner. The Company intends to plant native grass in the Spring of 2015 and believes it has substantially complied with the standards set for reclamation of the site. Management does not believe the cost of replanting to be material at this time and, therefore, accrues no additional contingent liability.

On February 12, 2015, the Company entered into a settlement agreement with the Staff of the Corporation Commission of the State of Kansas with respect to a Penalty Order served by the Company for failure to comply with certain portions of the Kansas Administrative Regulations. The Settlement Agreement is not binding until accepted with regard to Commission Docket Number 15-CONS-458-CPEN. The Company was found in violation of failure to plug, return to service or temporarily abandon 71 wells and assessed a $7,100 penalty, of which $3,100 is payable immediately, a $2,000 payment due by April 1, 2015 and the final $2,000 payment by May 1, 2015. The Company has subsequently submitted 71 temporary abandonment applications, of which 63 applications were approved. The Company has up to one year to plug the wells, return them to service or file additional temporary abandonment applications. The remaining 6 wells were found to be out of compliance and the Company has been granted until June 15, 2015 to bring the wells into compliance by either plugging the wells, returning them to service or obtaining temporary abandonment status by such date. If the Company fails to meet this deadline, the Company shall be assessed an additional $5,000 penalty. If the Company fails to bring the wells into compliance by August 15, the Company will be assessed and additional $20,000 penalty and the Company’s operator license in Kansas shall be revoked.

No director, officer or affiliate of Jayhawk Energy, Inc. and no owner of record or beneficial owner of more than 5% of the Company’s securities or any associate of any such director, officer or security holder is a party adverse to JayHawk Energy, Inc. or has a material interest adverse to JayHawk Energy, Inc. in reference to pending litigation.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Form 10-K for the year ended September 30, 2014, which was filed with the SEC on January 13, 2015.

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

None.

Item 3. Defaults Upon Senior Securities

The Company has outstanding, with certain institutional investors, convertible debentures in the outstanding principal amount, as of December 31, 2013, of $1,038,687 (See Note 7 Convertible Debentures). The convertible debentures matured as of December 31, 2013. The principal amount owed under the debentures is currently due and owing in full and the Company has not paid the principal amount owing. As a result the Company is in default under the terms of the debentures.

Item 4. Mining Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

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

32.1 Section 1350 Certification of CEO

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: May 28, 2015	By:	/s/ Kelly J. Stopher
		Kelly J. Stopher Principal Executive Officer, Interim President and Interim Chief Executive Officer

Jayhawk Energy, Inc. - FORM 10-Q/A - June 2, 2015

Attached files

Jayhawk Energy, Inc. Reports