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EX-5.1 - Jayhawk Energy, Inc.ex5-1.htm
EX-23.1 - Jayhawk Energy, Inc.ex23-1.htm
EX-23.2 - Jayhawk Energy, Inc.ex23-2.htm
As filed with the Securities and Exchange Commission on May 19, 2010
 
Registration No. 333-[________]
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

JAYHAWK ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
Colorado
1311
20-0990109
(State or other jurisdiction
of incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
 
6420 E. Seltice Way
Suite C
Post Falls, Idaho 83854
(208) 667-1328
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Lindsay E. Gorrill
Chief Executive Officer and Chief Financial Officer
420 E. Seltice Way
Suite C
Post Falls, Idaho 83854
 (208) 667-1328
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
Marc J. Ross, Esq.
Thomas A. Rose, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway, 32nd Floor
New York, New York 10006
Telephone: (212) 930-9700
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
 
 

 
 
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer o
Accelerated Filer o
   
Non-accelerated Filer o
Smaller Reporting Company x
(Do not check if a smaller reporting company)
 
 
 CALCULATION OF REGISTRATION FEE

Title of each class of
securities to be registered
 
Amount to be
Registered(1)
 
Proposed maximum
offering price per
share
 
Proposed maximum
aggregate offering
price
 
Amount of
registration fee
                 
Common stock, par value $0.001 per share, issuable upon
     conversion of senior secured convertible debentures
   
5,000,001
 
$0.51(2)
 
$2,550,001
 
$181.82
Common stock, par value $0.001 per share, issued upon
     exercise of warrants issued to investors in a cashless
     exercise during the quarter ended March 31, 2010
   
2,111,387
 
$0.51(2)
 
$1,076,808
 
$76.78
Common stock, par value $0.001 per share, issuable upon
     exercise of warrants issued to investors
   
2,000,000
 
$0.51(2)
 
$1,020,000
 
$72.73
Common stock, par value $0.001 per share, issuable, at the
     option of the Company, in lieu of payments of interest on
     senior secured convertible debentures
   
925,000
 
$0.51(2)
 
$471,750
 
$33.64
Common stock, par value $0.001 per share, issued on April 1,
     2010, at the option of the Company in lieu of payments of
interest on senior secured convertible debentures
   
21,666
 
$0.51
 
$11,050
 
$0.79
Common stock, par value $0.001 per share, upon exercise
     of warrants issued to the placement agent
   
166,000
 
$0.51(2)
 
$84,660
 
$6.04
Total
   
10,224,054
 
$0.51(2)
 
$5,214,269
 
$371.80
____________
 
 
(1)
 
Pursuant to Rule 416 under the Securities Act, the shares of common stock offered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of anti-dilution provisions, stock splits, stock dividends, recapitalizations or other similar transactions.
 
 
(2)
With respect to the shares of common stock offered by the selling stockholders named herein, estimated at $0.51 per share, the average of the high and low prices of the common stock as reported on the OTC Bulletin Board on May 17, 2010, for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act.
 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
 
 
 

 
 
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 19, 2010
 
 
10,224,054 Shares

JayHawk Energy, Inc.
 
Common Stock
 

 

 
 
This prospectus relates to the sale by the selling stockholders identified in this prospectus of up to 10,224,054 shares of our common stock, which includes (i) 5,000,001 shares issuable upon conversion of senior secured convertible debentures; (ii) 2,111,387 shares issued upon the exercise of warrants in a cashless exercise during the quarter ended March 31, 2010; (iii) 2,000,000 shares issuable upon the exercise of warrants with an exercise price of $0.45 per share; (iv) 925,000 shares issuable, at our option, in lieu of  payments of interest on the senior secured convertible debentures based upon the market price of our common stock as reported on the OTC Bulletin Board on May 17, 2010; (v) 21,666 shares issued on April 1, 2010, at our option, in lieu of  payments of interest on the senior secured convertible debentures; and (vi) 166,000 shares issuable upon the exercise of warrants issued to the placement agent with an exercise price of $0.45 per share  All of these shares of our common stock are being offered for resale by the selling stockholders. 

The prices at which the selling stockholders may sell shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any proceeds from the sale of these shares by the selling stockholders. However, we will receive proceeds from the exercise of the warrants if they are exercised for cash by the selling stockholders. 

We will bear all costs relating to the registration of these shares of our common stock, other than any selling stockholders’ legal or accounting costs or commissions.
 
Our common stock is quoted on the regulated quotation service of the OTC Bulletin Board under the symbol “JYHW.OB”. The last reported sale price of our common stock as reported by the OTC Bulletin Board on May 17, 2010, was $0.52 per share.
 
Investing in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” beginning on page 4 of this prospectus before making a decision to purchase our common stock.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is *, 2010
 
 
 

 

TABLE OF CONTENTS
 
 
Page
   
Prospectus Summary
1
   
Special Note Regarding Forward Looking Statements 
3
   
Risk Factors
4
   
Use of Proceeds
11
   
Market for Our Common Stock and Related Stockholder Matters
11
   
Dividend Policy
11
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
   
Business
16
   
Management
18
   
Executive Compensation
21
   
Certain Relationships and Related Transactions
22
   
Security Ownership of Certain Beneficial Owners and Management
22
   
Selling Stockholders
23
   
Description of Securities
24
   
Plan of Distribution
27
   
Legal Matters
28
   
Experts
28
   
Where You Can Find Additional Information
29
   
Index to Financial Statements
F-1

You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
 
 
i

 

PROSPECTUS SUMMARY
 
The following summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless otherwise noted, the terms “the Company,” “we,” “us,” and “our” refer to JayHawk Energy, Inc., and its wholly-owned subsidiary, JayHawk Gas Transportation Corporation.
 
JayHawk Energy, Inc. was incorporated in Colorado on April 5, 2004 as Bella Trading Company, Inc.  We were originally formed to offer for sale, traditional ethnic and contemporary jewelry, as well as accessories, imported from Nepal and Thailand. During the third quarter of the fiscal year ending September 30, 2007, we decided to change management, enter the oil and gas business, and cease all activity in the retail jewelry industry.  At that time we changed our name to JayHawk Energy, Inc. and shifted our focus to the acquisition, exploration, development, production and sale of natural gas, crude oil, and natural gas liquids, primarily from conventional reservoirs within North America.

We initiated this new focus in July of 2007 with the acquisition of certain oil, gas and mineral leases totaling approximately 35,000 gross acres, located in Bourbon County, Kansas within the Cherokee basin, referred to as the Uniontown properties.   This acreage is leased for the development of coal-bed methane and conventional oil and gas reserves.  We continued our development strategy in the 2nd quarter of the year ending September 30, 2008, acquiring a 65% gross working interest in 5 producing oil wells located in the Williston Basin of North Dakota, along with the right to develop the oil, gas and mineral resources on 15,500 acres of leases in this same area.

In March and April of 2008 the Company augmented its initial investment in southeast Kansas with the acquisition of additional assets, referred to as the Girard properties, including leased acreage, adjacent to the Uniontown properties, 34 gas wells, and a 16 mile natural gas pipeline.  During July and August of 2008 the Company completed drilling, casing and tying-in of an additional 20 gas wells.

Our strategy is to increase shareholder value through strategic acquisitions, drilling and development, and by prudently managing our balance sheet.  We believe in creating opportunities for our shareholders through acquisition and through the “drill-bit.”  In this regard, the Company’s investments to date have been concentrated in essentially coal bed methane gas properties, located in southeast Kansas, and oil producing properties in northwest North Dakota.

Due to a lack of funding, during the fiscal year ending September 30, 2009, no new additional acreage was acquired and no new development or drilling took place.  This lack of funding contributed to management’s decision in August of 2009 to enter into a joint venture agreement with DK True Energy Development (DKTED) for the continued development of our coal-bed methane wells of the Girard properties.  DKTED has contributed $250,000 through the date of this report to acquire an interest in the Girard properties.

As of the date of this prospectus, we remain an early stage oil and gas company led by an experienced management team focused on exploration and production of oil and natural gas.  Our immediate business plan is to focus our efforts on further developing the as yet undeveloped acreage in Southeast Kansas and to drill two or more wells in the Candak, North Dakota properties.  Our main priority will be given to projects with near term cash flow potential, although consideration will be given to projects that may not be as advanced from a technical standpoint but demonstrate the potential for significant upside.  Future development activities will be determined by our ability to access sources of sufficient funding.

Our principal executive offices are located at 6240 E. Seltice Way, Suite C, Post Falls, Idaho 83854.

On December 9, 2009, we entered into a securities purchase agreement wherein we agreed to issue and sell up to $1.5 million of senior secured convertible debentures and warrants to purchase up to an aggregate of 5,000,001 shares of our common stock.  The senior secured convertible debentures are due on December 9, 2011, bear interest at the rate of 10% per annum and are convertible into shares of our common stock at a conversion price of $0.30 per share.  The interest on the senior secured debentures may be paid, at our option, in shares of our common stock at a conversion price equal to the lesser of $0.30 or the lesser of (i) the average of the VWAPs for the 5 consecutive trading days ending on the day preceding the interest payment date or (ii) the average of the VWAPs for the 5 consecutive trading days ending on the trading day that is immediately prior to the date the shares are delivered to the holder.  The warrants are exercisable for a term of forty two months, from the date of their issuance, at an exercise price of $0.45 per share.  In connection with the private placement, we also issued warrants to purchase an aggregate of 166,000 shares of our common stock to the placement agent.  The placement agent warrants are exercisable for a term of five years at an exercise price of $0.45 per share.
 
 
1

 

THE OFFERING

Common stock offered by selling stockholders
This prospectus relates to the sale by certain selling stockholders of 10,224,054 shares of our common stock consisting of:
     
 
(i) 
5,000,001 shares of our common stock issuable upon conversion of senior secured convertible debentures;
     
 
(ii) 
2,111,387 shares of our common stock issued upon the exercise of warrants in a cashless exercise during the quarter ended March 31, 2010;
     
 
(iii)
 2,000,000 shares of our common stock issuable upon the exercise of warrants with an exercise price of $0.45 per share;
     
 
(iv)
925,000 shares of our common stock issuable, at our option, in lieu of payments of interest on the senior secured convertible debentures based upon the market price of our common stock as of May 17, 2010 as reported on the OTC Bulletin Board;
     
 
(v)
21,666 shares of our common stock issued on April 1, 2010, at our option, in lieu of payments of interest on the senior secured convertible debentures; and
     
 
(vi)
166,000 shares of our common stock issuable upon the exercise of warrants issued to the placement agent with an exercise price of $0.45 per share.
     
Offering price
Market price or privately negotiated prices.
   
Common stock outstanding before the
offering
48,857,549 shares (1)
   
Common stock to be outstanding after the offering
56,948,550 shares (2)
   
Use of proceeds
We will not receive any proceeds from the sale of the common stock by the selling stockholders. However, we will receive the exercise price, if the cashless exercise feature is not used, upon exercise of the warrants by the selling stockholders. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.
   
OTB Bulletin Board Symbol
JYHW.OB
   
Risk Factors
You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 9 of this prospectus before deciding whether or not to invest in our common stock.
____________
 
 
(1) Represents the number of shares of our common stock outstanding as of May 17, 2010. Excludes (i) 5,000,001 shares of our common stock issuable upon conversion of outstanding convertible debentures; (ii) 2,000,000 shares of our common stock issuable upon exercise of outstanding warrants with an exercise price of $0.45 per share; (iii) 925,000 shares of our common stock issuable, at our option, in lieu of payments of interest on the senior secured convertible debentures based upon ; the market price of our common stock as of May 17, 2010 as reported on the OTC Bulletin Board, (iv) 166,000 shares of our common stock issuable upon the exercise of warrants issued to the placement agent with an exercise price of $0.45 per share and (v) 4,000,000 shares of our common stock issuable pursuant to our 2009 Stock Incentive Plan..

 
(2) Includes (i) 5,000,001 shares of our common stock issuable upon conversion of outstanding convertible debentures; (ii) 2,000,000 shares of our common stock issuable upon exercise of outstanding warrants with an exercise price of $0.45 per share; (iii) 925,000 shares of our common stock issuable, at our option, in lieu of payments of interest on the senior secured convertible debentures based upon the market price of our common stock as of May 17, 2010 as reported on the OTC Bulletin Board; and (iv) 166,000 shares of our common stock issuable upon the exercise of warrants issued to the placement agent with an exercise price of $0.45 per share.
 
 
2

 
 
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements include statements regarding our expectations, hopes, beliefs or intentions regarding the future, including but not limited to statements regarding our market, strategy, competition, development plans (including acquisitions and expansion), financing, revenues, operations, and compliance with applicable laws. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks described in greater detail in the following paragraphs. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward- looking statement. Market data used throughout this prospectus is based on published third party reports or the good faith estimates of management, which estimates are based upon their review of internal surveys, independent industry publications and other publicly available information. Although we believe that such sources are reliable, we do not guarantee the accuracy or completeness of this information, and we have not independently verified such information.

 
3

 
 
Risk Factors

There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.

Risks Relating to Our Business

Since we have a somewhat limited operating history in our current line of business, it is difficult for potential investors to evaluate our business.

We entered the oil and gas business in the third quarter of our fiscal year ended September 30, 2007. Our somewhat limited operating history makes it difficult for potential investors to evaluate our business or prospective operations. Since our formation, we have generated only limited and sporadic revenues. As an early stage company, we are subject to all the risks inherent in the initial organization, financing, expenditures, complications and delays inherent in a new business. Accordingly, our business and success faces risks from uncertainties faced by developing companies in a competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.

We are dependent upon key personnel whose loss may adversely impact our business.

We rely heavily on the expertise, experience and continued services of Lindsay E. Gorrill, our Chief Executive Officer, Chief Financial Officer and Director, Marshall Diamond-Goldberg, our President, Director and Chairman of Reserve Reporting. The loss of Mr. Gorrill or Mr. Diamond-Goldberg and the inability to attract or retain other key individuals could materially adversely affect us. We seek to compensate and motivate our executives, as well as other personnel, through competitive salaries and bonus plans, but there can be no assurance that these programs will allow us to attract or retain personnel. If Mr. Gorrill or Mr. Diamond-Goldberg were to leave, we could face substantial difficulty in hiring a qualified successor and could experience a loss in productivity while any such successor obtains the necessary training and experience.

We may need additional financing to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all.

We have limited funds. Even with the aggregate proceeds of $1,500,000 from the private placement, pursuant to which we accepted subscriptions for $1,500,000 in principal amount of senior secured convertible debentures and warrants to purchase an aggregate of 5,000,001, shares of our common stock, we may not be able to execute our current business plan and fund business operations long enough to achieve profitability. Our ultimate success may depend upon our ability to raise additional capital. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us.

We may be required to pursue sources of additional capital through various means, including joint venture projects and debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and results of operations.

Our ability to obtain needed financing may be impaired by such factors as the condition of the economy and capital markets, both generally and specifically in our industry, and the fact that we are not profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.

Our independent auditors have expressed doubt about our ability to continue as a going concern.

In their report dated December 17, 2009, our current independent registered public accounting firm stated that our consolidated financial statements for the years ended September 30, 2009 were prepared assuming that we would continue as a going concern, and that they have doubt about our ability to continue as a going concern. In their report dated December 23, 2008, our former independent registered public accounting firm stated that our consolidated financial statements for the year ended September 30, 2008 were prepared assuming that we would continue as a going concern, and that they have doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our ability to obtain sufficient working capital to fund future operations. If we are unable to raise additional capital, our efforts to continue as a going concern may not prove successful.
 
 
4

 

Our exploration and development operations are subject to many risks which may affect our ability to profitably extract oil and natural gas reserves or achieve targeted returns.  In addition, continued growth requires that we acquire and successfully develop additional oil and natural gas reserves.

Our exploration and development activities will depend in part on the evaluation of data obtained through geophysical testing and geological analysis, as well as test drilling activity.  The results of such studies and tests are subjective, and no assurances can be given that exploration and development activities based on positive analysis will produce oil or natural gas in commercial quantities or costs.  As developmental and exploratory activities are performed, further data required for evaluation of our oil and natural gas interests will become available.  The exploration and development activities that will be undertaken by us are subject to greater risks than those associated with the acquisition and ownership of producing properties.  The drilling of development wells, although generally consisting of drilling to reservoirs believed to be productive, may result in dry holes or a failure to produce oil and natural gas in commercial quantities.  Moreover, any drilling of exploratory wells is subject to significant risk of dry holes.
 
Our commercial success depends on our ability to find, acquire, develop and commercially produce oil and natural gas reserves.  Without the continual addition of new reserves, any existing reserves and the production there from will decline over time as such existing reserves are depleted. A future increase in our reserves will depend not only on our ability to explore and develop any properties we may have from time to time, but also on our ability to select and acquire suitable producing properties or prospects.  No assurance can be given that we will be able to continue to locate satisfactory properties for acquisition or participation.  

Our oil and natural gas operations are subject to unforeseen operating hazards which may damage or destroy assets. 

Although we maintain a level of insurance coverage consistent with industry practices against property or casualty losses unique circumstances to any particular event may make the coverage inadequate.  Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or in personal injury.

Natural gas and oil drilling is a speculative activity and involves numerous risks and substantial and uncertain costs that could adversely affect us.

An investment in us should be considered speculative due to the nature of our involvement in the exploration for, and the acquisition, development and production of, oil and natural gas in North America. Oil and gas operations involve many risks, which even a combination of experience and knowledge and careful evaluation may not be able to overcome. There is no assurance that commercial quantities of oil and natural gas will be discovered or acquired by us.
 
We depend on successful exploration, development and acquisitions to maintain reserves and revenue in the future.

Acquisitions of crude oil and natural gas issuers and crude oil and natural gas assets are typically based on engineering and economic assessments made by independent engineers and our own assessments. These assessments will include a series of assumptions regarding such factors as recoverability and marketability of crude oil and natural gas, future prices of crude oil and natural gas and operating costs, future capital expenditures and royalties and other government levies which will be imposed over the producing life of the reserves. Many of these factors are subject to change and are beyond our control. In particular, the prices of and markets for oil and natural gas products may change from those anticipated at the time of making such assessment. In addition, all such assessments involve a measure of geologic and engineering uncertainty that could result in lower production and reserves than anticipated.

In addition, our review of records and properties of potential acquisitions may not necessarily reveal existing or potential problems, nor will we necessarily become sufficiently familiar with the properties before we acquire them to assess fully their deficiencies and potential. Environmental problems, such as soil or ground water contamination, are not necessarily observable even when an inspection on a well is undertaken and even when problems are identified, we may assume certain environmental and other risks and liabilities in connection with acquired properties.

Our reserve estimates, like all estimates, are subject to numerous uncertainties and may be inaccurate.

There are numerous uncertainties inherent in estimating quantities of oil or natural gas reserves and cash flows to be derived from, including many factors beyond our control. The reserve and associated cash flow information set forth herein represents estimates only. In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.
 
 
5

 
 
Estimates of proved or unproved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will result in variations in the estimated reserves and such variations could be material.

Our properties are held in the form of licenses, leases and working interests in operating agreements and leases. If the specific requirements of such licenses, leases and working interests are not met, the instrument may terminate or expire.

If we or the holder of a lease fail to meet the specific requirements of the lease, license or operating agreement the specific instrument may terminate or expire. There can be no assurance that any of the obligations required to maintain each license or lease will be met, although we exercise every commercially reasonable efforts to do so. The termination or expiration of our licenses or leases or the working interests relating to a license or lease may have a material adverse effect on our results of operations and business.

As some of our properties are in the exploration stage, there can be no assurance that we will establish commercial discoveries on those properties.

Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few properties that are explored are ultimately developed into producing oil and/or gas wells. Some of our properties are in the exploration stage only and we have only limited revenues from operations. While we do have a limited amount of production of oil and gas, we may not establish additional commercial discoveries on any of our undeveloped properties. Failure to do so would have a material adverse effect on our financial condition and results of operations.

Our lack of diversification will increase the risk of an investment in us, and our financial condition and results of operations may deteriorate if we fail to diversify.

Our current business focus is on the oil and gas industry in a limited number of properties, including Kansas and North Dakota. Larger companies have the ability to manage their risk by diversification. However, we currently lack diversification, in terms of both the nature and geographic scope of our business. As a result, we will likely be impacted more acutely by factors affecting our industry or the regions in which we operate, than we would if our business were more diversified, enhancing our risk profile.

We have substantial capital requirements that, if not met, may hinder our operations.

We anticipate that we will make substantial capital expenditures for the acquisition, exploration, development and production of oil and natural gas reserves in the future and for future drilling programs. If we have insufficient revenues, we may have limited ability to expend the capital necessary to undertake or complete future drilling programs. There can be no assurance that debt or equity financing, or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes, or if debt or equity financing is available, that it will be on terms acceptable to us. Moreover, future activities may require us to alter our capitalization significantly. Our inability to access sufficient capital for our operations could have a material adverse effect on our financial condition, results of operations or prospects.

Because we are small and have limited access to additional capital, we may have to limit our exploration activity, which may result in a loss of investment.

We have a small asset base and limited access to additional capital. Accordingly, we must limit our exploration activity. As such, we may not be able to complete an exploration program that is as thorough as our management would like. In that event, existing reserves may go undiscovered. Without finding reserves, we cannot generate revenues and investors may lose their investment.

We face strong competition from other oil and gas companies.

We encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of exploratory prospects and proven properties. Our competitors include major oil and gas companies and numerous independent oil and gas companies, individuals and drilling and income programs. Many of our competitors have been engaged in the oil and gas business much longer than we have and possess substantially larger operating staffs and greater capital resources than us. These companies may be able to pay more for exploratory projects and productive oil and gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe are and will be increasingly important to attaining success in the industry. Such competitors may also be in a better position to secure oilfield services and equipment on a timely basis or on favorable terms. We may not be able to conduct our operations, evaluate and select suitable properties and consummate transactions successfully in this highly competitive environment.
 
 
6

 

Current global financial conditions have been characterized by increased volatility which could have a material adverse effect on our business, prospects, liquidity and financial condition.

Current global financial conditions and recent market events have been characterized by increased volatility and the resulting tightening of the credit and capital markets has reduced the amount of available liquidity and overall economic activity. There can be no assurance that debt or equity financing, the ability to borrow funds or cash generated by operations will be available or sufficient to meet or satisfy our initiatives, objectives or requirements. Our inability to access sufficient amounts of capital on terms acceptable to us for our operations could have a material adverse effect on our business, prospects, liquidity and financial condition.

The potential profitability of oil and gas properties depends upon factors beyond our control.

The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance. In addition, a productive well may become uneconomic in the event that water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. These factors cannot be accurately predicted and the combination of these factors may result in us not receiving an adequate return on invested capital.

Seasonal weather conditions and other factors could adversely affect our ability to conduct drilling activities.

Our operations could be adversely affected by seasonal weather conditions and wildlife restrictions on federal leases. In some areas, certain drilling and other oil and gas activities can only be conducted during limited times of the year, typically during the summer months. This would limit our ability to operate in these areas and could intensify competition during those times for drilling rigs, oil field equipment, services, supplies and qualified personnel, which may lead to periodic shortages. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs, which could have a material adverse effect upon us and our results of operations.

The marketability of natural resources will be affected by numerous factors beyond our control.

The markets and prices for oil and gas depend on numerous factors beyond our control. These factors include demand for oil and gas, which fluctuate with changes in market and economic conditions, and other factors, including:

 
·
worldwide and domestic supplies of oil and gas;
 
·
actions taken by foreign oil and gas producing nations;
 
·
political conditions and events (including instability or armed conflict) in oil-producing or gas-producing regions;
 
·
the level of global and domestic oil and gas inventories;
 
·
the price and level of foreign imports;
 
·
the level of consumer demand;
 
·
the price and availability of alternative fuels;
 
·
the availability of pipeline or other takeaway capacity;
 
·
weather conditions;
 
·
domestic and foreign governmental regulations and taxes; and
 
·
the overall worldwide and domestic economic environment.

Significant declines in oil and gas prices for an extended period may have the following effects on our business:

 
·
adversely affect our financial condition, liquidity, ability to finance planned capital expenditures and results of operations;
 
·
cause us to delay or postpone some of our capital projects;
 
·
reduce our revenues, operating income and cash flow; and
 
·
limit our access to sources of capital.

We may have difficulty distributing our oil and gas production, which could harm our financial condition.

In order to sell the oil and gas that we are able to produce, we may have to make arrangements for storage and distribution to the market. In May 2008, we acquired a 16 mile pipeline in Crawford, County, Kansas, however for our other properties, we will rely on local infrastructure and the availability of transportation for storage and shipment of our products. Infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate. This situation could be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping and/or pipeline facilities. These factors may affect our ability to explore and develop properties and to store and transport our oil and gas production and may increase our expenses.
 
7

 

Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will operate, or labor disputes may impair the distribution of oil and/or gas and in turn diminish our financial condition or ability to maintain our operations.

Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated, causing an adverse effect on us.

Oil and gas operations are subject to federal, state, provincial and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, provincial and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received.  Further, hydraulic fracturing, the process used for releasing natural gas from shale rock, has recently come under increased scrutiny and could be the subject of further regulation that could impact the timing and cost of development.

Exploration activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.

In general, our exploration activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.

With the introduction of the Kyoto Protocol, oil and gas producers may be required to reduce greenhouse gas emissions. This could result in, among other things, increased operating and capital expenditures for those producers. This could also make certain production of crude oil or natural gas by those producers uneconomic, resulting in reductions in such production. We are unable to predict the effect on our future earnings of the ratification of the Kyoto Protocol. However, in order to mitigate this risk, we are committed to maximizing shareholder value in an environmentally, socially responsible and safe manner.

We believe that our operations comply, in all material respects, with all applicable environmental regulations. Our operating partners generally maintain insurance coverage customary to the industry; however, we are not fully insured against all possible environmental risks.

Exploratory drilling involves many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.

Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labor, and other risks are involved. We may become subject to liability for pollution or hazards against which we cannot adequately insure or for which we may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.

Any change in government regulation and/or administrative practices may have a negative impact on our ability to operate and on our profitability.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the U.S. or any other jurisdiction may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on our business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitability.

No assurance can be given that defects in our title to natural gas and oil interests do not exist.

Title to natural gas and oil interests is often not possible to determine without incurring substantial expense. An independent title review was completed with respect to certain of the more valuable natural gas and oil rights acquired by us and the interests in natural gas and oil rights owned by us. Also, legal opinions have been obtained with respect to the spacing units for the wells which have been drilled to date and which have been operated by us. However, no assurance can be given that title defects do not exist. If a title defect does exist, it is possible that we may lose all or a portion of the properties to which the title defect relates. Our actual interest in certain properties may therefore vary from our records.
 
 
8

 

Difficult conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations and we do not expect these conditions to improve in the near future.

Our results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world. The stress experienced by global capital markets that began in the second half of 2007 continued throughout 2009. Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and a global recession. Domestic and international equity markets have been experiencing heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on our business. In the event of extreme prolonged market events, such as the global credit crisis, we could incur significant losses.
 
Risks Relating to our Organization and our Common Stock

We may be unable to register for resale all of the shares of common stock and shares of common stock underlying the senior secured convertible debentures and warrants sold in the Private Placement, in which case purchasers in the private placement will need to rely on an exemption from the registration requirements in order to sell such shares.

This prospectus covers all of the shares of common stock underlying the senior secured convertible debentures and warrants sold in the private placement as well as shares which may be issued in lieu of interest on the senior secured convertible debentures. It is possible that the SEC may not permit us to register all of such shares of common stock for resale. In certain circumstances, the SEC may take the view that the private placement requires us to register the resale of the securities as a primary offering. Investors should be aware of the existence of risks that interpretive positions taken with respect to Rule 415, or similar rules or regulations including those that may be adopted subsequent to the date of this prospectus, that could impede the manner in which the shares of common stock underlying the senior secured convertible debentures and warrants may be registered or our ability to register the shares of common stock underlying the senior secured convertible dentures and warrants for resale at all or the trading in our securities. If we are unable to register some or all of the shares of common stock underlying the senior secured convertible debentures or warrants, or if shares previously registered are not deemed to be freely tradeable, such shares would only be able to be sold pursuant to an exemption from registration under the Securities Act, such as Rule 144.

If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if historical un-discovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement.

Our stock price may be volatile.

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 
 
changes in our industry;
 
 
competitive pricing pressures;
 
 
our ability to obtain working capital financing;
 
 
additions or departures of key personnel;
 
 
sales of our common stock (particularly following effectiveness of the resale registration statement required to be filed in connection with the Private Placement);
 
 
our ability to execute our business plan;
 
 
operating results that fall below expectations;
 
 
loss of any strategic relationship;
 
 
regulatory developments;
 
 
economic and other external factors;
 
 
period-to-period fluctuations in our financial results; and
 
 
inability to develop or acquire new or needed technology.

 
9

 
 
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

Our common stock may be deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.

Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on The NASDAQ Stock Market or other national securities exchange and trades at less than $4.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

If our stockholders sell substantial amounts of our common stock in the public market, including shares issued in the private placement upon the effectiveness of the registration statement required to be filed, or upon the expiration of any statutory holding period, under Rule 144, or upon expiration of lock-up periods applicable to outstanding shares, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. The shares of common stock issuable upon conversion of the senior secured convertible debentures and warrants sold in the private placement will be freely tradable upon the earlier of: (i) effectiveness of a registration statement covering such shares and (ii) the date on which such shares may be sold without registration pursuant to Rule 144 (or other applicable exemption) under the Securities Act.

We may apply the proceeds of the private placement to uses that ultimately do not improve our operating results or increase the value of your investment.

We intend to use a portion of the net proceeds from the private placement, including proceeds received upon the exercise of the warrants, for general working capital purposes. Therefore, our management will have broad discretion in how we use these proceeds. These proceeds could be applied in ways that do not ultimately improve our operating results or otherwise increase the value of the investment in units sold in the Private Placement.

Exercise of options and warrants and conversion of convertible debentures may have a dilutive effect on our common stock.

If the price per share of our common stock at the time of exercise of any warrants, options, or any other convertible securities is in excess of the various exercise or conversion prices of such convertible securities, exercise or conversion of such convertible securities would have a dilutive effect on our common stock. As of May 17, 2010, we had (i) outstanding senior secured convertible debentures which are convertible into an aggregate of 5,000,001 shares of our common stock, (ii) warrants to purchase 2,000,000 shares of our common stock at an exercise price of $0.45 per share, (iii) interest payments on our senior secured convertible debentures which, based upon current market prices, are convertible, at our option, into an aggregate of 925,000 shares of our common stock, (iv) outstanding placement agent warrants to purchase 166,000 shares of our common stock at an exercise price of $0.45 per share, and (v) 4,000,000 shares of our common stock issuable pursuant to our 2009 Stock Incentive Plan. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and which result in additional dilution of the existing ownership interests of our common stockholders.

Our certificate of incorporation allows for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.
 
 
10

 
 
USE OF PROCEEDS
 
The selling stockholders will receive all of the proceeds from the sale of the shares offered by them under this prospectus. We will not receive any proceeds from the sale of the shares by the selling stockholders covered by this prospectus. We will, however, receive proceeds from the exercise of the warrants if the warrants are exercised for cash. Proceeds received by us, if any, will be used for working capital and general corporate purposes.
 

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the OTC Bulletin Board under the symbol JYHW.OB. As of May 17, 2010, there were 97 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Corporate Stock Transfer Company at 3200 Cherry Creek Drive South, Suite #340, Denver, Colorado, 80209.
 
The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
Fiscal Year Ended September 30, 2009
 
High
   
Low
 
1st Quarter Ended December 31
  $ 1.06     $ 0.13  
2nd Quarter Ended March 31
  $ 0.56     $ 0.17  
3rd Quarter Ended June 30
  $ 0.64     $ 0.20  
4th Quarter Ended September 30
  $ 0.50     $ 0.25  

Fiscal Year Ended September 30, 2008
 
High
   
Low
 
1st Quarter Ended December 31
  $ 2.71     $ 1.66  
2nd Quarter Ended March 31
  $ 2.27     $ 0.94  
3rd Quarter Ended June 30
  $ 2.54     $ 1.64  
4th Quarter Ended September 30
  $ 2.14     $ 0.71  
 
The last reported sales price of our common stock on the OTC Bulletin Board on May 17, 2010 was $0.52 per share.

 
DIVIDEND POLICY
 
We have not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers significant.
 
 
11

 
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors”.

Overview
 
This overview is presented in chronological order as to dates the respective transactions were completed.  It should be read in conjunction with the "Notes to consolidated financial statements" presented in Item 4, specifically Note 9 relative to Common Stock, and Note 4 relative to Asset Impairments.

On June 21, 2007, we changed our name from Bella Trading Company, Inc. to JayHawk Energy, Inc. and shifted our focus from the retail jewelry industry to the oil and gas business.  Our new business plan was to acquire oil and gas properties for exploration and development with the intent to bring the projects to feasibility at which time we would either contract out the operations or joint venture the project to qualified interested parties.

We implemented this plan on July 25, 2007 with the acquisition of certain oil, gas, and mineral leases to approximately 35,000 gross acres located in Bourbon County, Kansas (“Uniontown project”).  The assets were purchased for a total purchase price of $2.2 million.

On January 16, 2008, JayHawk purchased a 65% working interest in 5 producing oil wells located in the Williston Basin of North Dakota, along with the right to develop the oil, gas and mineral resources on 15,500 acres of leases in this same area.  In consideration for these properties JayHawk paid JED Oil $3.5 million in cash.  The cash used to complete this transaction was raised in the private placement transaction more fully described in Note 9 of the Consolidated Notes to Financial Statements.

On March 31, 2008, JayHawk closed a transaction, initiated with an agreement dated February 18, 2008, whereby JayHawk acquired a 16 mile pipeline, associated easements, oil, gas and mineral leases to approximately 6,500 gross acres, 34 gas wells, compressor, and other field equipment.  In consideration for these assets JayHawk exchanged $1 million in cash and 1 million shares of our common stock (See Note 8 of the "Notes to Financial Statements").

On April 18, 2008, JayHawk entered into an agreement to acquire oil and natural gas rights to 1,336 gross acres and 14 completed but non-producing gas wells, in exchange for $300 thousand in cash and 50,000 shares of the Registrants common stock (See Note 8 of the Consolidated Notes to Financial Statements).

On June 30, 2008, the Company agreed to purchase oil, gas and mineral leases on 11,462 gross acres, located in Crawford and Bourbon counties Kansas, and 5 completed and cased gas wells.  In consideration for these assets JayHawk paid $140 thousand in cash and was obligated to issue 286,550 shares of its common stock as the leases were assigned at the rate of 25 shares per acre (See Note 8 of the "the Consolidated Notes to Financial Statements").

During the 4th quarter of the year ending September 30, 2009 the Company completed a signed letter agreement with DK True Energy Development Limited ("DKTED”) which allows DKTED to earn up to an 85% working interest in JayHawk's Coal Bed Methane ("CBM") project in southeast Kansas (the Girard project).  This interest can be earned by True Energy after paying the Company $500,000 and spending a minimum of $1,300,000 over a three year period.  DKTED has the option to cap its participation and working interest at 42.5 percent after paying the Company $250,000 and spending $300,000 on workovers of existing wells during the first year, in what is described as the “Primary Program”.  As at September 30, 2009, DKTED had paid JayHawk $125,000 of the initial $250,000 obligation.  

 We have not entered into commodity swap arrangements or hedging transactions, and although we have no current plans to do so, we may enter into commodity swap and/or hedging transactions in the future in conjunction with oil and gas production. We have no off-balance sheet arrangements.
 
Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could fail as a result of a number of factors.  Our future financial results continue to depend primarily on (1) our ability to discover has commercial quantities of oil and gas; (2) the market price for oil and gas; (3) our ability to continue to source and screen potential projects; and (4) our ability to fully implement our exploration and development program with respect to these and other matters. We cannot assure that we will be successful in any of these activities or that the prices of oil and gas prevailing at the time of production will be at a level allowing for profitable production.
 
 
12

 

Results of Operations

Year Ended September 30, 2009 as Compared to Year Ended September 30, 2008

For the years ending September 30, 2009 and 2008 we report gross revenues of $588,410 and $1,199,837, respectively, from the sales of oil and natural gas.  Details of these two revenue components follow:  

Oil Revenues:  For the years ended September 30, 2009 and 2008 JayHawk’s gross working interest in the revenues generated from the five North Dakota oil wells were $479,598 and $1,108,055 respectively.  The Company’s revenues are determined after deducting volumes and amounts attributable to outside working and royalty interests.  Computation of JayHawk’s distributable share of the gross sales values for the periods ending September 30, 2009 and 2008 are reflected in the following table:
 
Description             
 
Year End
Sept. 30, 2009
   
Year End
Sept. 30, 2008
 
Gross Sales Value
 
$
898,950
   
$
2,079,523
 
Less: Distributable to Outside Interests
   
(419,352
)
   
(971,468
)
JayHawk’s Gross Revenues
 
$
479,598
   
$
1,108,055
 
 
The steep decline in gross revenues evidenced here is attributable to the equivalent decline between the two periods in the average price received for a barrel of oil.  For the year ending September 30, 2009 the average price we received for a barrel of oil was $46.30.  During the comparable period ending September 30, 2008 the average price received per barrel was in excess of $100.00.   
 
Gas Revenues:  Revenues derived from gas sales for the years ending September 30, 2009 and 2008 were $108,812 and $91,782.  Average monthly prices received for each thousand cubic feet (mcf) of gas sold during the period end September 30, 2009 have remained volatile, ranging from a high of $4.54, received for the sale of December 2008 production,  to a low of $2.58 received for March 2009 production.  The average price received for the 12 month period ending September 30, 2008 was $3.06 per mcf.

Exploration Expenses:  There were no exploration expenses incurred during the years ending September 30, 2009 or 2008.

Production Expenses:  Production expenses are comprised of production taxes, field labor, maintenance, chemicals, fuel, and salt water disposal, less amounts charged other working interests in the particular wells.  These expenses associated with the Company’s North Dakota oil operations decreased approximately 24 percent from $280,689 for the year ending September 30, 2008 to $211,507 for the year ending September 30, 2009.  The Kansas gas operations saw production expenses declining approximately 17 percent, from $226,552 to $187,638, between the same periods.

Depreciation, depletion, amortization, and asset impairment expense: The aggregate of these expenses for the years ending September 30, 2009 and 2008 are detailed below.  The total for the 2008 fiscal year end includes a provision of $1,474,000 as a valuation allowance for those leases associated with the unproved properties described as the Uniontown project (Note 4) and the annual accretion of the asset retirement obligation, explained in Note 8.
 
   
Year End
Sept. 30, 2009
   
Year End
Sept. 30, 2008
 
Asset Impairment Expense
 
$
---
   
$
1,474,000
 
Unproved Property Amortization Expense (Note 4)
   
291,396
     
114,535
 
Proved Property Depreciation and Depletion (Note 5)
   
753,406
     
613,158
 
Accretion in annual Asset Retirement Obligation (Note 8)
   
12,804
     
11,640
 
Depreciation of Office Furniture & Equipment
   
11,971
     
1,431
 
Total
 
$
1,069,577
   
$
2,214,764
 

As discussed generally in Note 2, and specifically in Note 5, of "Notes to the Consolidated Financial Statements," JayHawk periodically reviews and assesses its unproved properties to determine if they have been impaired.  During the year ending September 30, 2008, management made a review of the portfolio of leases acquired in the Uniontown transaction of July 2007, and decided, based on geology and proximity to our pipeline, to allow approximately half of the original Uniontown leases acquired, to expire.  Further, given the Company's inability at this time to fund development of any acreage, we have provided a valuation for potential loss equal to two-thirds, 67%, of the original cost of this leased acreage. Under U.S. Generally Accepted Accounting Principles, losses on write-downs of assets are not considered extraordinary losses.  Accordingly, this amount is included in operating expenses.
 
 
13

 
General and Administrative Expenses:  General and administrative expenses have been reduced to $612,105 for the 12 months ending September 2009 from $1,541,691 for the comparable period end September 30, 2008.
 
Description     
 
Year End
Sept. 30, 2009
   
Year End
Sept. 30, 2008
 
Salaries, Wages and Compensation
 
$
242,500
   
$
558,443
 
Consulting, Legal & Professional Fees
   
114,560
     
414,837
 
All other operating expenses combined
   
302,653
     
568,411
 
Total General and Administrative Expenses
 
$
659,713
   
$
1,541,691
 
 
Other Income and Expense: Detail of the aggregate of this classification is disclosed in the following table:
 
Description  
 
Year Ended
Sept. 30, 2009
   
Year Ended
Sept. 30, 2008
 
Net Interest Expense
 
$
101,890
   
$
6,271
 
Bad Debt Expense (Note 3)
   
27,001
     
105,311
 
Capital Raising Costs
   
91,958
     
---
 
Note Discount & Accretion Expense
   
522,248
     
---
 
Interest and other income
   
(5,490
)
   
(47,099
)
Total Other Income and Expense
 
$
737,607
   
$
64,483
 
 
The increase in interest expense for the year ending September 30, 2009 is attributable to the fact that it reflects a full year of interest on the Note Payable whereas in the year ending September 30, 2008, interest was accrued on the note for only two months, August and September.  Additionally, interest expense is reported net of interest income, of which there was a minimal amount in the more recent year end than in the year ending September 30, 2008.  Likewise, during the period end September 30, 2008 no note discount or accretion expense was recorded.


Three Months Ended March 31, 2010 as Compared to Three Months Ended March 31, 2009

Drilling Operations – during the three month period ended March 31, 2010, JayHawk spud and completed two new oil wells on the Crosby, North Dakota properties.  The Knudson #1 and Jenks #1 were each spud and completed during March 2010.  Both are expected to commence production during this current quarter ending June 30, 2010.  Based on the flow rates achieved during initial testing, the Company is anticipating commercial production from each.  At March 31, 2010 all of the costs associated with the drilling and completion of these two wells have been capitalized and included in the net cost of the proved and developed Crosby, North Dakota oil properties.  As capital costs, these items do not affect the cost and expenses associated with the normal production activities reflected in these current financial statements.  As of March 31, 2010 we have capitalized drilling costs totaling approximately $1.3 million.

Oil Revenues – derived from oil sales delivered from our Crosby, North Dakota properties are reported in the Consolidated Statements of Operations net of working and royalty interests.  For the three and six month periods ending March 31, 2010, JayHawk sold a gross 4,845 Bbls. and 9,773 Bbls., respectively.  This production was sold at average prices of $65.59/Bbl. and $63.27/Bbl., yielding gross sales amounts of $317,805 and $618,298 for the three and six month periods.  These gross numbers are reconciled to the net sales revenue by deducting those amounts applicable to the outside working and royalty interests.

JayHawk’s net oil revenues for the three and six month periods ended March 31, 2010, of $176,269 and $346,575, reflect very  favorable variances from the net oil revenues reported for the comparable periods ending March 31, 2009, of $61,599 and $184,932.   This is attributable to a strong price variance and a significant volume variance, as there was no production or sales during the month of January 2009 due to severe winter weather in North Dakota.  Prices for the three and six month periods ending March 31, 2009 averaged only $34.78 and $39.18 per barrel, respectively.

Gas Revenues – Gross sales of gas produced and delivered from our Girard, Kansas properties for the three and six month periods ending March 31, 2010 were $30,059 and $63,435, respectively.  The amount reported in the financial statements of the Company however reflect only JayHawk’s net working interest.  During the first quarter ending December 31, 2009 the Company entered into an agreement whereby 42.5 percent of the gas revenues generated from the Girard properties were assigned to a joint venture partner in exchange for $250,000.  Therefore, the net gas revenues accruing to the Company for the three and six month periods ending March 31, 2010 are reported net of our joint venture partner’s interest.  JayHawk’s net gas revenues from the gross sales were $18,544 and $42,638 for the respective three and six month periods.  Additionally during the three months ending March 31, 2010 the pipeline has undergone significant maintenance and modifications in an attempt to increase daily volumes.  This has caused a decrease in the volumes sold during this period.
 
 
14

 

Prices received for our gas production continue to be volatile.  During the three months ending March 31, 2010 they have fluctuated between a low of $3.58 per mcf. to a high of $5.41 per mcf.  During the comparable periods ending March 31, 2009 prices fluctuated between a low of $2.48 and a high of $4.67 per mcf.  Gas revenues accruing to JayHawk during the three and six month periods ending March 31, 2009 were $29,213 and $62,913, respectively.

Production Expenses – include direct costs and expenses such as field labor, fuel, power, well repair and maintenance, saltwater disposal, and production and severance taxes.  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.  The increase in production expenses for the North Dakota oil operations for the three and six month periods end March 31, 2010 is primarily associated with an extra month of operations in the 2010 period end.  During the 2009 period end there were no production activities for a full month due to unfavorable weather conditions.

Relative to the Company’s Kansas natural gas activities, throughout both the three and six month periods ending March 31, 2010, in accordance with the joint operating agreement, the joint venture partner has paid the majority of all costs associated with those operations.  This accounts for the reduction in production costs reflected between the comparable three and six month periods ending March 31, 2010 and 2009.

General and Administrative Expenses – include the cost of head office administration and the salaries and wages paid senior management and administrative staff.  An comparative analysis of the  general and administrative expense for the three and six month periods ending March 31, 2010 and 2009 is provided in the following table:
 
   
Period End March 31, 2010
   
Period End March 31, 2009
 
   
Three Months
   
Six Months
   
Three Months
   
Six months
 
                         
Compensation
 
$
120,500
   
$
194,000
   
$
48,500
   
$
160,000
 
Legal and consulting fees
   
43,537
     
133,490
     
20,910
     
78,894
 
Audit and public company expense
   
34,289
     
53,961
     
16,029
     
18,343
 
Employer payroll taxes
   
8,551
     
9,637
     
3,606
     
11,228
 
Office expense
   
6,237
     
10,875
     
9,509
     
19,834
 
All other corporate general & administrative
   
12,268
     
33,200
     
3,073
     
34,903
 
Total
 
$
225,382
   
$
435,163
   
$
101,627
   
$
323,202
 
 
Other net (income) expense – includes interest and financing costs and the non-cash costs of debt conversion expense more fully discussed in Note 6 to the Condensed Notes to the Financial Statements, discount amortization, and note accretion expenses.  The detail comprising the total other net (income) and expense follows:
 
   
Period End March 31, 2010
   
Period End March 31, 2009
 
   
Three Months
   
Six Months
   
Three Months
   
Six Months
 
                         
Interest and financing costs
 
$
37,637
     
108,366
     
19,567
     
43,501
 
Debt conversion expense
   
1,466,978
     
1,466,978
     
--
     
--
 
Debenture discount amortization & expense
   
457,756
     
457,756
     
58,286
     
116.572
 
Accretion of convertible note payable
   
--
     
--
     
98,389
     
196,777
 
All other miscellaneous (income) & expense
   
(54,987
)
   
(73,513
)
   
3,201
     
(18,563
)
Total
 
$
1,907,384
   
$
1,959,587
   
$
179,443
   
$
338,287
 

Cash Flows, Liquidity and Capital Resources
 
As of March 31, 2010 our current assets totaled $971,346 consisting of cash, $826,698, accounts receivable, $129,284, and prepaid expenses, 15,364.  At the same time our current liabilities were $1,673,740.  This apparently significant working capital shortage was substantially alleviated with the receipt of $600,000 in April in consideration for the issuance of 10% convertible debentures (see Note 8 – Subsequent Events).

Net cash provided by operating activities totaled $1,029,061 for the six months ending March 31, 2010, compared to $230,780 used in operating activities for the six month period ending March 31, 2009. 
 
Net cash used in investing activities totaled $1,108,021 in the three months ending March 31, 2010 as compared to $30,973 in the same period ending March 31, 2009.
 
Cash in the amount of $900,000 was provided by financing activities during the six months ending March 31, 2010.  During the comparable period ending March 31,2009, $200,000 was provided by financing activities.

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 $821,040 which is the increase in the Company's cash balance of $5,658 existing at September 30, 2009, to the cash balance at March 31, 2010 of $826,698.  Generally, our main sources of liquidity are cash and internally generated cash flow from the sale of crude oil and natural gas.  In this six month period ending March 31, 2010 the cash position was significantly augmented by the issuance of the debentures in the amount of $900,000.
 
 
15

 

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

BUSINESS
Business Development

JayHawk Energy, Inc. was incorporated in Colorado on April 5, 2004 as Bella Trading Company, Inc.  We were originally formed to offer for sale, traditional ethnic and contemporary jewelry, as well as accessories, imported from Nepal and Thailand. During the third quarter of the fiscal year ending September 30, 2007, we decided to change management, enter the oil and gas business, and cease all activity in the retail jewelry industry.  At that time we changed our name to JayHawk Energy, Inc. and shifted our focus to the acquisition, exploration, development, production and sale of natural gas, crude oil, and natural gas liquids, primarily from conventional reservoirs within North America.

We initiated this new focus in July of 2007 with the acquisition of certain oil, gas and mineral leases totaling approximately 35,000 gross acres, located in Bourbon County, Kansas within the Cherokee basin, referred to as the Uniontown properties.   This acreage is leased for the development of coal-bed methane and conventional oil and gas reserves.  We continued our development strategy in the 2nd quarter of the year ending September 30, 2008, acquiring a 65% gross working interest in 5 producing oil wells located in the Williston Basin of North Dakota, along with the right to develop the oil, gas and mineral resources on 15,500 acres of leases in this same area.

In March and April of 2008 the Company augmented its initial investment in southeast Kansas with the acquisition of additional assets, referred to as the Girard properties, including leased acreage, adjacent to the Uniontown properties, 34 gas wells, and a 16 mile natural gas pipeline.  During July and August of 2008 the Company completed drilling, casing and tying-in of an additional 20 gas wells.

Our strategy is to increase shareholder value through strategic acquisitions, drilling and development, and by prudently managing our balance sheet.  We believe in creating opportunities for our shareholders through acquisition and through the “drill-bit.”  In this regard, the Company’s investments to date have been concentrated in essentially coal bed methane gas properties, located in southeast Kansas, and oil producing properties in northwest North Dakota.

Due to a lack of funding, during the fiscal year ending September 30, 2009, no new additional acreage was acquired and no new development or drilling took place.  This lack of funding contributed to management’s decision in August of 2009 to enter into a joint venture agreement with DK True Energy Development (DKTED) for the continued development of our coal-bed methane wells of the Girard properties.  DKTED has contributed $250,000 through the date of this report to acquire an interest in the Girard properties.  

As at September 30, 2009, we remain an early stage oil and gas company led by an experienced management team focused on exploration and production of oil and natural gas.  Our immediate business plan is to focus our efforts on further developing the as yet undeveloped acreage in Southeast Kansas and to drill two or more wells in the Candak, North Dakota properties.  Our main priority will be given to projects with near term cash flow potential, although consideration will be given to projects that may not be as advanced from a technical standpoint but demonstrate the potential for significant upside.  Future development activities will be determined by our ability to access sources of sufficient funding.

Oil and Gas Properties

S.E. Kansas - Uniontown Properties – Located in S.E. Kansas, these properties consist of the leased acreage and wells within the leased area drilled by previous operators.  Mud logs and cores have been taken to identify coal properties and gas contents.  There have been at least 11 gas bearing coals identified within the Cherokee Group from depths of 250 – 750 feet, with typical thicknesses of 1 to 4 feet, yielding total net coal thickness ranges from 20 to 38 feet.  Gas contents have been measured between 22 – 124 standard cubic feet per ton.  No production tests have yet been conducted.

S.E. Kansas - Girard Properties - Adjacent to the Uniontown Project is the Girard Project in Crawford County Kansas which we acquired on March 31, 2008.  With this transaction JayHawk acquired 34 wells, of which 7 were tied into a pipeline also acquired at this time (more fully described immediately following).  This acquisition provided JayHawk infrastructure necessary for future development of existing and acquired leased acreage, and during July and August of 2008 we completed drilling and casing an additional 20 gas wells.  Our acreage position in both Bourbon and Crawford counties Kansas was enhanced again with the acquisition from Missouri Gas Partners of certain oil, gas and mineral rights to 11,462 leased acres in June of 2008.  As at September 30, 2009, we have 20 producing gas wells tied-in to the pipeline.  At September 30, 2009 we had a total of 44,216 leased acres in Kansas, and are producing and selling an average of 105 MCF daily of coal bed methane gas.  Since June of 2008 through September of 2009, our gas production and sales has contributed $200 thousand in gross revenues.
 
 
16

 

JayHawk Gas Transportation Company - Associated with the acquisition of the Girard properties in March of 2008, the Company acquired a 16 mile pipeline.  Management anticipates that the pipeline will play a significant part in JayHawk's future development.  As such, in May of 2008, the Company established a 100% owned and controlled subsidiary, "JayHawk Gas Transportation Corporation" to hold and manage the assets associated with the pipeline.  This pipeline is tied into a 2 million cubic foot sales pipeline and allows for substantial growth.

North Dakota - Crosby Project – On January 16, 2008, we acquired a 65% working interest in five producing oil wells, historically referred to as the Crosby property, located in the Williston Basin, of North Dakota.  In addition to the five producing wells, we acquired certain oil, gas, and mineral rights in a 15,500-acre land position.  The Crosby property originally provided stable production of approximately 65 Bbls of light crude oil daily from the five existing wells.  We have been pleased with the success of these five producing wells.  Since their acquisition and through September 30, 2009 these five wells have produced and sold in excess of 40,000 Bbls. and generated net revenues to JayHawk of $1,587,653.

Reserves - For the North Dakota properties, the independent petroleum engineering firm of McDaniel & Associates Consultants, Ltd. of Calgary, Alberta Canada, prepared the estimates of our proved developed and proved undeveloped reserves as at September 30, 2008 and 2009, and the future net cash flows (and related present value) attributable to proved reserves at these respective dates.  Proved developed reserves are defined as estimated quantities of oil, natural gas and natural gas liquids which upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable  in the future from known oil and gas reservoirs under existing economic and operating conditions.  Proved undeveloped reserves are those reserves which can be expected to be recovered from new wells with existing equipment and operating methods.

Estimated quantities of proved reserves for the North Dakota, Crosby property for the year end September 30, 2009 are presented below:
 
   
Reserves
In Barrels
 
       
Proved developed reserves
   
60,400
 
Proved undeveloped reserves
   
88,500
 
Total proved reserves
   
148,900
 
 
The Kansas properties identified above as the Girard and Uniontown projects have not been evaluated and no independent estimates of proved reserves have yet been made.  Additional information about the Company’s proved oil and gas reserves are presented under Supplemental Oil and Gas Disclosures on pages 30 through 32 in the accompanying financial statements.

Employees

During the year ending September 30, 2009, we employed 6 individuals.  Administrative and executive functions are carried out by two individuals located in Post Falls, Idaho. We outsource our accounting function to an independent contractor.  Oil production operations are overseen by the Company’s President and a field superintendent located in the Williston Basin area of North Dakota.  Both of these individuals were compensated as independent contractors.  Additionally one employee functioned as the field superintendent of the Girard and Uniontown properties and was responsible for the gas production operations.  Going forward, and for the foreseeable future, we plan to outsource our geological, geophysical, drilling and petroleum engineering requirements to independent consultants and contractors.

Competitive Business Conditions

We are a junior oil and gas exploration company. We compete with other companies for financing and for the acquisition of new oil and gas properties. Many of the oil and gas exploration companies with whom we compete have greater financial and technical resources than those available to us. Accordingly, these competitors may be able to spend greater amounts on acquisitions of oil and gas properties of merit, on exploration of their properties and on development of their properties. In addition, they may be able to afford more geological expertise in the targeting and exploration of oil and gas properties. This competition could result in competitors having properties of greater quality and interest to prospective investors who may finance additional exploration and development. This competition could have an adverse impact on our ability to achieve the financing necessary for us to conduct further exploration of our acquired properties.

We will also compete with other junior oil and gas exploration companies for financing from a limited number of investors that are prepared to make investments in junior oil and gas exploration companies. The presence of competing junior oil and gas exploration companies may have an adverse impact on our ability to raise additional capital in order to fund our exploration programs if investors are of the view that investments in competitors are more attractive based on the merit of the oil and gas properties under investigation and the price of the investment offered to investors.  Additionally, there is competition for other resources, including, but not limited to, professional geologists, camp staff, helicopter or float planes, mineral exploration supplies and drill rigs.

Patents and Trademarks

We do not own, either legally or beneficially, any patent or trademark.
 
 
17

 

Governmental Regulations

Our oil and gas operations are subject to various federal, state and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state and local laws and regulations relating primarily to the protection of human health and the environment. To date, we have incurred no cost related to complying with these laws, for remediation of existing environmental contamination and for plugging and reclamation of our oil and gas exploration property. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.

Legal Proceedings

From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. No legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve the Company which, in the opinion of the management of the Company, could reasonably be expected to have a material adverse effect on its business or financial condition.

There are no proceedings in which any of the directors, officers or affiliates of the Company, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to that of the Company.
 
 
MANAGEMENT
 
Set forth below is certain information regarding our executive officers and directors. Each of the directors listed below was elected to our board of directors to serve until our next annual meeting of stockholders or until his successor is elected and qualified. All directors hold office for one-year terms until the election and qualification of their successors. The following table sets forth information regarding the members of our board of directors and our executive officers:
 
Name
 
Age
 
Position with the Company
         
Lindsay E. Gorrill
 
48
 
Chief Executive Officer, Chief Financial Officer and Director
         
Marshall Diamond-Goldberg
 
56
 
President, Director & Chairman of Reserve Reporting
         
Mathew J. Wayrynen
 
48
 
Chairman of the Board of Directors
         
Jeffrey W. Bright
 
46
 
Director
         
Tyrone Docherty
 
50
 
Director

Lindsay E. Gorrill – Chief Executive Officer, Chief Financial Officer and Director

Mr. Lindsay Gorrill is a C.A. and has university degrees in Finance and Marketing. Mr. Gorrill has a background in acquisitions, company building, financial markets and world exposure. Previously he was the president and CEO of Berkley resources, an oil and gas company based in Vancouver, BC. Mr. Gorrill has 18 years experience in the resource sector and 15 years experience in successful international company building.
 
Mathew J. Wayrynen – Chairman of the Board of Directors

Mr. Wayrynen was appointed to the Board of Directors on April 30, 2008.  Mr. Wayrynen is a citizen of Canada.  He also serves as a director of Quinto Technology (since 2002), as a director of Avino Silver & Gold Mines, Ltd. (since 2004) and as CEO of Berkley Resources, Inc. (since 2003).  Prior to these positions Mr. Wayrynen was a broker with Golden Capital Securities, located in Vancouver, British Columbia.  Mr. Wayrynen is not an officer or director of any other U.S. reporting company.
 
 
18

 

Tyrone Docherty - Director

Mr. Docherty was appointed to the Board of Directors on July 10, 2008.  Mr. Docherty is a citizen of Canada and is presently the CEO and a director of Golden Odyssey Mining.  Prior to this position he was president and CEO of Quinto Mining Corporation from June 1997 to June 2008.

Jeffrey W. Bright - Director

Mr. Bright was appointed to the Board of Directors on April 30, 2008.  Mr. Bright is a citizen of Canada.  Mr. Bright has worked as an attorney since 2003, with the firm of Gowling, Lafleur, & Henderson, LLP, located in Calgary Alberta, Canada.  He is a member of the Association of International Petroleum Negotiators, the Canadian Association of Petroleum Producers, and the Canadian and American Bar Associations.  Mr. Bright is not an officer or director of any other U.S. reporting entity.

Marshall Diamond-Goldberg – President, Director and Chairman of Reserve Reporting

Mr. Diamond-Goldberg was appointed to the Board of Directors on July 29, 2008.  Mr. Diamond-Goldberg is a citizen of Canada.  He has been employed as a geologist and consultant providing related services in Calgary, Alberta, Canada since 1980.  Since 1997, Mr. Diamond-Goldberg has been the President of Marlin Consulting Corporation (not to be confused with Marlin Property Management) providing services to oil and gas companies.  Mr. Diamond-Goldberg is a member of the Canadian and American Societies of Professional Geologists, as well as the Association of Professional Engineers, Geologists and Geophysicists of Alberta.
 
There are no family relationships among any of our directors and executive officers.
 
Independent Directors
 
We believe Matthew J. Wayrynen and Tyrone Docherty are “independent directors,” as that term is defined by listing standards of the national exchanges and SEC rules, including the rules relating to the independence standards of an audit committee and the non-employee director definition of Rule 16b-3 of the Exchange Act.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of the Company's Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they filed.
 
We have been provided with copies of all forms (3, 4 and 5) filed by officers, directors, or ten percent shareholders within three days of such filings. Based on our review of such forms that we received, or written representations from reporting persons that no Forms 5s were required for such persons, we believe that, during all prior fiscal periods, all Section 16(a) filing requirements have been satisfied on a timely basis for members of the Board of Directors and Executive Officers.

Code of Ethics
 
Our Board of Directors has adopted a Code of Business Conduct and Ethics Compliance Program and an Insider Trading Policy providing guidelines with respect to transactions in Company securities and is applicable to all directors, officers, employees and consultants who receive or have accesses to material non-public Company information.
 
Corporate Governance
 
Audit Committee

On June 30, 2008 JayHawk established an audit committee of its Board of Directors, appointed Mr. Don Siemens as its Chairman, and adopted a "Code of Ethics" to promote honest and ethical conduct, proper disclosure of financial information and compliance with applicable laws, rules and regulations by all of the Company's employees and members of the board of directors.  On June 15, 2009 the Company accepted the resignation of Mr. Siemens.  This was not the result of any disagreement as to policy, practices, or procedures.  Simultaneously with the resignation of Mr. Siemens the Company appointed Mr. Tyrone Docherty to the board of directors and as Chairman of the Audit Committee.  The audit committee currently consists of three members: Tyrone Docherty, Marshall-Diamond Goldberg and Jeffrey W. Bright.

Compensation Committee

Mathew J. Wayrynen has served as Chairman of the Compensation Committee since August 27, 2008.  Lindsay Gorrill and Tyrone Docherty also serve on the Compensation Committee.
 
 
19

 

Nominating Committee

Jeffrey W. Bright was appointed Chairman of the Nominating Committee. On August 27, 2008.  Lindsay Gorrill and Matthew Wayrynen also serve as members of the Nominating Committee.

Reserves Committee

Marshall Diamond-Goldberg has served as the Chairman of the Reserves Committee since August 27, 2008.  Lindsay Gorrill and Jeffrey W. Bright also serve on the Reserves Committee.

Compensation Committee Interlocks and Insider Participation

Mathew J. Wayrynen has served as the Chairman of the Compensation Committee since August 27, 2008.  Lindsay Gorrill and Tyrone Docherty also serve as members of the compensation committee.
 
None of our directors or executive officers serves as a member of the board of directors or compensation committee of any other entity that has one or more of its executive officers serving as a member of our board of directors.
 
Director Compensation
 
The table below sets forth, for the last fiscal years, the compensation earned by our non-employee directors:

Name
 
Fees Earned
or Paid
in Cash
   
Stock
Awards
   
Option
Awards
   
Non-equity
Incentive Plan
Compensation
   
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
   
All
Other
Compensation
   
Total
 
Mathew J. Wayrynen
  $ 8,000       -       -       -       -       -     $ 8,000  
                                                         
Jeffrey W. Bright
  $ 8,000       -       -       -       -       -     $ 8,000  
                                                         
Tyrone Docherty (1)
  $ 8,000       -       -       -       -       -     $ 8,000  
                                                         
Donald R. Siemens (2)
  $ 13,125       -       -       -       -       -     $ 13,125  
__________
 
(1)
Mr. Docherty was appointed to the board of directors effective July 10, 2009.
 
(2)
Mr. Siemens resigned as a member of the board of directors effective June 15, 2009.

 
20

 
 
EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
The table below sets forth, for the last two fiscal years, the compensation earned by (i) each individual who served as our principal executive officer or principal financial officer during the last fiscal year (together, the “Named Executive Officers”). No other executive officer had annual compensation in excess of $100,000 during the last fiscal year.
 
Name and Principal Position
Year
 
Salary
($)
 
Bonus
($)
 
Option
Awards
($)
 
All Other
Compensation
($)
 
Total
($)
                             
Lindsay E. Gorrill,
 
 
 
   
   
 
 
 
       
 
Chief Executive Officer,
 
2009
    $90,000    
-
 
-
    -  
$90,000
Chief Financial and Director (1)   
2008
 
$155,000
   
-
 
-
       
$155,000
                             
Thomas G. Ryman Chief                            
Financial Officer (2)
 
2009
 
$79,000
   
-
 
-
   
-
 
$79,000
 
 
2008
 
-
   
-
 
-
   
-
 
-
____________
 
(1)
Mr. Gorrill was appointed as President and Chief Executive Officer on July 9, 2007.  He resigned as President effective September 2, 2009. Mr. Gorrill was appointed Chief Financial Officer effective January 12, 2010 upon the resignation of Mr. Ryman.
 
(2)
Mr. Ryman appointed as Chief Financial Officer on October 1, 2008 and resigned as Chief Financial Officer effective January 12, 2010.

Outstanding Equity Awards at Fiscal Year-End

There were no outstanding unexercised options, unvested stock, and/or equity incentive plan awards issued to our named executive officers as of September 30, 2009.

Employment Agreements
 
We entered into an employment agreement with our President, Mr. Marshall Diamond-Goldberg, pursuant to which he is to be compensated initially at a rate of $5,000 per month, increasing to $8,000 per month upon completion of the $1.5 million funding under the Securities Purchase Agreement dated December 11, 2009 disclosed in Note 14, Subsequent Events.  Upon the completion of a private placement in which minimum proceeds of $1.5 million are raised, Mr. Diamond-Goldberg is entitled to a payment of $30,000.  In addition, he is also entitled to a stock option award of 400,000 shares of the Company’s common stock at such time the Company can issue such options.

Equity Compensation Plan Information

            On August 11, 2009 our board of directors adopted the 2009 Stock Incentive Plan. The purpose of the 2009 Stock Incentive Plan is to provide an incentive to and attract retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship, and to stimulate an active interest of these persons in our development and financial success. Under the 2009 Stock Incentive Plan, we are authorized to issue up to 4,000,000 shares of our common stock to compensate directors, employees and consultants of the Company for services rendered to the Company.  To date no awards of stock or options have been made pursuant to the Plan.
 
 
21

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
Since the beginning of our prior fiscal year, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 10% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The following table sets forth certain information as of May 17, 2010 regarding the beneficial ownership of our common stock by (i) each person or entity who, to our knowledge, owns more than 5% of our common stock; (ii) our executive officers named in the Summary Compensation Table above; (iii) each director; and, (iv) all of our executive officers and directors as a group. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o JayHawk Energy, Inc., 6420 E. Seltice Way, Suite C, Post Falls, Idaho 83854 Shares of common stock subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of May 17, 2010, are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the stockholder holding the options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other stockholder.
 
Name of
Beneficial
Owner
 
Number of
Shares
Beneficially
Owned
 
Percentage
Beneficially
Owned (1)
         
Executive Officers and Directors :
         
           
Lindsay E. Gorrill
   
3,804,000
 
7.8%
           
Marshall Diamond- Goldberg
   
49,800
 
*
           
Mathew J. Wayrynen
   
0
 
0
           
Jeffrey W. Bright
   
0
 
0
           
Tyrone Docherty
   
0
 
0
           
All executive officers and directors as a group (six persons)
   
3,853,800
 
7.9%
___________
 
(1)
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of May 17, 2010 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
 
(2)
Percentage based on 48,857,549 shares of common stock outstanding as of May 17, 2010.
 
 
22

 

SELLING STOCKHOLDERS
 
Up to 10,224,054 shares of common stock are being offered by this prospectus, all of which are being registered for sale for the accounts of the selling security holders and include the following:
 
 
·
5,000,001 shares issuable upon conversion of senior secured convertible debentures;
 
 
·
2,111,387 shares issued upon the exercise of warrants in a cashless exercise during the quarter ended March 31, 2010;
     
 
·
2,000,000 shares issuable upon the exercise of warrants with an exercise price of $0.45 per share;
     
 
·
925,000 shares issued, at our option, in lieu of payments of interest on the senior secured convertible debentures;
     
 
·
21,666 shares issued, at our option on April 1, 2010, in lieu of payments of interest on the senior secured convertible debentures; and
     
 
·
166,000 shares issuable upon the exercise of warrants issued to the placement agent with an exercise price of $0.45 per share.

Each of the transactions by which the selling stockholders acquired their securities from us was exempt under the registration provisions of the Securities Act.
 
The shares of common stock referred to above are being registered to permit public sales of the shares, and the selling stockholders may offer the shares for resale from time to time pursuant to this prospectus. The selling stockholders may also sell, transfer or otherwise dispose of all or a portion of their shares in transactions exempt from the registration requirements of the Securities Act or pursuant to another effective registration statement covering those shares. We may from time to time include additional selling stockholders in supplements or amendments to this prospectus.
 
The table below sets forth certain information regarding the selling stockholders and the shares of our common stock offered by them in this prospectus. None of the selling stockholders have had a material relationship with us within the past three years other than as described in the footnotes to the table below or as a result of their acquisition of our shares or other securities. To our knowledge, subject to community property laws where applicable, each person named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite such person’s name.
 
Beneficial ownership is determined in accordance with the rules of the SEC. Each selling stockholder’s percentage of ownership of our outstanding shares in the table below is based upon 48,857,549 shares of common stock outstanding as of May 17, 2010.

   
Ownership Before Offering
 
After Offering(1)
 
Selling Stockholder
 
Number of
shares of
common stock
beneficially
owned
 
Number of
shares
offered
 
Number of
shares of
common
stock
beneficially
owned
 
Percentage
of
common
stock
beneficially
owned
 
Alpha Capital Anstalt (2)
   
2,356,521
 
6,038,328
 (8)
0
   
0
 
                       
Whalehaven Capital Fund Ltd. (3)
   
2,356,521
 
1,567,138
 (9)
0
   
0
 
                       
Lane Ventures, Inc. (4)
   
365,586
 
280,170
 (10)
0
   
0
 
                       
Momona Capital LLC(5)
   
730,589
 
559,126
 (11)
0
   
0
 
                       
Ellis International Ltd. Inc.(6)
   
1,951,637
 
1,613,292
 (12)
0
   
0
 
                       
Cynergy Advisors, LLC  (7)
   
166,000
 
166,000
 (13)
0
   
0
 
___________
 
(1)
Represents the amount of shares that will be held by the selling stockholders after completion of this offering based on the assumptions that (a) all shares registered for sale by the registration statement of which this prospectus is part will be sold and (b) no other shares of our common stock are acquired or sold by the selling stockholders prior to completion of this offering. However, the selling stockholders may sell all, some or none of the shares offered pursuant to this prospectus and may sell other shares of our common stock that they may own pursuant to another registration statement under the Securities Act or sell some or all of their shares pursuant to an exemption from the registration provisions of the Securities Act, including under Rule 144. To our knowledge there are currently no agreements, arrangements or understanding with respect to the sale of any of the shares that may be held by the selling stockholders after completion of this offering or otherwise.
 
 
23

 
 
 
(2)
Konrad Ackerman as Director of Alpha Capital Anstalt has voting and dispositive control over these securities.
 
 
(3)
Brian Mazzella of Whalehaven Capital Fund Ltd. has voting and dispositive control over these securities.

 
(4)
Joseph Hammer as President of Lane Ventures, Inc. has voting and dispositive control over these securities.

 
(5)
Arie Rabinowitz as President of Momona Capital LLC has voting and dispositive control over these securities.

 
(6)
Mendy Sheen of Ellis International Ltd. Inc. has voting and dispositive control over these securities.

 
(7)
Kevin Sellers and Jim Atkinson as Members and Managers of Cynergy Advisors, LLC have voting and dispositive control over these securities.

 
(8)
Includes (i) 2,969,147 shares issuable upon conversion of senior secured convertible debentures, (ii) 1,113,279 shares issued upon exercise of warrants in a cashless exercise during the quarter ended March 31, 2010, (iii) 1,385,823 shares issuable upon exercise of warrants exercisable at $0.45 per share, (iv) 554,246 shares issuable upon payment of interest on senior secured convertible debentures, and (v) 15,833 shares issued on April 1, 2010 upon payment of interest on senior secured convertible debentures.
 
 
(9)
Includes (i) 833,333 shares issuable upon conversion of senior secured convertible debentures, (ii) 587,972 shares issued upon exercise of warrants in a cashless exercise during the quarter ended March 31, 2010, and (iii) 145,833 shares issuable upon payment of interest on senior secured convertible debentures.

 
(10)
Includes (i) 139,167 shares issuable upon conversion of senior secured convertible debentures, (ii) 58,587 shares issued upon exercise of warrants in a cashless exercise during the quarter ended March 31, 2010, (iii) 55,833 shares issuable upon exercise of warrants exercisable at $0.45 per share, (iv) 25,750 shares issuable upon payment of interest on senior secured convertible debentures, and (v) 833 shares issued on April 1, 2010 upon payment of interest on senior secured convertible debentures.

 
(11)
Includes (i) 277,777 shares issuable upon conversion of senior secured convertible debentures, (ii) 117,183 shares issued upon exercise of warrants in a cashless exercise during the quarter ended March 31, 2010, (iii) 111,110 shares issuable upon exercise of warrants exercisable at $0.45 per share, (iv) 51,389 shares issuable upon payment of interest on senior secured convertible debentures and (v) 1,667 shares issued on April 1, 2010 upon payment of interest on senior secured convertible debentures.
 
 
(12)
Includes (i) 780,578 shares issuable upon conversion of senior secured convertible debentures, (ii) 234,366 shares issued upon exercise of warrants in a cashless exercise during the quarter ended March 31, 2010, (iii) 447,233 shares issuable upon exercise of warrants exercisable at $0.45 per share, (iv) 147,782 shares issuable upon payment of interest on senior secured convertible debentures and (v) 3,333 shares issued on April 1, 2010 upon payment of interest on senior secured convertible debentures.

 
(13)
Includes 166,666 shares issuable upon exercise of .warrants exercisable at $0.45 per share.

DESCRIPTION OF SECURITIES
 
Authorized and Outstanding Capital Stock

We have authorized 210,000,000 shares of capital stock, par value $0.001 per share, of which 200,000,000 are shares of common stock and 10,000,000 are shares of “blank-check” preferred stock.
 
As of May 17, 2010, we had the following issued and outstanding securities on a fully diluted basis:

 
•  48,857,549 shares of common stock;
 
•  No shares of preferred stock;
 
•  5,000,001 shares issuable upon conversion of outstanding senior secured convertible debentures;
 
•  Warrants to purchase 2,000,000 shares of common stock exercisable for a term of 42 months at an exercise price of $0.45 per share issued to the investors in the private placement;
 
•  925,000 shares of common stock issuable, at our option, in lieu of payments of interest on outstanding senior secured convertible debentures based upon the market price of our common stock as reported on the OTC Bulletin Board as of May 17, 2010;
 
•  Warrants to purchase 166,666 shares of common stock exercisable for a term of 42 months at an exercise price of $0.45 per share issued to the placement agent in the private placement; and
 
•  4,000,000 shares of common stock issuable pursuant to our 2009 Stock Incentive Plan.

 
24

 
 
Common Stock

The holders of our common stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled to receive ratably dividends, if any, declared by our board of directors out of legally available funds; however, the current policy of our board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our common stock will be entitled to share ratably in all assets that are legally available for distribution. The holders of our common stock will have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be designated solely by action of our board of directors and issued in the future.

Preferred Stock

Our board of directors will be authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have the number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

Senior Secured Convertible Debentures

On December 9, 2009, we entered into a securities purchase agreement with certain accredited investors, pursuant to which we agreed to issue and sell up to $1.5 million of senior secured convertible debentures.  The senior secured convertible debentures bear interest at a rate of 10% per annum payable quarterly and are due on December 9, 2011. The senior secured convertible debentures are convertible, at the option of the holder, into shares of our common stock at a conversion price equal to $0.30 per share. Provided certain conditions are satisfied, we have the option to pay the interest on the senior secured convertible debentures in shares of our common stock. The conversion price for the interest payments is equal to the lesser of $0.30 or the lesser of (i) the average of the VWAPs for the 5 consecutive trading days ending on the day preceding the interest payment date or (ii) the average of the VWAPs for the 5 consecutive trading days ending on the trading day that is immediately prior to the date the shares are delivered to the holder. We have granted the holders of the senior secured convertible debentures a security interest in all of our assets. We are prohibited from effecting the conversion of the senior secured convertible debentures to the extent that as a result of the conversion the holder of the converted senior secured convertible debentures beneficially owns more than 4.99% (or, if this limitation is waived by the holder upon no less than 61 days prior notice to us, 9.99%) in the aggregate of the issued and outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the senior secured convertible debentures. Prior to conversion, the senior secured convertible debentures do not confer upon holders any voting or any other rights as a stockholder. The senior secured convertible debentures contain provisions that protect the holders against dilution by adjustment of the purchase price in certain events such as stock dividends, stock splits and other similar events. In addition, the senior secured convertible debentures have anti-dilution protection in the event we issue securities at a value less than $0.30 per share. No fractional shares will be issued upon conversion of the senior secured convertible debentures. If, upon conversion of the senior secured convertible debentures, a holder would be entitled to receive a fractional interest in a share, we may, in our discretion, upon conversion, pay a cash adjustment or round up to the nearest whole number the number of shares of our common stock to be issued to the senior secured convertible debenture holder or otherwise equitably adjust the conversion amount and conversion price per share.

Warrants

We issued warrants to purchase an aggregate of 5,000,001 shares of our common stock, at an exercise price of $0.45 per share for a term of 42 months to investors in the private placement. We also issued warrants to the placement agent to purchase 166,000 shares of our common stock, at an exercise price of $0.45 per share for a term of 42 months, in connection with their efforts as placement agent in connection with the private placement. We are prohibited from effecting the exercise of the warrants to the extent that as a result of the exercise the holder of the exercised warrants beneficially owns more than 4.99% (or, if this limitation is waived by the holder upon no less than 61 days prior notice to us, 9.99%) in the aggregate of the issued and outstanding shares of our common stock calculated immediately after giving effect to the issuance of shares of common stock upon the exercise of the warrants. Prior to exercise, the warrants do not confer upon holders any voting or any other rights as a stockholder. The warrants contain provisions that protect the holders against dilution by adjustment of the purchase price in certain events such as stock dividends, stock splits and other similar events. In addition, the warrants have anti-dilution protection in the event we issue securities at a value less than $0.45 per share. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we may, in our discretion, upon exercise, pay a cash adjustment or round up to the nearest whole number the number of shares of our common stock to be issued to the warrant holder or otherwise equitably adjust the exercise amount and exercise price per share.
 
 
25

 

Transfer Agent

Our transfer agent is Corporate Stock Transfer, 3200 Cherry Creek Drive South, Suite #430. Denver, Colorado 80209.
 
 
Indemnification of Directors and Officers
 
Under our Articles of Incorporation and Bylaws of the corporation, we may indemnify an officer or director who is made a party to any proceeding, including a lawsuit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest.  We may advance expenses incurred in defending a proceeding.  To the extent that the officer or director is successful on the merit in a proceeding as to which he is to be indemnified, we must indemnify him against all expenses incurred, including attorney’s fees.  With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order.  The indemnification is intended to be the fullest extent permitted by the laws of the State of Colorado.

Disclosure of Commission Position on Indemnification for Securities Act Liabilities

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and persons controlling us, we have been advised that it is the SEC’s opinion that such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
 
 
26

 
 
 
PLAN OF DISTRIBUTION
 
Each selling stockholder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the over-the-counter market or any other stock exchange, market or trading facility on which the shares are traded, or in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more of the following methods when selling shares:
 
 
•  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
 
 
•  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
 
•  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
 
•  conducting business in places where business practices and customs are unfamiliar and unknown;
 
 
•  an exchange distribution in accordance with the rules of the applicable exchange;
 
 
•  privately negotiated transactions;
 
 
•  settlement of short sales entered into after the date of this prospectus;
 
 
•  broker-dealers may agree with the selling stockholders to sell a specified number of the shares at a stipulated price per share;
 
 
•  a combination of any of these methods of sale;
 
 
•  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or
 
 
•  any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
 
Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. Each selling stockholder does not expect these commissions and discounts relating to its sales of shares to exceed what is customary in the types of transactions involved.
 
Cynergy Advisors, LLC served as placement agent in our recently completed private placement offering, and received, in addition to cash commissions, warrants to purchase 166,000 shares of our common stock with an exercise price of $0.45 per share. The registration statement of which this prospectus forms a part includes the shares of common stock underlying the warrants held by Cynergy Advisors, LLC.

Cynergy Advisors LLC has indicated to us its willingness to act as selling agent on behalf of certain of the selling stockholders named in this prospectus under “Selling Stockholders” that purchased our privately placed securities. All shares sold, if any, on behalf of selling stockholders by these firms would be in transactions executed by Cynergy Advisors LLC on an agency basis and commissions charged to its customers in connection with each transaction shall not exceed a maximum of 4.5% of the gross proceeds. Cynergy Advisors LLC does not have an underwriting agreement with us and/or the selling stockholders and no selling stockholders are required to execute transactions through Cynergy Advisors LLC. Further, other than their existing brokerage relationship as customers with Cynergy Advisors LLC, no selling stockholders have any pre-arranged agreement, written or otherwise, with these firms to sell their securities through Cynergy Advisors LLC.

FINRA Rule 2710 requires FINRA member firms (unless an exemption applies) to satisfy the filing requirements of Rule 2710 in connection with the resale, on behalf of selling stockholders, of the securities on a principal or agency basis. FINRA Notice to Members 88-101 states that in the event a selling stockholder intends to sell any of the shares registered for resale in this Prospectus through a member of FINRA participating in a distribution of our securities, the member is responsible for ensuring that a timely filing, if required, is first made with the Corporate Finance Department of FINRA and disclosing to FINRA the following:
 
 
•  it intends to take possession of the registered securities or to facilitate the transfer of the certificates;
 
 
•  the complete details of how the selling shareholders shares are and will be held, including location of the particular accounts;
 
 
•  whether the member firm or any direct or indirect affiliates thereof have entered into, will facilitate or otherwise participate in any type of payment transaction with the selling shareholders, including details regarding these transactions; and
 
 
•  in the event any of the securities offered by the selling shareholders are sold, transferred, assigned or hypothecated by any selling shareholder in a transaction that directly or indirectly involves a member firm of FINRA or any affiliates thereof, that prior to or at the time of said transaction the member firm will timely file for review with the Corporate Finance Department of FINRA all relevant documents with respect to these transactions.

 
27

 
 
FINRA has recently proposed rule changes to FINRA Rule 2710 which may, if approved, modify the requirements of its members to make filings under FINRA Rule 2710. Further, no FINRA member firm may receive compensation in excess of that allowable under FINRA rules, including Rule 2710, in connection with the resale of the securities by the selling shareholders, which total compensation may not exceed 8%.

We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this Prospectus available to the selling stockholders for the purpose of satisfying the Prospectus delivery requirements of the Securities Act.
 
In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to these broker-dealers or other financial institutions of shares offered by this prospectus, which shares these broker-dealers or other financial institutions may resell pursuant to this prospectus (as supplemented or amended to reflect these transactions).
 
The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. In this event, any commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling stockholder has informed us that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the common stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).
 
We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
 
The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.
 
Because selling stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the shares by the selling stockholders.
 
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of our common stock by the selling stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

LEGAL MATTERS
 
Sichenzia Ross Friedman Ference LLP (“SRFF”), New York, New York, will pass upon the validity of the shares of our common stock to be sold in this offering.
 
 
EXPERTS

The consolidated financial statements as of and for the year ended September 30, 2009 included in this prospectus have been audited by BehlerMick PS., an independent registered public accounting firm as set forth in their report, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements as of and for the year ended September 30, 2008 included in this prospectus have been audited by Meyers Norris Penny LLP, an independent registered public accounting firm as set forth in their report, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing
 
 
28

 
 
WHERE YOU CAN FIND ADDITIONAL INFORMATION
 
We have filed with the SEC a registration statement on Form S-1, together with any amendments and related exhibits, under the Securities Act with respect to our shares of common stock offered by this prospectus. The registration statement contains additional information about us and our shares of common stock that we are offering in this prospectus.

 We file annual, quarterly and current reports and other information with the SEC under the Exchange Act. Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. You may also request a copy of those filings, excluding exhibits, from us at no cost. These requests should be addressed to us at: Lindsay E. Gorrill, Chief Executive Officer, JayHawk Energy, Inc., 6420 E. Seltice Way, Suite C, Post Falls, Idaho 83854.
 
 
29

 
 
JAYHAWK ENERGY, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm
   
F-2
 
         
Report of Independent Registered Public Accounting Firm
   
F-3
 
         
Consolidated Balance Sheets as at September 30, 2009 and September 30, 2008
   
F-4
 
         
Consolidated Statements of Operations and Comprehensive Loss for the years ended September 30, 2009 and September 30, 2008
   
F-5
 
         
Statements of Changes in Stockholders’ Equity
   
F-6
 
         
Statement of Consolidated Cash Flows for the years ended September 30, 2009 and September 30, 2008
   
F-7
 
         
Notes to Consolidated Financial Statements
   
F-8
 
         
Consolidated Balance Sheet as at March 31, 2010 (Unaudited) and Consolidated Balance Sheet as at September 30, 2009
   
F-22
 
         
Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the three and six months ended March 31, 2010 and March 31, 2009
   
F-23
 
         
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2010 and March 31, 2009
   
F-24
 
         
Notes to Consolidated Financial Statements (Unaudited)
   
F-25
 
 
 
F-1

 

BEHLERMICKPS
Bank of America Financial Center
601 W Riverside. Suite 430
Spokane. WA 99201
United States of America
 
To the Board of Directors and
Stockholders of JayHawk Energy, Inc.
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We have audited the accompanying consolidated balance sheet of JayHawk Energy, Inc. and subsidiaries as of September 30, 2009, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JayHawk Energy, Inc. and subsidiaries as of September 30, 2009 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's accumulated deficit and lack of revenues raise substantial doubt about its ability to continue as a going concern. Management's plans regarding the resolution of this issue are also discussed in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ BehlerMick
BehlerMick PS
Spokane, Washington
December 17, 2009
 
 
F-2

 
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Stockholders of
JayHawk Energy, Inc.

We have audited the accompanying consolidated balance sheet of JayHawk Energy, Inc. ("the Company”) as of September 30, 2008, and the statements of operations, stockholder’s equity and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluation of the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2008, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company’s ability to continue as a going concern is dependent on obtaining sufficient working capital to fund future operations.  Management’s plan in regard to these matters is also described in Note 2.  These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Meyers Norris Penny LLP
Chartered Accountants
Calgary, Canada
December 23, 2008
 
 
F-3

 
 
JayHawk Energy, Inc.
Consolidated Balance Sheets
 
Assets
 
September 30,
2009
   
September 30,
2008
 
Cash and cash equivalents
  $ 5,658     $ 82,683  
Trade accounts receivable, less allowance for doubtful
               
accounts of $119,763 and $95,800 at September 30, 2009 and 2008, respectively (Note 3)
    293,507       413,862  
Other current assets
    2,544       16,027  
Total Current Assets
    301,709       512,572  
                 
Plant, Property and Equipment
               
Unproved oil and gas properties, net of allowances
               
for impairment  of $1,474,000 and accumulated amortization of $405,931 and 14,535, at                
September 30, 2009 and 2008,respectively.  (Note 4).
    2,265,673       2,555,910  
Proved and developed oil & gas properties, net of
               
accumulated DD&A of $1,366,204 and $613,158 at September 30, 2009 and 2008, respectively (Note 5)
    6,256,238       6,991,043  
Computers, office equipment, furniture and
               
leasehold improvements, net of allowance for
               
Depreciation of $1,335 and $nil, respectively.
    31,605       32,366  
Total Net Plant, Property and Equipment
    8,553,516       9,579,319  
                 
Other Long-Term Assets  (Note 6)
    55,100       247,586  
                 
Total Assets
  $ 8,910,325     $ 10,339,477  
                 
Liabilities and Stockholders' Equity
               
Current Liabilities
               
Accounts payable
  $ 172,166     $ 381,197  
Due to other Working and Royalty Interests
    107,905       106,003  
Other Payables, Interest & Taxes Accrued
    350,797       147,100  
Note Payable in less than one year (Note 7)
    800,000       472,038  
Total Current Liabilities
    1,430,868       1.106.338  
Asset Retirement Obligations  (Note 8)
    140,844       128,040  
                 
Total Liabilities
    1,571,712       1,234,378  
                 
Commitments and Contingencies (Note 15)
    ---       ---  
Stockholders' Equity
               
Preferred Stock, $.001 par value; 10,000,0000 shares authorized, no shares issued and outstanding.
    ---       ---  
Common Stock, $.001 par value; 200,000,000 shares
               
authorized; 44,509,496 shares issued and outstanding at September 30, 2009 and 42,810,929 shares                
issued and outstanding at September 30, 2008 (Note 9)
    44,509       42,811  
Additional paid-in capital
    12,821,792       12,400,784  
Stock issuance obligation (Notes 7 and 9)
    136,000       47,559  
Accumulated deficit
    (5,663,688 )     (3,386,055 )
Total Stockholders' Equity
    7,338,613       9,105,099  
                 
Total Liabilities and Stockholders' Equity
  $ 8,910,325     $ 10,339,477  
 
“See Accompanying Notes to the Consolidated Financial Statements”
 
 
F-4

 
 
JayHawk Energy, Inc.
Consolidated Statements of Operations
and Comprehensive Loss
 
   
Year Ended
September 30,
2009
   
Year Ended
September 30,
2008
 
Revenue
           
Oil Sales
  $ 479,598     $ 1,108,055  
Gas Sales
    108,812       91,782  
Total Gross Revenues
  $ 588,410     $ 1,199,837  
                 
Costs and Operating Expenses
    ---       ---  
Exploration Costs                
Production Costs – North Dakota
    211,507       280,689  
Production Costs – Kansas
    187,638       226,552  
Depreciation, depletion, amortization and asset impairment expense
    1,069,577       2,214,764  
General and Administrative
    659,714       1,541,691  
Other Income and Expense
    737,607       64,483  
Total Costs and Expenses
    2,866,043       4,328,179  
                 
Loss from continuing operations before income tax
  $ (2,277,633 )   $ (3,128,342 )
                 
Provision for income taxes
    ---       ---  
Deferred tax benefit
    ---       ---  
                 
Net loss from continuing operations
  $ (2,277,633 )   $ (3,128,342 )
                 
                 
Net loss and total comprehensive loss
  $ (2,277,633 )   $ (3,128,342 )
                 
Basic and diluted loss per share (Note 10)
  $ (0.05 )   $ (0.08 )
                 
Basic weighted average number shares outstanding
    43,699,043       40,266,335  
 
“See Accompanying Notes to the Consolidated Financial Statements”
 
 
F-5

 
 
JayHawk Energy, Inc.
Statements of Changes in Stockholders’ Equity
 
    Common
Shares
    Stock
Par Value
    Additional
 Paid-In
Capital
    Retained
 Earnings or
(Deficit)
    Stock
Issuance
Obligation
     
Total
 
Balance at September 30, 2007
    36,882,659     $ 36,882     $ 2,904,982       (257,713 )   $ ---     $ 2,684,151  
Jan. 16, 2008 Private placement
    2,666,667       2,667       3,997,333                       4,000,000  
March 13, 2008 issue for services
    50,000       50       109,950                       110,000  
March 31, 2008 issuance
    1,024,727       1,025       2,325,105                       2,326,130  
April 16, 2008 exercise  warrants
    900,000       900       899,100                       900,000  
April 15, 2008 exercise  warrants
    599,939       600       599,339                       599,939  
May 5- 7, 2008 issue for services
    75,000       75       171,925                       172,000  
May 9, 2008 exercise  warrants
    399,962       400       399,562                       399,962  
May 14, 2008 issue obligation
                                    519,011       519,011  
July 3, 2008 issuance
    211,975       212       471,240               (471,452 )     ---  
September 30, 2008 Convertible Note Warrant Valuation
                    522,248                       522,248  
Loss for year ending September 30, 2008
                            (3,128,342 )             (3,128,342 )
Balance at September 30, 2008
    42,810,929     $ 42,811     $ 12,400,784     $ (3,386,055 )   $ 47,559     $ 9,105,099  
October 31, 2008 issuance for services
    25,000       25       16,725                       16,750  
January 12, 2009 issuances for non renewed leases and services
    74,575       74       74,184               (47,559 )     26,699  
Jan. 12, 2009 issue for services
    51,000       51       20,859                       20,910  
February 5, 2009 Private placement
    1,000,000       1,000       199,000                       200,000  
March 2, 2009 issue obligation
                                    14,555       14,555  
April 20,2009 issue for services
    85,400       85       14,470               (14,555 )     ---  
May 20, 2009 issue for services
    40,000       40       7,960                       8,000  
June 4, 2009 issue for services
    49,800       50       7,420                       7,470  
July 31, 2009 issue for services
    139,167       139       28,199                       28,338  
July 31, 2009 issue  obligation in lieu of extension fee and interest
                                    136,000       136,000  
August 5, 2009 issue for services
    203,625       204       40,521                       40,725  
Sept. 3, 2009 issue for services
    30,000       30       11,670                       11,700  
Loss for year ending September 30, 2009
                            (2,277,633 )             (2,277,633 )
Balance at September 30, 2009
    44,509,496     $ 44,509     $ 12,821,792     $ ( 5,663,688 )   $ 136,000     $ 7,338,613  
 
“See Accompanying Notes to the Consolidated Financial Statements”
 
 
F-6

 

JayHawk Energy, Inc.
Statement of Consolidated Cash Flows

<
   
Year Ended
September 30,
2009
   
Year Ended
September 30,
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss from operations
  $ (2,277,633 )   $ (3,128,342 )
Adjustments to reconcile net loss to net cash used
               
by operating activities:
               
Depreciation, depletion and amortization
    1,249,259       729,028  
Provisions for doubtful collection of receivables
    23,953       105,311  
Provision for lease impairments
    ---       1,474,000  
Accretion in annual asset retirement obligation
    12,804       11,640  
Common stock issued in consideration for services
    311,147       58,000  
Loss on disposition of asset
    ---       573  
(Increase) decrease in accounts receivable
    96,402       (509,672 )
(Increase) decrease in other current assets
    13,483       (78,827 )
Increase (decrease) in accounts payable
    (209,030 )     381,197  
Increase in accruals and other current liabilities
    533,561       211,564  
Provision (benefit) for deferred income taxes
               
Net cash used by operating activities
    (246,054 )     (745,528 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proved oil and gas property additions
    (18,600 )     (7,487,803 )
Unproved oil and gas property additions
    ( 1,160 )     (1,944,444 )
Other property additions
    (11,211 )     (33,701 )
Net cash used in investing activities
    (30,971 )     (9,465,948 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from the sale of common stock
    200,000       8,969,042  
Borrowings with note payable
    0       800,000  
Net cash provided by financing activities
    200,000       9,769,042