10-Q 1 jyhwfinstmt063012finalfiling.htm 10-Q UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2012.


o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

      For the transition period from                                             to                                           


Commission File Number: 000-53311

 

JayHawk Energy, Inc.

(Exact name of small business issuer as specified in its charter)


Colorado

20-0990109

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)


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

(Address of principal executive offices)


(208) 667-1328

(Issuer’s Telephone Number)

 

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  xYes  o  No


Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer (Do not check if a smaller reporting company)

o

Smaller reporting company

x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date.  As of August 15, 2012, there were 60,759,178 shares of the issuer's $.001 par value common stock issued and outstanding.

  



Page 1 of 22







JAYHAWK ENERGY, INC.


Quarterly Report on Form 10-Q for the

Quarterly Period Ended June 30, 2012


TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

  

  

  

Item 1. Financial Statements (unaudited)

3

  

  

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

22

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

22

 

 

Item 4. Controls and Procedures

22

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

22

 

 

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

22

 

 

Item 3. Defaults Upon Senior Securities

22

 

 

Item 4. Mine Safety Disclosures

22

  

  

Item 5. Other Information

22

  

  

Item 6. Exhibits

22

  

  

                 Signatures

23

 





















Page 2 of 22



PART I - FINANCIAL INFORMATION

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


CONTENTS

  

  

  

    FINANCIAL STATEMENTS (unaudited):

Page

 

  

        Consolidated Balance Sheets

4

  

  

        Consolidated Statements of Operations

5

  

  

        Consolidated Statements of Cash Flows

6

  

  

        Notes to Consolidated Financial Statements 

7

















































Page 3 of 22




JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

September 30, 2011

 

 

 

 

 

 

(unaudited)

 

(audited)

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash

 

$

30,847

$

52,912

 

 

Trade accounts receivable

 

 

73,625

 

78,855

 

 

Other current assets

 

 

9,140

 

10,162

 

 

 

TOTAL CURRENT ASSETS

 

 

113,612

 

141,929

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

 

 

Unproved oil and gas properties, net of accumulated amortization of $1,635,238 and $1,443,629, respectively (Note 4)

 

 

3,732.224

 

3,922,673

 

 

Proved and developed oil, net of accumulated DD&A of $995,025 and $748,836 respectively (Note 5)

 

 

711,976

 

958,165

 

 

Computers, office equipment, furniture and leasehold improvements, net of depreciation of $40,012 and $36,659 respectively

 

 

4,899

 

8,252

 

 

 

NET PROPETY AND EQUIPMENT

 

 

4,449,099

 

4,889,090

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

 

101,597

 

101,500

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

4,664,308

$

5,132,519

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

$

577,302

$

489,043

 

 

Due to royalty and working interest holders

 

 

343,455

 

181,367

 

 

Other payables, interest and taxes accrued

 

 

161,531

 

132,058

 

 

Conversion option derivative (NOTE 6)

 

 

305,782

 

286,498

 

 

Warrant derivative (NOTE 6)

 

 

136,611

 

299,947

 

 

Convertible debentures, net of discount (NOTE 7)

 

 

1,164,000

 

962,375

 

 

 

TOTAL CURRENT LIABILITIES

 

 

2,688,681

 

2,351,288

 

 

 

 

 

 

 

 

 

 

LONG TERM LIABILITIES

 

 

 

 

 

 

 

Asset retirement obligations  (NOTE 8)

 

 

183,202

 

170,421

 

 

 

TOTAL LONG-TERM LIABILITIES

 

 

183,202

 

170,421

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

2,871,883

 

2,521,709

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (NOTE 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized,

 

 

 

 

 

 

 

 

none issued and outstanding

 

 

-

 

-

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized, 60,251,886

 

 

 

 

 

 

 

 

and 58,236,245 shares issued and outstanding respectively

 

 

60,252

 

58,236

 

 

Additional paid-in capital

 

 

21,115,488

 

20,967,464

 

 

Accumulated deficit

 

 

(19,383,315)

 

(18,414,890)

 

 

 

TOTAL STOCKHOLDERS' EQUITY

 

 

1,792,425

 

2,610,810

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

4,664,308

$

5,132,519

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 




Page 4 of 22



JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

 

Three Months Ended

Nine months Ended

 

 

 

 

 

June 30,

June 30,

 

 

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

(re-stated -Note 14)

 

 

 

(re-stated -Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

112,359

$

45,379

$

436,199

$

195,794

 

Natural gas sales

 

 

-

 

7,353

 

3,612

 

28,293

 

 

TOTAL REVENUE

 

 

112,359

 

52,732

 

439,811

 

224,087

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

Production costs - oil

 

 

39,085

 

19,843

 

199,184

 

88,264

 

Production costs - natural gas

 

 

4,685

 

3,347

 

28,228

 

6,315

 

Depreciation, depletion and amortization

 

 

112,299

 

191,329

 

441,151

 

555,076

 

Loss on write-off and sales of leases and equipment

 

 

-

 

102,515

 

-

 

102,515

 

Accretion of asset retirement obligation

 

 

4,260

 

3,874

 

12,781

 

11,620

 

General and administrative

 

 

140,622

 

183,314

 

494,945

 

675,757

 

 

TOTAL OPERATING EXPENSES

 

 

300,951

 

504,222

 

1,176,289

 

1,439,547

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(188,592)

 

(451,490)

 

(736,478)

 

(1,215,460)

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

Interest and financings costs

 

 

(32,401)

 

(68,582)

 

(99,104)

 

(209,920)

 

Miscellaneous income (expense)

 

 

-

 

54,268

 

-

 

55,352

 

Loss on initial recording of derivatives

 

 

 

 

 

 

 

 

(342,187)

 

Gain (loss) on extinguishment and conversion of debt

 

 

 

 

(57,817)

 

(1,023,417)

 

(218,457)

 

Gain (loss) on change in fair value of conversion option derivative

 

 

314,153

 

178,432

 

872,052

 

806,342

 

Gain (loss) on change in fair value of warrant derivative

 

 

(123,695)

 

249,956

 

163,336

 

623,200

 

Amortization of discount on debentures

 

 

-

 

(216,374)

 

(144,814)

 

(628,939)

 

 

TOTAL OTHER INCOME (EXPENSE)

 

 

158,057

 

139,883

 

(231,947)

 

85,391

 

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAX

 

 

(30,535)

 

(311,607)

 

(968,425)

 

(1,130,069)

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

-

 

-

 

-

 

-

NET LOSS

$

(30,535)

$

(311,607)

$

(968,425)

$

(1,130,069)

Basic and diluted loss per share

$

Nil

$

(0.01)

$

(0.02)

$

(0.02)

Basic and diluted weighted average shares outstanding

 

60,194,665

 

54,712,328

 

59,618,987

 

52,134,837

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.




Page 5 of 22



JAYHAWK ENERGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF  CASH FLOWS (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended June 30,

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

(restated-Note 14)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

(1,130,069)

 

Net Income

 

$

(968,425)

$

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

441,151

 

555,076

 

 

 

Accretion of asset retirement obligation

 

 

12,781

 

11,620

 

 

 

Amortization of discount on debentures

 

 

144,814

 

628,939

 

 

 

Loss on initial recording of derivative

 

 

-

 

342,187

 

 

 

Loss (gain) on extinguishment and conversion of debt

 

 

1,023,417

 

218,457

 

 

 

Loss (gain) on change in fair value of conversion option derivative

 

 

(872,052)

 

(806,342)

 

 

 

Loss (gain) on change in fair value of warrant derivative

 

 

(163,336)

 

(623,200)

 

 

 

Common stock issued in consideration of charitable contribution

 

 

5,000

 

-

 

 

 

Common stock issued in consideration of services

 

 

-

 

37,783

 

 

 

Common stock issue in lieu of interest

 

 

60,332

 

64,711

 

 

 

Loss on write-off and sales of leases and equipment

 

 

-

 

102,515

 

 

 

Stock based compensation

 

 

9,438

 

159,858

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

5,230

 

178,760

 

 

 

Other current assets and other long term assets

 

 

925

 

(55,348)

 

 

 

Accounts payable

 

 

88,259

 

(502,500)

 

 

 

Due to royalty and working interest holders

 

 

162,088

 

(64,863)

 

 

 

Other payables, interest and taxes accrued

 

 

29,473

 

(44,777)

 

 

 

 

Net cash provided (used) by operating activities

 

 

(20,905)

 

(927,193)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of property and equipment

 

 

-

 

(22,770)

 

Proceeds from sales of equipment

 

 

-

 

170,000

 

Unproved oil and gas additions

 

 

(1,160)

 

(48,445)

 

 

 

 

Net cash used by investing activities

 

 

(1,160)

 

98,785

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from sale of common stock

 

 

-

 

321,000

 

Proceeds from convertible debentures

 

 

-

 

500,000

 

 

 

 

Net cash provided by financing activities

 

 

-

 

821,000

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(22,065)

 

(7,408)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

52,912

 

56,280

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

30,847

$

48,872

 

 

 

 

 

 

Supplemental Disclosure of Cash Flows:

 

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activity:

 

 

 

 

 

 

 

 

Accrued payables paid with common stock

 

$

-

$

38,500

 

 

 

Expiration of option to acquire unproved properties

 

 

-

 

189,234

 

 

 

Common stock issued for conversion of debentures

 

 

115,000

 

530,500

 

 

The accompanying notes are an integral part of these consolidated financial statements.



Page 6 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012



NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the nine months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the full year ending September 30, 2012.

For further information, refer to the financial statements and footnotes thereto in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.

Principles of Consolidation

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

Going Concern

As shown in the accompanying consolidated financial statements, the Company has incurred operating losses since inception.  As of June 30, 2012, the Company has limited financial resources with which to achieve the objectives and obtain profitability and positive cash flows.  As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $19,383,315 and net loss of $968,425 for the nine months ended June 30, 2012, and as of that date the Company's current liabilities exceeded its current assets by $2,575,068.  Achievement of the Company's objectives will be dependent upon the ability to obtain additional financing, to locate profitable energy properties and generate revenue from current and planned business operations, and control costs.  The Company plans to fund its future operations by joint venturing, obtaining additional financing from investors, and attaining additional commercial production.  However, there is no assurance that the Company will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists.  The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implications of associated bankruptcy costs should the Company be unable to continue as a going concern.

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods.  Significant areas requiring the use of management assumptions and estimates relate to asset impairments, proved and unproved properties, asset retirement obligations, stock-based compensation, income taxes and derivatives.   



Page 7 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012



Actual results may differ from these estimates and assumptions which could have a material effect on the Company's reported financial position and results of operations.

Income or Loss Per Common Share

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

The dilutive effect of convertible and outstanding securities as of June 30, 2012 and June 30, 2011, would be as follows:

 

 

 

 

June 30, 2012

 

June 30, 2011

 

Stock Options

 

2,040,000

 

2,040,000

 

Convertible debt

 

23,279,993

 

12,220,831

 

Warrants

 

4,999,113

 

4,999,113

 

 

Total Possible Dilution

 

30,319,106

 

19,259,944

At June 30, 2012 and June 30, 2011, the effect of the Company's outstanding options and common stock equivalents would have been anti-dilutive.

Reclassifications

Certain reclassifications have been made to the June 30, 2011 financial statements in order to conform to the 2012 presentation.  These reclassifications have no effect on net loss, total assets or accumulated deficit as restated except as otherwise described in Note 14 (Correction Of An Error In Previously Issued Financial Statements).

Accounting Changes and Error Corrections

Changes in accounting principle are reported through retrospective application of the new accounting principle to all prior periods. Errors in the financial statements of a prior period discovered subsequent to their issuance are reported as a prior-period adjustment restating the prior period.  As described in Note 14, financial information included for the three and nine months ended June 30, 2011 has been restated.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, "Presentation of Comprehensive Income" ("ASU 2011-05").  This standard will require entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income.  The option to present items of other comprehensive income in the statement of changes in equity is eliminated.  The new requirements are generally effective for public entities in fiscal years (including interim periods) beginning after December 15, 2011.  Management does not believe ASU 2011-05 will have a material effect on the Company's consolidated financial statements.

From time to time, new accounting guidance is issued by the FASB that the Company adopts as of the specified effective date.  If not discussed, management believe that the impact of recently issued standards, which are not yet effective, will not have a material impact on its financial statements upon adoption.

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The table below sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2012 and September 30, 2011, respectively, and the fair value calculation input hierarchy that the Company has determined has applied to each asset and liability category.



Page 8 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012






 

 

 

June 30, 2012

 

September 30, 2011

 

Input HierarchyLevel

 

Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

30,847

$

52,912

 

Level 1

 

Liabilities:

 

 

 

 

 

 

 

 

Conversion option derivative

 

305,782

 

286,498

 

Level 2

 

 

Warrant derivative

 

136,611

 

299,947

 

Level 2

 

 

 

 

 

 

NOTE 4 - UNPROVED PROPERTIES AND IMPAIRMENT  

The total of the Company's investment in unproved properties at June 30, 2012 and September 30, 2011 consists of the following capitalized costs, respectively:

 

 

 

June 30, 2012

 

September 30, 2011

 

Name

 

 

 

 

 

 

 

 

 

 

 

Unproved and developed properties

 

 

 

 

 

Kansas Girard Project

 

 

 

 

 

 

Field equipment

$

615,953

$

615,953

 

 

Capitalized drilling costs

 

662,899

 

662,899

 

 

 

Subtotal

 

1,278,852

 

1,278,852

 

 

Less Accumulated DD&A

 

(490,289)

 

(458,765)

 

Net capitalized costs in Girard Project

 

788,563

 

820,087

 

 

 

 

 

 

 

 

Jayhawk Gas Transport Company

 

 

 

 

 

 

Field Equipment

 

2,605,871

 

2,605,871

 

 

Less Accumulated DD&A

 

(491,950)

 

(404,865)

 

Net capitalized costs

 

2,113,921

 

2,201,006

 

 

 

 

 

 

 

 

Unproved and undeveloped properties

 

 

 

 

 

Kansas Girard Project

 

1,404,604

 

1,403,444

 

 

Less: accumulated amortization

 

(652,999)

 

(579,999)

 

Net investment in Girard Project

 

751,605

 

823,445

 

 

 

 

 

 

 

 

North Dakota Project

 

78,135

 

78,135

 

Net investment in North Dakota Project

 

78,135

 

78,135

 

 

 

 

 

 

 

 

Total Unproved Oil and Gas Properties

$

3,732,224

$

3,922,673

The Kansas properties identified above as the Girard Project have not been evaluated and an independent estimates of proved reserves have yet been made.  

Abandonment of Uniontown:  In 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 the Company's pipeline, to permit only approximately one-third of the original leases acquired and allow the remainder to expire without renewal. Given the Company's inability at that time to fund development of any acreage, justification existed at the time to abandon those properties.  The abandonment was estimated at two-thirds, 67 percent, of the original investment.  Further evaluation by management during the year ended September 30, 2011 indicated the capital required to develop the Uniontown Project exceeded the Company's ability to fund the project and any capital raised would be better served being deployed on other opportunities. Thus, the remainder of the leases expired without renewal and the Company recognized an additional abandonment loss of $1,020,479 on the Uniontown project for the year ended September 30, 2011.

NOTE 5 - PROVED PROPERTIES AND IMPAIRMENT  

Net capitalized costs are comprised of the following; detailed by property:



Page 9 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012






 

Name

 

June 30, 2012

 

September 30, 2011

 

 

 

 

 

 

 

Crosby, North Dakota Properties

 

 

 

 

 

 

Proved Reserves

$

2,357,753

$

2,357,753

 

 

Field Equipment

 

1,200,245

 

1,200,245

 

 

Capitalized Drilling Costs

 

416,429

 

416,429

 

 

  Subtotal

 

3,974,427

 

3,974,427

 

 

Less: Impairments

 

(2,267,426)

 

(2,267,426)

 

 

Less: Accumulated DD&A

 

(995,025)

 

(748,836)

 

 

 

 

 

 

 

 

Total Proved Oil Properties

$

711,976

$

958,165

During the year ended September 30, 2011, the Company impaired certain previously capitalized non-saleable assets of $1,301,422 at the Crosby, North Dakota property.

For the year ended September 30, 2011, the Company performed an analysis to determine whether the carrying amounts in its financial statements exceeded the net present value of the reserve estimates for the Crosby, North Dakota property.  Management determined that the net values reflected in the financial statements did not exceed the net discounted present value of the reserves estimated by the independent reserve engineer. Management determined that an impairment exists on other Crosby property. The impairment write-down was recognized at $280,963 for the year ended September 30, 2011.

NOTE 6 - DERIVATIVE LIABILITIES

As discussed in Note 7, the Company entered into three separate issuances of convertible debentures, dated December 14, 2009, April 23, 2010 and October 20, 2010, which contained provisions allowing holders of the debentures to convert outstanding debt to shares of the Company's common stock. The debentures contain ‘down-round’ provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions.  Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting.  As such, management has valued them at fair value at the date of issuance and bifurcated from the host instruments.  

The debentures are convertible at any time after the original issue date into a number of shares of the Company’s common stock, determined by dividing the amount to be converted by a conversion price as of June 30, 2012, of $0.05 per share or an aggregate of 23,279,993 shares.  Additionally common share purchase warrants were issued, expiring 42 months from the original issue date.  The warrants were exercisable by purchase of the Company’s common stock for cash, or alternatively, in a cashless exercise, the number of shares being determined in accordance with a predetermined formula based on the Company’s then current stock price.

Conversion option derivative

At June 30, 2012 and September 30, 2011, the fair value of conversion options was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions and the associated revaluation range of assumptions over the past two years:

 

 

 

 

June 30, 2012

 

September 30, 2011

Risk-free interest rate

 

 

 

0.09%

 

0.01% to 1.60%

Expected dividend rate

 

 

 

-

 

-

Expected term

 

 

 

.25 years

 

.21 years to 3 years

Expected volatility

 

 

 

202.7% to 217.9%

 

120.1% to 184%

Per unit fair value of conversion option derivative liability

 

 

 

$0.0131

 

$0.006 to $0.90


At June 30, 2012, the associated debentures have matured and are in default.  Management has estimated the remaining life of the conversion option to be 3 months.  



Page 10 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012



Below is detail of the conversion option liability balance at June 30, 2012, and September 30, 2011:

 

 

 

June 30, 2012

 

September 30, 2011

 

 

 

 

 

 

 

Beginning balance

$

286,498

$

848,300

 

 

Initial fair value of conversion option liability

 

-

 

388,889

 

 

Change in conversion option liability resulting from extinguishment of debt

 

763,718

 

-

 

 

Revaluation of conversion option liability resulting from conversion of debentures

 

(71,383)

 

(119,683)

 

 

Net change in fair value of conversion option liability

 

(673,051)

 

(831,008)

 

Ending balance

$

305,782

$

286,498

 

 

 

 

 

 

 

 

Conversion option shares outstanding

 

23,279,993

 

10,658,333

 

 

Weighted average fair value per unit

$

0.0131

$

0.03

 

 

$

305,782

$

286,498

 

 

 

 

 

 


Warrant derivative


For periods ended June 30, 2012 and September 30, 2011, respectively,  the fair value of warrants was estimated using the Black-Scholes option pricing model using the following weighted average assumptions and the associated  revaluation range of assumptions on designated event dates over the associated period:

 

 

 

June 30, 2012

 

September 30, 2011

 

 

 

 

 

 

 

Risk-free interest rate

 

0.21% to 0.33%

 

0.25% to 1.70%

 

Expected dividend rate

 

-

 

-

 

Expected term

 

.96 years to 1.82 years

 

3 to 5 years

 

Expected volatility

 

170.2% to 199.7%

 

136.6% to 172.8%

 

Per unit fair value of warrant derivative liability

 

$0.027

 

$0.03 to $1.44

 

Number of warrants valued

 

4,999,113

 

4,999,113

Below is detail of the warrant derivative balance at June 30, 2012 and September 30, 2011:

 

 

 

June 30, 2012

 

September 30, 2011

 

 

 

 

 

 

 

Beginning balance

$

299,947

$

498,180

 

 

Initial fair value of warrant derivative

 

 

 

453,298

 

 

Change in derivative liability resulting from modification of warrant exercise price

 

159,271

 

-

 

 

Net change in fair value of warrant derivative

 

(322,607)

 

(651,531)

 

Ending balance

$

136,611

$

299,947

 

 

 

 

 

 

 

 

Conversion option shares outstanding

 

4,999,113

 

4,999,113

 

 

Weighted average fair value per unit

$

0.027

$

0.06

 

 

$

136,611

$

299,947

 

 

 

 

 

 

NOTE 7 - CONVERTIBLE DEBENTURES

During the year ended September 30, 2010, the Company issued, pursuant to a securities purchase agreement, 10% convertible debentures with a face value of $1,500,000.  The first tranche of the total financing, with a face value of $900,000, was issued during the first quarter ended December 31, 2009.  In April 2010, additional debentures with a face value of $600,000 were issued.  All of the debentures have a two year maturity and were issued with attached common stock purchase warrants.  The effective interest rate on the debentures is 10% per annum.  The debentures are secured by all assets of the Company except those specifically excluded in the agreement which include all Kansas properties and related assets.



Page 11 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012



The debentures are convertible at any time after the original issue date into a number of shares of the Company’s common stock, determined by dividing the amount to be converted by an initial conversion price of $0.30 per share.  Additionally, attached common share purchase warrants expire 42 months from the original issue date and permit the holders two exercise options.  The warrants were exercisable by purchase of the Company’s common stock for cash at an initial exercise price of $0.45, or alternatively, with respect to the warrants issued in conjunction with the initial $900,000 tranche, in a cashless exercise, the number of shares being determined in accordance with a predetermined formula based on the Company’s then current stock price.   Subsequent to the initial issue date, the initial conversion price of $0.30 per share was amended to $0.18 per share and then $0.12 based on of provisions in the agreements related to equity issuances and issuance of additional convertible debentures described hereafter during the year ended September 30, 2011.  All of the warrants containing cashless exercise provision were fully exercised during the year ended September 30, 2010.

During the year ended September 30, 2010, the holders of the debentures and the common stock purchase warrants associated with the first $900,000 issuance, exercised all 3,000,000 warrants to acquire 2,111,388 shares of the Company’s common stock in two separate cashless exercises on January 6 and January 27, 2010.  Warrants attached to the debentures issued in April 2010 total 2,000,000, do not contain a cashless exercise provision, and remain to be exercised at the election of the debenture holders.

During the year ended September 30, 2011, the Company entered into a Securities Purchase Agreement with certain institutional investors to issue $500,000 of Secured Convertible Debentures.  The debentures provide for interest to be paid quarterly, at the rate of 10% per annum, and are due two years from the issuance date.  The debentures are secured by all assets of the Company except those specifically excluded in the agreement which include all Kansas properties and related assets.


The debentures are convertible at any time after the original issue date into a number of shares of the registrant’s common stock, determined by dividing the amount to be converted by an initial conversion price of $0.18 per share.  In addition to the debentures the purchasers were issued an aggregate of 2,833,113 common share purchase warrants, each having a term of 42 months, expiring April of 2014, and giving the purchasers the right to purchase the Company’s common shares at an initial exercise price of $0.18 per share. Subsequent to the initial issue date, the initial conversion price of $0.18 per share was amended to $0.12 per share based on provisions in the agreements related to equity issuances and issuance of additional convertible debentures described hereafter during the year ended September 30, 2011.  


Further, the modified conversion price of $0.12 per share was amended to $0.05 per share based on provisions in the agreements related to equity issuances and issuance of additional convertible debentures described hereafter during the nine months ended June 30, 2012.

Based upon the fair values as of the original agreement dates of the December 2009 and April 2010 debentures, $1,500,000 was allocated to the common stock purchase warrants and the conversion features resulting in a discount on the debt.  Giving effect to the amortization of the discount, and the conversion of $658,000 in principal conversion for the year ended September 30, 2011, $ nil and $118,625 of the discount remains to be amortized at June 30, 2012 and September 30, 2011, respectively.  

Based upon the fair values as of the original agreement dates of the October 2010 debentures, $500,000 was allocated to the common stock purchase warrants and the conversion features resulting in a discount on the debt. Giving effect to the amortization of the discount, and the conversion of $115,000 and $60,000 and the modification of the denture agreement for the nine months ended June 30, 2012 and the year ended September 30,  2011, respectively, and $ nil and $198,000 of the discount remains to be amortized as of June 30, 2012 and September 30, 2011, respectively.  

The 10% interest payable quarterly as per provisions in the debentures may be paid in shares of common stock at the Company's option according to a predetermined formula.  For the nine months ended June 30, 2012 and June 30, 2011, 483,811 and 774,563 common shares were issued, respectively, for interest payable under the debentures.  Interest expense of $64,147 and $86,810 has been included in ‘Interest and financing costs’ in the consolidated statements of operations for the nine months ended June 30, 2012 and June 30, 2011, respectively. Interest accrued is included on the Consolidated Balance Sheets in "Other payables, interest and taxes accrued" of $29,045 and $33,362 at June 30, 2012 and September 30, 2011, respectively.

The debentures all contain ‘down-round’ provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions.  Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting.  As such, management has valued at fair value at the date of issuance and bifurcated from the host instruments.  See Note 6.



Page 12 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012



In all three cases, the entire face amount of the debt issued has been allocated to discount, and is being amortized over the respective term of the debt.

During the nine months ended June 30, 2012 and fiscal year ended September 30, 2011, holders of the debt elected to convert $115,000 and $718,000 face amounts of the debt into 958,333 and 4,898,614 shares of common stock, respectively, according to the terms of the agreements.

Giving effect to monthly amortization of the debt discounts and the conversion of debt into shares of common stock, during the nine months ended June 30, 2012 and June 30, 2011, respectively, $144,814 and $628,939, respectively, of debt discount amortization has been posted to the statement of operations.   

On January 9, 2012, the Company entered into a Modification Agreement with the Purchasers.   The maturity date of the 2009 Debentures was extended to March 15, 2012.  Also the conversion price of Debentures issued in the 2009 Transactions and 2010 Transaction was reduced to five cents ($0.05) per share, and the Exercise Price of the Warrants issued in the 2009 Transactions and 2010 Transaction was reduced to five cents ($0.05) per share.  The Company determined that the modification resulted in a substantial change in the terms of the agreements such that recognition of an extinguishment loss is required. The Company recognized a loss on extinguishment of $1,023,417 including write-off of the remaining unamortized debt discount of $171,811 and loss on warrant derivative resulting from exercise price modification of $71,383 at January 9, 2012.

As of June 30, 2012, the Company is in default of the terms of the convertible debentures as a result of certain provisions of the agreement.  The December 2009 and April 2010 debentures maturity date of December 14, 2011 has lapsed, causing the default provisions on all debentures including the October 2010 debentures for a total balance of $1,164,000 as of June 30, 2012.  The Exercise Price of all outstanding warrants is reduced to five cents ($0.05) per share effective January 9, 2012.

NOTE 8 - ASSET RETIREMENT OBLIGATIONS

The Company has identified asset retirement obligations at the Girard, Kansas and Crosby, North Dakota operating sites.  These retirement obligations are determined based on the estimated cost to comply with abandonment regulations established by the Kansas Corporation Commission and the State of North Dakota.  The Company's engineers have estimated the cost, in today's dollars, to comply with these regulations.  These estimates have been projected out to the anticipated retirement date 12 to 18 years in the future, at an assumed inflation rate of 1.5 percent.  The anticipated future cost of remediation efforts in North Dakota, and Kansas, are $204,685, and $281,547, respectively.  These amounts were discounted back at an assumed interest rate of 10 percent, to arrive at a net present value of the obligation. The amount of the annual increase in the obligation is charged to "accretion expense" and for the nine months ended June 30, 2012 and 2011, respectively, was computed to be $12,781 and $11,620 respectively.

The following table summarizes the change in the asset retirement obligation for the nine months ended June 30, 2012 and the year ended September 31, 2011, respectively:

 

 

 

 

June 30, 2012

 

September 30, 2011

 

Beginning balance

$

170,421

$

158,801

 

Liabilities incurred

 

-

 

-

 

Liabilities settled

 

-

 

-

 

Accretion expense

 

12,781

 

11,620

 

 

TOTAL

$

183,202               

$

170,421

NOTE 9– COMMITMENTS AND CONTINGENCIES  

On July 1, 2008, the Company leased office space for a period of three years for a fixed monthly rental of $1,500 (See Note 12).  On December 1, 2011, the Company leased office space for a period of four years for fixed monthly rental of $2,500.  Accordingly, the Company's commitment to make these lease payments for each successive year is $30,000.

The Company is obligated to pay royalties to holders of oil and natural gas interests in both North Dakota and Kansas operations.  The Company also is obligated to pay working interest holders a pro-rata portion of revenue in oil operations net of shared operating



Page 13 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012



expenses.  The amounts are based on monthly oil and natural gas sales and are charged monthly net of to oil and gas revenue and recognized as "Due to royalty and working interest holders" on the Company's balance sheet.

NOTE 10 - COMMON STOCK

Nine months Ended June 30, 2012

Per the terms of the convertible debentures (Note 7), holders of the debentures have the option to receive shares of common stock issued in lieu of cash for accrued interest at 10% per annum through the date of conversion.  The table and narrative below details common shares issued for conversion of debentures and accrued interest during the nine months ended June 30, 2012:

 

 

Date

 

Debt Converted

Conversion price per share

Shares Issued

 

Accrued Interest

Fair Market Value per share

Shares Issued

 

 

 

 

 

 

 

 

 

 

 

 

 

October 4, 2011

$

-

-

-

$

5,835

$0.0706

82,660

 

 

October 20, 2011

 

60,000

$0.12

500,000

 

607

$0.0670

9,141

 

 

November 29, 2011

 

55,000

$0.12

458,333

 

932

$0.0765

12,183

 

 

TOTAL

$

115,000

 

958,333

$

7,374

 

103,984

 

 

 

 

 

 

 

 

 

 

 

On December 8, 2011, the Company issued 83,333 shares of common stock as a charitable contribution. The shares were valued at $0.06 per share.

On February 16, 2012, the Company issued 469,446 shares of common stock in lieu of paying interest with cash, to holders of  convertible debentures described in Note 7.  The interest totaled $25,643 and was issued at the 5-day variable weighted-average price ("VWAP") of $0.067 per share which materially agrees to fair value of the common stock on date of issuance.

On April 16, 2012, the Company issued 400,545 shares of common stock in lieu of paying interest with cash, to holders of  convertible debentures described in Note 7.  The interest totaled $20,292 and was issued at the 5-day variable weighted-average price ("VWAP") of $0.051 per share which materially agrees with fair value.

NOTE 11 - BROKER AND SHARE PURCHASE WARRANTS

In conjunction with the issuance of the $1,500,000 convertible debentures described in Note 7 on December 14, 2009, 166,000 warrants were issued for services provided in execution of the debentures. As discussed in Note 6, the share purchase and broker warrants are also treated as derivatives.   The warrants were valued at $104,580 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 1.70%, volatility of 165.4%, exercise price of $0.45, current market price of $0.63 per share and an expected life of 3.5 years.  The warrants expire June 14, 2013.  

In conjunction with the issuance of the $500,000 convertible debentures on or about October 26, 2010, described in Note 7, 55,335 warrants were issued for services provided in execution of the debentures.  The warrants were valued at $8,854 using the Black-Scholes option pricing model with the following assumptions:  risk free interest rate of 0.59%, volatility of 159.6%, exercise price of $0.18, current market price of $0.16 per share and an expected life of 3.5 years.  The warrants expire April 26, 2014.

The fair value of the broker warrants were expensed as financing costs.

A summary of the Company's share purchase and broker warrants outstanding at June 30, 2012 is presented as follows:



Page 14 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012






 

 

 

Broker warrants

 

Broker warrant exercise price

 

Share purchase warrants

 

Warrant exercise price

 

 

Balance outstanding, September 30, 2010

166,000

 

$0.45

 

2,000,000

 

$0.45

 

 

 

Granted

55,335

 

$0.18

 

2,777,778

 

$0.18

 

 

 

Exercised

-

 

 

 

-

 

 

 

 

 

Forfeited

-

 

 

 

-

 

 

 

 

Balance outstanding, September 30, 2011

221,335

 

$0.12 (1)  

 

4,777,778

 

$0.12(1)

 

 

 

Granted

-

 

 

 

-

 

 

 

 

 

Exercised

-

 

 

 

-

 

 

 

 

 

Forfeited

-

 

 

 

-

 

 

 

 

Balance outstanding, June 30, 2012

221,335

 

$0.05(1)

 

4,777,778

 

$0.05(1)

(1)  Provisions allow for a reduction in exercise price based on equity issuances subsequent to warrant issuance.  See Notes 6 and 7.

The Company entered into a Modification Agreement with holders of debentures discussed in Note 7.  The Exercise Price of the warrants issued in the 2010 transaction is reduced to five cents ($0.05) per share effective January 9, 2012.

NOTE 12 - RELATED PARTY TRANSACTIONS

On July 1, 2008, the Company subleased office space for $1,500 per month from Marlin Property Management, LLC an entity owned by the spouse of the Company's President, CEO and member of the board of directors.  On December 1, 2011, the Company subsequently entered into a four year lease with Marlin Property Management, LLC for $2,500 for office space at an alternate location in Coeur d'Alene, Idaho.  For the three months and nine months ended June 30, 2012, the Company recognized $7,500 and $20,500, respectively, in rent expense to the related party.  For the three months and nine months ended June 30, 2011, the Company recognized $4,500 and $13,500 respectively.

NOTE 13 - INCOME TAX

The Company did not recognize an income tax benefit or expense for the period ended June 30, 2012, and fiscal year ended September 30, 2011.  For the fiscal year ending September 30, 2012, the Company anticipates an effective income tax rate of 0% due to the availability of net operating losses to offset any income taxes.  

NOTE 14- CORRECTION OF ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS

As disclosed in the financial statements as of and for the year ended September 30, 2011, management has determined that certain errors were contained in the Company's financial statements.

The errors were related to an incorrect application of conversion option derivative and warrant derivative accounting related to convertible debentures entered into by the Company on or about December 14, 2009, April 23, 2010 and October 18, 2010 (Note 7).   As discussed in Note 2, embedded derivatives that are not clearly and closely related to the host contract are bifurcated and recognized at fair value with changes in fair value recognized as either a gain or loss in earnings if they can be reliably measured.

Management has also assessed undeveloped properties in both North Dakota and Kansas and determined restatement of financial statements is appropriate for the quarters ended June 30, 2011 and prior.   The Uniontown, Kansas project was acquired for $2,200,000 in 2007, and consisted of mineral leases covering approximately 35,000 acres in Bourbon County, KS.  During 2008, it was determined that the Company only actually permitted approximately one-third of the leases it had acquired initially, and therefore recognized an impairment for the remaining two-thirds of the original cost ($1,474,000).  Throughout 2007 and 2008, the Company paid approximately $295,000 to renew these leases, each for a term of three years.  The payments represented acquisition costs, and since the property was not yet in production the leases should not have been subject to amortization but is instead subjected to an annual impairment test.



Page 15 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012



The adjustments required to appropriately record these adjustments are material to the previously filed financial statements, thus management is restating these financial statements.  The accompanying financial statements have been restated to reflect the corrections.   As discussed in Note 1, certain reclassifications have been made for comparative purposes.

The effects of the Company's previously issued June 30, 2011 statement of operations is as follows:

 

 

For the three months ended June 30, 2011

 

 

Previously reported

 

Increase

(Decrease)

 

Restated

 

 

 

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

45,379

 

-

$

45,379

 

 

 

Natural gas sales

 

 

7,353

 

-

 

7,353

 

 

 

 

TOTAL REVENUE

 

 

52,732

 

-

 

52,732

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Production costs - oil

 

19,843

 

-

 

19,843

 

 

 

Production costs - natural gas

 

3,347

 

-

 

3,347

 

 

 

Depreciation, depletion and amortization

 

193,351

 

(2,022)

 

191,329

 

 

 

Loss on write-off and sales of leases and equipment

 

102,875

 

(360)

 

102,515

 

 

 

Accretion of asset retirement obligation

 

11,620

 

(7,746)

 

3,874

 

 

 

General and administrative

 

183,314

 

-

 

183,314

 

 

 

 

TOTAL OPERATING EXPENSES

 

514,350

 

(10,128)

 

504,222

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(461,618)

 

(10,128)

 

(451,490)

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest and financing costs

 

(70,430)

 

1,848

 

(68,582)

 

 

 

Miscellaneous income (expense)

 

55,352

 

(1,084)

 

54,268

 

 

 

Gain (loss) on extinguishment and conversion of debt

 

101,459

 

(159,276)

 

(57,817)

 

 

 

Gain (loss) on change in fair value of conversion option derivative

 

-

 

178,432

 

178,432

 

 

 

Gain (loss) on change in fair value of warrant derivative

 

-

 

249,956

 

249,956

 

 

 

Amortization of discount on debentures

 

(293,060)

 

76,686

 

(216,374)

 

 

 

 

TOTAL OTHER INCOME (EXPENSE)

 

(206,679)

 

346,562

 

139,883

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAX

 

(668,297)

 

356,690

$

(311,607)

 

 

 

 

 

 

 

 

 

 

 

Provision for income tax

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

$

(668,297)

$

356,690

$

(311,607)

 

 

 

 

 

 

 

 

 

 









Page 16 of 22



Jayhawk Energy, Inc. and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2012






 

 

For the nine months ended June 30, 2011

 

 

Previously reported

 

Increase

(Decrease)

 

Restated

 

 

 

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

195,794

$

-

$

195,794

 

 

 

Natural gas sales

 

 

28,294

 

-

 

28,294

 

 

 

 

TOTAL REVENUE

 

 

224,087

 

-

 

224,087

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Production costs - oil

 

88,264

 

-

 

88,264

 

 

 

Production costs - natural gas

 

6,315

 

-

 

6,315

 

 

 

Depreciation, depletion and amortization

 

578,467

 

(23,391)

 

555,077

 

 

 

Loss on write-off and sales of leases and equipment

 

102,875

 

(360)

 

102,515

 

 

 

Accretion of asset retirement obligation

 

11,620

 

-

 

11,620

 

 

 

General and administrative

 

675,757

 

-

 

675,757

 

 

 

 

TOTAL OPERATING EXPENSES

 

1,463,298

 

(23,751)

 

1,439,547

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(1,239,211)

 

23,751

 

(1,215,460)

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest and financing costs

 

(210,685)

 

765

 

(209,920)

 

 

 

Miscellaneous income (expense)

 

55,352

 

-

 

55,352

 

 

 

Loss on initial recording of derivatives

 

-

 

(342,187)

 

(342,187)

 

 

 

Gain (loss) on extinguishment and conversion of debt

 

-

 

(218,457)

 

(218,457)

 

 

 

Gain (loss) on change in fair value of conversion option derivative

 

-

 

806,342

 

806,342

 

 

 

Gain (loss) on change in fair value of warrant derivative

 

-

 

623,200

 

623,200

 

 

 

Accretion of convertible note payable

 

 

 

 

 

 

 

 

 

Amortization of discount on debentures

 

(635,982)

 

7,043

 

(628,939)

 

 

 

 

TOTAL OTHER INCOME (EXPENSE)

 

(791,315)

 

876,706

 

85,391

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAX

 

(2,030,526)

 

900,457

 

(1,130,069)

 

 

 

 

 

 

 

 

 

 

 

Provision for income tax

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

$

(2,030,526)

$

900,457

$

(1,130,069)

 

 

 

 

 

 

 

 

 

 

NOTE 15 - SUBSEQUENT EVENTS  

On July 11, 2012, the Company issued 507,292 shares of common stock in lieu of paying interest with cash, to holders of convertible debentures described in Note 7.  The interest totaled $20,292 and was issued at the 5-day variable weighted-average price ("VWAP") of $0.04 per share which materially agrees with fair value.



Page 17 of 22






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



Results of Operations for the three months ended June 30, 2012 and 2011   

 

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and supplemental information presented in our Annual Report for the period ending September 30, 2011, on Form 10-K, and the Forms 8-K and Forms 10-Q issued in the periods subsequent to September 30, 2011.  Certain sections of Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting our business.  These statements typically contain words such as "anticipates," "believes," "estimates," "expects," "plans," "probable," "should," "could," "would," or similar words indicating that future outcomes are uncertain.  In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not all such factors, which could cause future outcomes to differ materially from those set forth in the forward-looking statements.


Oil and Gas Properties

During the three months ended June 30, 2012, the Crosby area experienced improving weather conditions which provided adequate access to four of JayHawk Energy’s five producing wells.  All four wells produced regularly during the quarter just ended, and continue to produce to date of this report.    

Revenues – For the three months ending June 30, 2012 and 2011, revenues reported as JayHawk's net working interest were $112,359 and $52,732 respectively.  The comparative volume of oil and gas delivered and the average prices received during each of the two respective three month periods of 2012 and 2011, are disclosed in the following table:

 

 

 

Volumes

 

Average Prices

 

Gross Revenue

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales (in barrels)

3,302

 

1,013

 

$67.35

 

$90.11

 

$  222,382

 

91,280

 

Gas sales (in thousand cubic feet)

-

 

2,923

 

-

 

3.62

 

-

 

12,437

 

Total gross receipts

 

 

 

 

 

 

 

 

$  222,382

 

103,717

 

 

Less: working and royalty interests

 

 

 

 

 

 

 

 

(99,081)

 

(46,327)

 

 

Less: severance taxes

 

 

 

 

 

 

 

 

(10,940)

 

(4,658)

 

Net revenue to JayHawk

 

 

 

 

 

 

 

 

$ 112,359

 

$      52,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


Volumes of oil delivered during the three month period ending June 30, 2012 increased by 2,289 barrels (+226%) over the same timeframe in 2011.  The Company operated four of five wells in the three months ended June 30, 2012 for an aggregate of 282 production days compared to 49 days producing for the three months ended June 30, 2011.   


Access to the Kearney well continued to be restricted by flood waters during the three months ended June 30, 2012.  Subsequent to the report date, access to the Kearney well has been restored and production resumed at the well site.  Management anticipates the well to resume historic production levels of approximately 200 barrels of oil per month.


For the three month period ending June 30, 2012, JayHawk sold a gross 3,302 barrels (Bbls).  Field prices (after delivery charges) fluctuated from a low of $63.78 to a high of $69.79 during the three month period ending June 30, 2012  This production was sold at average prices of $67.35/Bbl.  During the comparable period ending June 30, 2011 the quarterly sales volumes were 2,136 Bbls.  Field prices (after delivery charges) fluctuated from a low of $69.25 to a high of $83.36/Bbl.  Average prices received per barrel of crude oil were $75.35 for the three months ending June 30, 2011.


Gas Revenues – During the fourth quarter ending September 30, 2011, the Company’s joint venture partner failed to exercise an option that would have given WHL Midcon, LLC an 85 percent working interest in the Girard properties.  By failing to exercise,



Page 18 of 22





WHL Midcon’s revenue percentage fell from 42.5 to 35% beginning in July 2011.  As well, under the terms of the previous joint venture agreement, the joint venture partner was responsible for all operating expenses related to the Girard properties.  Beginning in July 2011, Jayhawk Energy became responsible for 100% of operating expenses related to the Girard properties.  As WHL Midcon, LLC continues to maintain oil operations in the Girard vicinity, Jayhawk continues to share some contract employees and overhead expenses pro-rata with WHL Midcon, LLC.  Consequently, production expenses in Kansas have increased.


Prices received for gas production continue to remain low. As such, production was temporarily shut-in in anticipation of natural gas prices strengthening.   


Production and Operating Expenses – Total operating expenses for the three months ended June 30, 2012 and 2011 were $504,222 and $300,951 respectively.  The expenses are segregated as follows:


 

 

Three months ended

 

Three months ended

 

 

June 30, 2012

 

June 30, 2011

 

 

Crosby, ND

 

Girard, KS

 

G&A

 

Total

 

Total

Direct Regional Costs

$

39,085

$

4,685

$

-

$

43,770

$

23,191

Depreciation, depletion and amortization

 

71,645

 

39,536

 

1,118

 

112,299

 

191,329

General and administrative

 

43

 

214

 

140,531

 

140,788

 

183,314

Accretion of asset retirement obligation

 

1,793

 

2,467

 

-

 

4,260

 

3,874

Loss on write-off and sale of equipment

 

-

 

-

 

-

 

-

 

102,515

Other net (income) and expense

 

540

 

5

 

(158,618)

 

(158,073)

 

(33,496)

 

Totals

$

113,106

$

46,907

$

(16,969)

$

143,044

$

470,727

 

 

 

 

 

 

 

 

 

 

 


Total production expenses for the North Dakota oil operations were $39,085 (34.8% of oil revenue) for the three months ended June 30, 2012 compared to $19,843 (43.7% of oil revenue)   for the three months ended June 30, 2012.   These expenses are 8.9% lower as a percentage of revenue than incurred in the comparative periods ending June 30, 2012.    Management expects repairs and maintenance to increase in the quarter ending September 30, 2012 primarily as a result of road maintenance and well repairs associated with the Kearney well.  


Relative to the Company’s Kansas natural gas activities, throughout the three month period ending June 30, 2012, in accordance with the joint operating agreement lapsing, JayHawk will bear the responsibility for costs associated with the operations, and, in turn will derive a higher percentage of revenue  for that responsibility once the Company's natural gas wells are returned to production.    


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


General and Administrative Expenses – include the cost of head office administration and the salaries and wages paid senior management and administrative staff.  A comparative analysis of the general and administrative expense for the three month period ending June 30, 2012 and 2011 is provided in the following table:


 

 

 

 

Three months ended

 

Three months ended

 

 

 

 

June 30, 2012

 

June 30, 2011

 

Compensation and payroll taxes

$

57,329

$

57,541

 

Stock option expense

 

3,146

 

53,286

 

Legal, professional and consulting fees

 

45,320

 

26,102

 

Audit and public company expense

 

6,803

 

24,744

 

Insurance

 

13,843

 

12,664

 

All other general and administrative

 

14,181

 

8,977

 

 

TOTAL

$

140,622               

$

183,314










Page 19 of 22





Management has taken appropriate and necessary actions to reduce general and administrative expenses and will continue to seek further cost reductions.  Total general and administrative expense has decreased $42,692 (23.4%) during the three month period ending June 30, 2012 compared to the prior year.  Compensation and payroll expense has decreased $50,352, attributable to stock options expensed, and reduction in payroll expense by not replacing the salary of the Company’s former president in the comparable period ending June 30, 2011.   The Company's CEO has foregone compensation during quarter ended June 30, 2012.   Audit and public company expense decreased $17,941, as a result of discontinuing the use of a dedicated investor relations consultant during the current fiscal year.  


Legal, professional and consulting fees increased by $19,218 over the comparable period ending June 30, 2011 as a result of engaging Cynergy Advisors to provide Company management recommendations in connection with opportunities for capital raises, mergers, acquisitions, joint ventures, sale or trade of a working interest and or other business combinations or divestitures.  The Company continues to seek opportunities to increase shareholder value by seeking merger candidates, joint venture partners or interested parties in sale or trade of business operations.   


Insurance expense increased $1,179 over the prior year due to rise in annual premium costs.  


Other income (expense) – for the three month period ending June 30, 2012 and 2011, are detailed below.  Interest expense, discount amortization, financing costs and the non-cash costs of debt conversion and derivatives are more fully discussed in Note 8 to the Notes to the Financial Statements.


 

 

 

 

Three months ended

 

Three months ended

 

 

 

 

June 30, 2012

 

June 30, 2011

 

Interest and financing costs

$

(31,421)

$

(68,582)

 

Miscellaneous income (expense)

 

-

 

54,268

 

Loss on initial recording of derivatives

 

-

 

-

 

Gain (loss) on extinguishment and conversion of debt

 

-

 

(57,817)

 

Gain (loss) on change in fair value of conversion option derivative

 

313,173

 

178,432

 

Gain (loss) on change in fair value of warrant derivative

 

(123,695)

 

249,956

 

Amortization of discount on debentures

 

-

 

(216,374)

 

 

TOTAL

$

158,057

$

139,883


Interest and financing costs decreased due to a lower debt load and reducing interest-bearing vendor payables over the past twelve months.  


On or about January 9, 2012, the Company modified the terms of its debentures (Note 6 and 7) and warrants (Note 6), changing the conversion and exercise price from $0.12 to $0.05 per share whereby the fair value of the options and warrants were re-price to their fair market trading value.  The Company recognized no additional derivatives during the quarter ended June 30, 2012 nor any loss on conversion of debt.  The total non-cash (loss) gain on conversion derivative of $314,153 and warrant derivative of ($123,695) positively impacted the financial results for the quarter.  


Cash Flows, Liquidity and Capital Resources  


As of June 30, 2012 current assets totaled $113,612 consisting of cash, $30,847, accounts receivable, $73,625, and prepaid expenses, $9,140.  At the same time the Company's current liabilities were $2,688,681.  This working capital shortage of $2,575,065 impairs the Company's ability to continue operating as a going concern.  Future success and independence will be dependent upon the Company's ability to obtain sufficient additional financing and upon achieving profitable future operations.  At this time there is no assurance that the Company will be able to achieve these objectives.  Management is seeking joint venture, merger, acquisition and other means of financing to grow the Company.


Net cash used by operating activities totaled $20,905 for the nine months ending June 30, 2012, compared to $927,193 used by operating activities for the six month period ending  June 30, 2011.   


Net cash (used) provided by investing activities totaled ($1,160) during the nine months ending June 30, 2012 as compared to  $98,785 in the same period ending June 30, 2011.


Net cash used by financing activities totaled $ nil during the nine months ending June 30, 2012 as compared to net cash provided of  $821,000 in the same period ending June 30, 2011.




Page 20 of 22





The net change in cash is the sum of cash used in operating activities and provided by investing and financing activities, or a net decrease of $22,065 which is a decrease in the Company's cash balance of $52,912 existing at September 30, 2011, to the cash balance at June 30, 2012 of $30,847.  


Off-Balance Sheet Arrangements


We have no off-balance sheet arrangements.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We have no investments, trading or non-trading, that would be sensitive to market risk.

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures - We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon the evaluation of those controls and procedures performed as of June 30, 2012, the date of this report, our chief executive officer concluded that our disclosure controls and procedures were effective to allow timely decisions regarding required disclosure.

 

(b) Changes in internal controls – Our management, including the CEO and CFO, identified no change in our internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal  control over financial reporting.  


 PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On March 7, 2012, Gross Capital, Inc. (“Gross”) filed suit against the Company (Civil Action No. 4:12-cv-00714) in the United States District Court for the Southern District of Texas, Houston Division (the “Gross Lawsuit”).  Gross formerly provided the Company with investor relations and other consulting services.  The Gross Lawsuit alleges the Company breached two separate contracts between Gross and JayHawk.  The suit requests relief in the form of money damages, including attorneys’ fees and costs.  On March 30, 2012 the Company filed its answer (defenses) to the original complaint, wherein it denied all claims, and filed counterclaims against Gross for breach of contract, fraud and fraud in the inducement.  The Company also requested the Gross Lawsuit be transferred to be heard in the state of Idaho.


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


Item 1A. Risk Factors

 

There have been no material changes from the risk factors as previously disclosed in our Form 10-K for the year ended September 30, 2011 which was filed with the SEC on February 15, 2011.


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

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

Convertible Debentures-- As of June 30, 2012, the Company is in default, as a result of certain provisions of the debentures, of the terms of its 10% convertible debentures issued to certain institutional investors in December 2009 and April 2010.  The December 2009 and April 2010 debentures original maturity date of December 14, 2011, which was extended to June 30, 2012, has lapsed, causing the default provisions on all debentures including the October 2010 debentures for a total balance of $1,164,000 as of June 30, 2012. Management has reclassified the outstanding balance of all debentures, including the October 2010 debentures to current



Page 21 of 22





liabilities as of June 30, 2012.   The Exercise Price of all outstanding warrants is reduced to five cents ($0.05) per share effective February 16, 2012.  See Part I, Item II, Note 9-Convertible Debentures for a more thorough discussion of the debentures.

 

Item 4.  Mining Safety Disclosures

 

None.

 

Item 5.  Other Information


None.

 

Item 6.  Exhibits

 

31.1

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

32.1

Section 1350 Certification of CEO

101.INS*

XBRL Instance

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

XBRL Taxonomy Extension Calculation

101.DEF*

XBRL Taxonomy Extension Definition

101.LAB*

XBRL Taxonomy Extension Label

101.PRE*

XBRL Taxonomy Extension Presentation


* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.





SIGNATURES


In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

JayHawk Energy, Inc.,

a Colorado corporation

 

 

 

 

 

Date: August 17, 2012 

By:

/s/ Lindsay E. Gorrill

 

 

 

Lindsay E. Gorrill

Principal Executive Officer,

President and a Director 

 

 

 

 

 

 

 



Page 22 of 22