10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2011.

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

      For the transition period from                                             to                                           

Commission File Number: 000-53311

JayHawk Energy, Inc.

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

Colorado	20-0990109
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6240 E. Seltice Way, Suite C, Post Falls, Idaho 83854

(Address of principal executive offices)

(208) 667-1328

(Issuer’s Telephone Number)

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

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company	x

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date.  As of February 20, 2012, there were 59,381,895 shares of the issuer's $.001 par value common stock issued and outstanding.

1

EXPLANATORY NOTE

The purpose of this Amendment on Form 10-Q/A to the Quarterly  Report on Form 10-Q of Jayhawk Energy, Inc. (the “Company”), for the quarterly period ended December  31, 2011, is to reclassify unproven and proven reserves related to the Company’s Girard, Kansas property.  As no independent third-party engineer reserve estimate has been conducted on the Company’s Girard, Kansas project, management has determined it appropriate to reclassify those assets as ‘unproven’ despite natural gas production at the location.  At this time, the Company has no oil production at its Kansas properties and, conversely, no natural gas production as its Crosby, North Dakota site.  

2

JAYHAWK ENERGY, INC.

Quarterly Report on Form 10-Q for the

Quarterly Period Ending December 31, 2011

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management Discussion and Analysis	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. Submission of Matters to a Vote of Security Holders	22
Item 5. Other Information	22
Item 6. Exhibits	22
Signatures	23

3

PART I - FINANCIAL INFORMATION

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONTENTS
FINANCIAL STATEMENTS:	Page
Consolidated Balance Sheets	4
Consolidated Statements of Operations	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7

4

JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
					December 31, 2011		September 30, 2011
					(unaudited)		(audited)
ASSETS
	CURRENT ASSETS
		Cash and cash equivalents		$	129,165	$	52,912
		Trade accounts receivable (NOTE 4)			139,015		78,855
		Other current assets			10,731		10,162
			TOTAL CURRENT ASSETS		278,911		141,929
	PROPERTY AND EQUIPMENT
		Unproved gas properties, net of accumulated amortization of $1,519,665 and $1,443,629 respectively (NOTE 5)			3,846,637		3,922,673
		Proved and developed oil and gas properties, net of accumulated DD&A of
		$839,257 and  $748,836 respectively (NOTE 6)			867,744		958,165
		Computers, office equipment, furniture and leasehold improvements, net
		of depreciation of $37,777 and $36,659 respectively			7,134		8,252
			NET PROPERTY AND EQUIPMENT		4,721,515		4,889,090
	OTHER LONG-TERM ASSETS (NOTE 7)				101,500		101,500
	TOTAL ASSETS			$	5,101,926	$	5,132,519
LIABILITIES AND STOCKHOLDERS' EQUITY
	CURRENT LIABILITIES:
		Accounts payable		$	763,468	$	489,043
		Due to royalty and working interest holders			128,194		181,367
		Other payables, interest and taxes accrued			137,751		132,058
		Conversion option derivative (NOTE 8)			57,668		286,498
		Warrant derivative  (NOTE 8)			101,467		299,947
		Convertible debentures (NOTE 11)			1,164,000		1,279,000
			Less: unamortized discount on debentures		(171,811)		(316,625)
			TOTAL CURRENT LIABILITIES		2,180,737		2,351,288
	LONG-TERM LIABILITIES
		Asset retirement obligation (NOTE 10)			174,681		170,421
			TOTAL LONG-TERM LIABILITIES		174,681		170,421
	TOTAL LIABILITIES				2,355,418		2,521,709
	COMMITMENTS AND CONTINGENCIES (NOTE 18)
	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,
			59,381,895 and 58,236,245 shares issued and outstanding
			respectively (NOTE 12)		59,382		58,236
		Additional paid-in capital			21,056,550		20,967,464
		Accumulated deficit			(18,369,424)		(18,414,890)
			TOTAL STOCKHOLDERS' EQUITY		2,746,508		2,610,810
	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	5,101,926	$	5,132,519

See accompanying notes to consolidated financial statements.

5

JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
					For the three months ended  December 31,
					2011		2010
					(unaudited)		(unaudited and restated-Note 17)
	REVENUE
		Oil sales		$	166,382	$	69,051
		Natural gas sales			2,874		10,415
			TOTAL REVENUE		169,256		79,466
	OPERATING EXPENSES
		Production costs - oil			92,248		35,692
		Production costs – natural gas			13,096		2,310
		Depreciation, depletion and amortization			167,575		187,795
		General and administrative			135,624		230,714
			TOTAL OPERATING EXPENSES		408,543		456,511
	OPERATING LOSS				(239,287)		(377,045)
	OTHER INCOME (EXPENSE)
		Interest and financing costs			(32,233)		(96,568)
		Loss on initial recording of derivatives			-		(342,187)
		Gain (loss) on extinguishment  and conversion of debt			71,383		(158,358)
		Gain ( on change in fair value of conversion option derivative			196,197		724,104
		Gain ( on change in fair value of warrant derivative			198,480		501,558
		Amortization of discount on debentures			(144,814)		(184,847)
		Accretion of asset retirement obligation			(4,260)		(3,873)
			TOTAL OTHER INCOME (EXPENSE)		284,753		439,829
	INCOME BEFORE INCOME TAX				45,466		62,784
	Provision for income taxes				-		-
	NET INCOME			$	45,466	$	62,784
	Basic and diluted income per share (NOTE 2)			$	Nil	$	Nil
	Basic and diluted weighted average number of shares outstanding				59,065,401		50,422,875

6

JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
						For the three months ended December 31,
						2011		2010
								(unaudited and restated-Note 17)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	45,466	$	62,784
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation, depletion and amortization				167,575		187,795
		Accretion of asset retirement obligation				4,260		3,873
		Amortization of discount on debentures				144,814		184,847
		Loss on initial recording of derivative				-		342,187
		Loss (gain) on conversion of debt				(71,383)		158,358
		Loss (Gain) on change in fair value of conversion option derivative				(196,197)		(724,104)
		Loss (Gain) on change in fair value of warrant derivative				(198,480)		(501,558)
		Common stock issued in consideration of charitable contribution				5,000		-
		Common stock issued in consideration of services						9,456
		Common stock issued in lieu of interest				5,836		37,500
		Stock based compensation				3,146		53,286
	Changes in assets and liabilities:
		Trade accounts receivable				(60,160)		138,194
		Other current assets and other long term assets				(569)		846
		Accounts payable				274,425		(87,057)
		Due to royalty and working interest holders				(53,173)		(72,734)
		Other payables, interest and taxes accrued				5,693		(13,270)
				Net cash provided (used) by operating activities		76,253		(219,597)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Proved oil and gas additions					-		(22,770)
		Net cash used by investing activities				-		(22,770)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Payments on short-term notes					-		(92,558)
	Proceeds from convertible debentures					-		500,000
		Net cash provided by financing activities				-		407,442
Net increase in cash and cash equivalents						76,253		165,075
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						52,912		56,280
CASH AND CASH EQUIVALENTS AT END OF PERIOD					$	129,165	$	221,355
Supplemental Disclosure of Cash Flows:
Non-Cash Investing and Financing Activity:
			Interest paid with common stock		$	5,836	$	37,500
			Expiration of option to acquire unproved properties			-		116,235
			Common stock issued for conversion of debentures			115,000		-

7

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

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 three months ended December 31, 2011, 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 December 31, 2011, 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 $18,369,424 and  net income of $45,466 for the three months ended December 31, 2011, and as of that date the Company's current liabilities exceeded its current assets by $1,901,826.  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.

Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalent, restricted cash, accounts receivable, investments, and accounts payable.  The carrying value of notes payable and convertible debentures approximate fair value based on the contractual terms of those instruments.

Joint Venture Operations

8

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

In instances where the Company’s oil and gas activities are conducted jointly with others, the Company’s accounts reflect only its proportionate interest in such activities.

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods.  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.   Actual results may differ from these estimates and assumptions which could have a material effect on the Company's reported financial position and results of operations.

Income or Loss Per Common Share

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

The dilutive effect of convertible and outstanding securities as of December 31, 2011 and December 31, 2010, would be as follows:

		December 31, 2011	December 31, 2010
Stock Options		2,040,000	2,040,000
Convertible debt		9,699,997	9,063,887
Warrants		4,999,113	4,999,113
	Total Possible Dilution	16,739,110	16,103,000

At December 31, 2011 and September 30, 2011, the effect of the Company's outstanding options and common stock equivalents would have been anti-dilutive.

Revenue and Cost Recognition

The Company uses the sales method of accounting for oil and gas revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes the Company may be entitled to, based on the Company's individual interest in the property.  Periodically, imbalances between production and nomination volumes can occur for various reasons.  In cases where imbalances have occurred, a production imbalance receivable or liability will be recorded when determined.  Costs associated with production are expensed in the period in which they are incurred.

Cash Equivalents

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

Trade Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate for doubtful accounts.  Management determines the allowance by regularly evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions.  Trade receivables are written off when deemed uncollectible.  Recoveries of receivables previously written off are recorded as income when received.

Concentrations

9

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

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

Property, Plant and Equipment

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

The Company follows the successful effort method of accounting for oil and gas property as promulgated in Accounting Standards Codification (ASC) Topic 932, "Extractive Activities – Oil and Gas".  Under this method of accounting, acquisition costs for proved and unproved properties are capitalized when incurred.  Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed.  Development costs, including the costs to drill and equip development wells, and successful exploratory drilling costs to locate proved reserves are capitalized.  Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves.  A determination of whether a well has found proved reserves is made shortly after drilling is completed.  The determination is based on a process that relies on interpretations of available geologic, geophysics and engineering data.  If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well.  If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made.  If an exploratory well requires a  major capital expenditure before production can begin, the cost of drilling the exploratory well will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made and ii) drilling of the additional exploratory wells is under way or firmly planned for the near future.  If drilling in the area is not under way or firmly planned, or if the well has not found a commercially producible quantity of reserves, the exploratory well is assumed to be impaired and its costs are charged to expense.  

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

The Company calculates depletion, depreciation and amortization (DD&A) of capitalized cost of proved oil properties on a field-by-field basis using the units-of-production method based upon proved reserves. In computing DD&A the Company will take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage.  When applicable, the Company will apply the provisions of ASC Topic 410, "Accounting for Asset Retirement Obligations", ("ASC 410") which provides guidance on accounting for dismantlement and abandonment cost (see Note 10).

Support equipment and other property, plant and equipment related to oil and gas production are depreciated on a straight-line basis over their estimated useful lives which range from 5 to 35 years.  Property, plant and equipment unrelated to oil and gas producing activities is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 25 years.

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

Impairment of Long-Lived Assets

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

10

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Proved properties - The Company evaluates its proved properties for impairment when circumstances or events occur that may impact the fair value of the assets.  The fair value of property is primarily evaluated based upon the present value of expected revenues directly associated with those assets.  An impairment loss would be recognized if the carrying amount of a capitalized asset is not recoverable and exceeds its fair value. 

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

Sales of Producing and Non-producing Property

The Company accounts for the sale of a partial interest in a proved property as normal retirement.   The Company accounts for the sale of a partial interest in an unproved property as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained.   The Company recognizes a gain or loss for all other sales of non-producing properties and includes the gain or loss in the results of operations.

Fair Value Measures

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

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

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

Level 3:  Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology

that are significant to the measurement of the fair value of the assets or liabilities.

Derivative Instruments

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

11

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Asset Retirement Obligation

The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  The carrying value of a property associated with the capitalization of an asset retirement cost is included in proved oil and gas property in the balance sheets.  The future cash outflows for oil and gas properties associated with settling the asset retirement obligations is accrued in the balance sheets.  The asset retirement obligation consists of costs related to the plugging of wells and removal of facilities and equipment on its oil and gas properties (see Note 10).  

Income Tax and Accounting for Uncertainty

Income taxes are determined using the liability method in accordance with ASC Topic 740 "Income Taxes" ("ASC 740").  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

ASC 740 recognizes that the ultimate deductibility of positions taken or expected to be taken on tax returns is often uncertain.  It provides guidance on when tax positions claimed by an entity can be recognized and guidance on the dollar amount at which those positions are recorded.  In order to recognize the benefits associated with a tax position taken the entity must conclude that the ultimate allowability of the deduction is more likely than not.  If the ultimate allowability of the tax position exceeds 50% (more likely than not), the benefit associated with the position is recognized at the largest dollar amount that has more than a 50% likelihood of being realized upon ultimate settlement.  Differences between tax positions taken in a tax return and recognized in accordance with the guidance will generally result in (1) an increase in income taxes currently payable or a reduction in an income tax refund receivable or (2) an increase in a deferred tax liability or a decrease in a deferred tax asset, or both (1) and (2).

Stock Options Granted to Employees and Non-Employees

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

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

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

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

12

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

Reclassifications

Certain reclassifications have been made to the December 31, 2010 financial statements in order to conform to the 2011 presentation.  These reclassifications have no effect on net loss, total assets or accumulated deficit as restated except as otherwise described in Note 18 (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 17, financial information included for the three months ended December 31, 2010 has been restated.

New Accounting Pronouncements

The FASB issued an ASU to amend existing oil and gas reserve accounting and disclosure guidance to align its requirements with the SEC's revised rules.  The significant revisions involve revised definitions of oil and gas producing activities, changing the pricing used to estimate reserves at period end to a twelve month arithmetic average of the first day of the month prices and additional disclosure requirements.  In contract to the SEC rule, the FASB does not permit the disclosure of probable and possible reserves in the supplemental oil and gas information in the notes to the financial statements.  The amendments are effective for annual reporting periods ending on or after December 31, 2009.  

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 carrying values of cash and cash equivalents, trade accounts receivables, accounts payable and accrued liabilities approximate fair value due to their limited time to maturity or ability to immediately convert them to cash in the normal course. The carrying values of convertible debentures are net of a discount and does not reflect fair value of similar instruments.  The approximate fair value of the convertible debentures based upon the number of shares into which the debentures are convertible is $388,000 using the current market price per share of stock at December 31, 2011. 

The table below sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011 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.

			December 31, 2011		September 30, 2011	Input Hierarchy Level
Assets:
	Cash and cash equivalents	$	129,165	$	52,912	Level 1
Liabilities:
	Conversion option derivative		57,668		286,498	Level 2
	Warrant derivative		101,467		299,947	Level 2

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JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

NOTE 4 - TRADE ACCOUNTS RECEIVABLE

At December 31, 2011, trade accounts receivable represents those amounts the Company is owed for its oil and gas production delivered during the month of December 2011 and amounts due from other working interests for their respective percentages of joint operating costs and drilling costs. Management has determined the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions.  As of December 31, 2011 and September 30, 2011 there is no allowance recognized for doubtful accounts.  

Proceeds for the December 2011 deliveries, valued at  $128,942, were subsequently received in January 2012.  Accounts receivable for December 2011 natural gas deliveries, $2,453 were also received in January 2012.   

Proceeds for the September 2011 deliveries, valued at $70,664, were subsequently received in October 2011.  Amounts receivable for September natural gas deliveries, $571 were also received in October 2011. Specifically, trade accounts receivable are detailed as follows:

			December 31, 2011		September 30, 2011
Due for crude oil		$	128,942	$	70,664
Due for natural gas			2,453		571
Other receivables			7,620		7,620
	TOTAL	$	139,015	$	78,855

NOTE 5 - UNPROVED PROPERTIES AND IMPAIRMENT  

The total of the Company's investment in unproved properties at December 31, 2011 and September 30, 2011 consists of the following capitalized costs, respectively:

					December 31, 2011		September 30, 2011
Name
UNPROVED AND PRODUCING GAS PROPERTIES
Girard, Kansas properties
	Field equipment			$	615,953	$	615,953
	Capitalized drilling costs				662,899		662,899
			Subtotal		1,278,852		1,278,852
	Less: Accumulated DD&A				(469,273)		(458,765)
Net capitalized costs					809,579		820,087
Jayhawk Gas Transport Company
		Field equipment			2,605,871		2,605,871
		Less Accumulated DD&A			(433,893)		(404,865)
Net capitalized costs					2,171,978		2,201,006
UNPROVED AND NON-PRODUCING OIL AND GAS PROPERTIES
Kansas Girard Project					1,403,444		1,403,444
	Less: accumulated amortization				(616,499)		(579,999)
Net investment in Girard Project					786,945		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				$	3,846,637	$	3,922,673

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

14

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

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 6 - PROVED PROPERTIES AND IMPAIRMENT  

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

Name			December 31, 2011		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		(839,257)		(748,836)
Total Proved Oil and Gas Properties		$	867,744	$	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 an impairment exists on other Crosby property. The impairment write-down was recognized at $280,963 for the year ended September 30, 2011.

NOTE 7 – OTHER LONG-TERM ASSETS

Other assets consist of various deposits and reclamation bonds as disclosed in the following table:

			December 31, 2011		September 30, 2011
Rental Security Deposit		$	1,500	$	1,500
Bond Deposits			100,000		100,000
	TOTAL	$	101,500	$	101,500

NOTE 8 - DERIVATIVE LIABILITIES

As discussed in Note 11, 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 at December 31, 2011, of $0.12 per share or an aggregate of 9,699,997 shares.  Additionally common share purchase warrants were issued, expiring 42 months from the original issue date and

15

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

permit the holders two exercisable options.  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

For the periods ended December 31, 2011 and 2010, 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 on designated event dates over the past two years:

	December 14, 2009	April 23, 2010	October 20, 2010	Revaluation Ranges
Risk-free interest rate	0.87%	1.10%	0.40%	0.04% to 1.60%
Expected dividend      yield	-	-	-	-
Expected term	2 years	1.64 years	2 years	.21 years to 3 years
Expected volatility	169.0%	196.6%	173.8%	120.1% to 184%
Per unit fair value of conversion option derivative liability	$0.60	$0.65	$0.14	$0.006 to $0.90
Number of conversion units valued	3,000,000	2,000,000	2,777,778	--
Valuation of conversion option derivative on date of issue	$1,800,000	$1,300,000	$388,889	--

Below is detail of the conversion option liability balance for the three months ended December 31, 2011 and for the year ended September 30, 2011.

		December 31, 2011	September 30, 2011
Beginning balance		$                    286,498	$                    848,300
	Initial fair value of conversion option liability	-	388,889
	Revaluation of conversion option liability resulting from conversion of debentures	(215,080)	(119,683)
	Net change in fair value of conversion option liability	(13,750)	(831,008)
Ending balance		$                       7,668	$                   286,498
Conversion option shares outstanding at December 31, 2011 and September 30, 2011 respectively		9,699,997	10,658,333
	Weighted average fair value per unit	$                        0.006	$                         0.03
Ending balance		$                      57,668	$                   286,498

Warrant derivative

For 2011 and 2010, the fair value of warrants 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 on designated event dates over the past two years:

16

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

	December 14, 2009	April 23, 2010	October 20, 2010	Revaluation Ranges
Risk-free interest rate	1.70%	1.68%	0.59%	0.25% to 1.70%
Expected dividend      yield	-	--	--
Expected term	3.5 years	3 years	3 years	3 to 3.5 years
Expected volatility	165.4%	166.2%	159.6%	136.6% to 172.8%
Per unit fair value of warrant derivative	$0.63	$0.66	$0.16	$0.06 to $1.44
Number of warrants valued	3,166,000	2,000,000	2,833,113	166,000 to 3,166,000
Valuation of warrant derivative	$2,564,460	$1,320,000	$453,298	--

Below is detail of the warrant derivative balance for the three months ended December 31, 2011 and for the year ended September 30, 2011.

		December 31, 2011	September 30, 2011
Beginning balance		$                   299,947	$                  498 ,180
	Initial fair value of warrant derivative	-	453,298
	Revaluation of warrant derivative resulting from exercise of warrant	-	-
	Net change in fair value of warrant derivative	(198,480)	(651,531)
Ending balance		$                   101,467	$                  299,947
Warrants outstanding at period end		4,999,113	4,999,113
Period end weighted average fair value per unit		$0.02	$0.06
Ending balance		$                   101,467	$                  299,947

NOTE 9 - NOTES PAYABLE DUE IN LESS THAN ONE YEAR

On September 1, 2010 the Company entered into a short-term promissory note with a vendor for its balance of accounts payable.  The initial principal balance of $272,373 was due and payable in six (6) equal payments of $46,729 including interest at a rate of 12% per annum.  Through December 31, 2011, the Company has satisfied all financial obligations on this note.  

On March 10, 2011 the Company entered into a short-term promissory note with a vendor for its balance of accounts payable.  The principal balance of $146,905 was due and payable in five (5) equal payments of $29,768 beginning on March 15, 2011 including interest at a rate of 5.25% per annum.  Through December 31, 2011, the Company has satisfied all financial obligations on this note.  

On April 28, 2011 the Company entered into a short-term promissory note with a vendor for its balance of accounts payable.  The principal balance of $107,230 was due and payable in five (5) equal payments of $21,446 beginning on April 28, 2011 including interest at a rate of 5.25% per annum.  Through December 31, 2011, the Company has satisfied all financial obligations on this note.  

NOTE 10 - 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

17

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

three months ended December 31, 2011, and the year ended September 30, 2011, was computed to be $4,260 and $15,493, respectively.

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

			December 31,2011		September 30, 2011
Beginning balance		$	170,421	$	154,925
Liabilities incurred			-		-
Liabilities settled			-		-
Accretion expense			4,260		15,493
	TOTAL	$	174,681	$	170,421

NOTE 11 - 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.

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 purchase $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

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, $59,311

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JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

and $118,625 of the discount remains to be amortized at December 31, 2011 and  September 30, 2011, respectively.  The discount will continue to be amortized over the remaining life of the underlying convertible debentures.

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 for the three months ended December 31, 2011 and the year ended September 30, 2011, $112,500 and $198,000 of the discount remains to be amortized as of December 31, 2011 and September 30, 2011 respectively.  The discount will continue to be amortized over the remaining life of the underlying convertible debentures.

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 three months ended December 31, 2011 and the year ended September 30, 2011 and 2010, 103,984 and 1,238,751 common shares were issued, respectively, for interest payable under the debentures.  Interest expense of $35,078 and $192,036 has been included in ‘Interest and financing costs’ in the  consolidated statements of operations for the three months ended December 31, 2011 and the year ended September 30, 2011, respectively. Interest accrued is included on the Consolidated Balance Sheets in "Other payables, interest and taxes accrued" of $35,078 and $33,362 at December 31, 2011 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 8.

In all three of these debt issuances, the fair value of the derivative liabilities at the date of issuance exceeded the amount of the debt.  The excess of the fair value of the derivative liabilities issued over the debt amount has been recorded to the statement of operations during the periods  ended December 31, 2011 and 2010, as follows:

		Excess fair value of derivative liabilities over face amount of debt at issuance
Issue Date	Debt Amount	2011	2010
December 14, 2009	$900,000	-	$2,894,580
April 23, 2010	600,000	-	2,020,000
October 20, 2010	500,000	$342,186	-
		$342,186	$4,914,580

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 three months ended December 31, 2011 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. See Note 12.

Giving effect to monthly amortization of the debt discounts and the conversion of debt into shares of common stock,  during the three months ended and year ended December 31, 2011 and September 30, 2011, respectively, $144,814 and $825,257, respectively, of debt discount amortization has been posted to the statement of operations.  The remaining discounts will continue to be amortized to the statement of operations over the remaining life of the underlying convertible debentures.

As of December 31, 2011, 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 $1,279,000 as of December 31, 2011.    Management has reclassified the outstanding balance of all debentures, including the October 2010 debentures to current liabilities as of December 31, 2011.   As discussed in Note 20 - Subsequent Events, the debenture holders have extended the maturity date on the

19

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

December 2009, April 2010 and October 2010 debentures to March 15, 2012. The Exercise Price of all outstanding warrants is reduced to five cents ($0.05) per share effective February 16, 2012

NOTE 12 - COMMON STOCK

Three Months Ended December 31, 2011

Per the terms of the debentures, holders have the option to receive shares issues in lieu of cash for accrued interest through the date of conversion.  The table below details common shares issued for conversion of debentures and accrued interest during the three months ended December 31, 2011:

	Date		Debt Converted	Conversion price per share	Shares Issued		Accrued Interest	Price 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.

NOTE 13 - STOCK BASED COMPENSATION

The Company’s board of directors approved a stock option plan on August 11, 2009.   The purpose of the Plan is to provide employees and consultants of the Corporation and its Subsidiaries with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Corporation and its Subsidiaries, to join the interests of employees and consultants with the interests of the shareholders of the Corporation, and to facilitate attracting and retaining employees and consultants of exceptional ability.    The total number of shares available for grant under the terms of the Plan is 4,000,000.  The stock option price is the market price of the share at the date of issuance, but may be changed by the Board of Directors or designee from time to time.  The stock options are non-transferable and expire not more than five (5) years from the date of the granting.

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

During the year ended September 30, 2011, the Company granted 2,790,000 stock options to employees, contractors, board members and consultants exercisable at a price of $0.20 per share which expire September 2015.

At December 31, 2011, the Company had 2,040,000 options issued and outstanding.

The following table reflects the summary of stock options outstanding at December 31, 2011 and changes during the three months ended December 31, 2011:

		Number of shares under options			Weighted Average Exercise Price Per Share			Weighted Average Fair Value			Aggregate Intrinsic Value
Balance outstanding, September 30, 2010			2,790,000	$		0.20	$		558,000	$		279,000
	Forfeited		(750,000)			0.20			(150,000)			-
	Exercised		-			-			-			-
	Granted		-			-			-			-
Balance outstanding, September 30, 2011			2,040,000	$		0.20	$		408,000	$		-

20

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

	Forfeited	-
	Exercised	-
	Granted	-
Balance outstanding, December 31, 2011		2,040,000	$	0.20	$	408,000	$	-

The fair value of the stock options granted was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options.  The underlying assumptions used to calculate the fair value are as follows:

Year Ended September 30, 2010
	Dividend yield	-
	Expected volatility	99.3%
	Risk free interest rate	1.43%
	Expected life	5 years

A summary of the status of the Company’s nonvested stock options outstanding at December 31, 2011 is presented as follows:

		Number of options			Weighted Average Grant Date Fair Value Per Share			Weighted Average Grant Date Fair Value
Nonvested, September 30, 2010			1,515,000	$		0.16	$		$238,813
	Granted		-			-			-
	Vested		(605,000)			0.16			(213,144)
	Forfeited		(750,000)			-			-
Nonvested, September 30, 2011			160,000			$0.16			$25,669
	Granted		-			-			-
	Vested		-			-			-
	Forfeited		-			-			-
Nonvested, December 31, 2011			160,000			$0.16			$25,669

As of December 31, 2011, there was $22,023 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan.  That cost is expected to be recognized over a weighted-average period of .85 years.  For the period ended December 31, 2011, $3,146 was expensed to operations.

NOTE 14 - BROKER AND SHARE PURCHASE WARRANTS

In conjunction with the issuance of the $1,500,000 convertible debentures described in Note 11, 166,000 warrants were issued for services provided in execution of the debentures. As discussed in Note 8, 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 11, 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 December 31, 2011 is presented as follows:

21

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

		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, December 31, 2011			221,335		$0.12		4,777,778		$0.12

⁽¹⁾  Provisions allow for a reduction in exercise price based on equity issuances subsequent to warrant issuance.  See Notes 8 and 11.

As discussed in Note 19 – Subsequent Events, the Company entered into a Modification Agreement with holders of debentures discussed in Note 11.  The Exercise Price of the warrants issued in the 2010 transaction is reduced to five cents ($0.05) per share effective February 16, 2012.

NOTE 15 - 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.

NOTE 16 - INCOME TAX

The Company did not recognize an income tax benefit or expense for the 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 17- 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 for the quarter ended December 31, 2010.

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 11).   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.

22

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

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 December 31, 2010 statement of operations is as follows:

					Previously reported		Increase (Decrease)		Restated
REVENUE
		Oil sales		$	69,051	$	-	$		69,051
		Natural gas sales			10,415		-			10,415
			TOTAL REVENUE		79,466		-			79,466
OPERATING EXPENSES
		Production costs - oil			35,692		-			35,692
		Production costs - natural gas			2,310		-			2,310
		Depreciation, depletion and amortization			210,053		(22,258)			187,795
		Loss on write-off and sales of leases and equipment			-		-			-
		Impairment of proved properties			-		-			-
		General and administrative			230,714		-			230,714
			TOTAL OPERATING EXPENSES		478,769		(22,258)			456,511
OPERATING LOSS					(399,303)		(22,258)			(377,045)
OTHER INCOME (EXPENSE)
		Interest and financing costs			(43,680)		(52,888)			(96,568)
		Loss on initial recording of derivatives			-		(342,187)			(342,187)
		Gain (loss) on extinguishment and conversion of debt			(95,348)		(63,010)			(158,358)
		Gain (loss) on change in fair value of conversion option derivative			-		724,104			724,104
		Gain (loss) on change in fair value of warrant derivative			-		501,558			501,558
		Amortization of discount on debentures			(174,279)		(10,568)			(184,847)
		Accretion of asset retirement obligation			-		(3,873)			(3,873)
		Other income (expense)			(52,889)		52,889			-
			TOTAL OTHER INCOME (EXPENSE)		(366,196)		806,025			439,829
	INCOME (LOSS) BEFORE INCOME TAX				(765,499)		828,283			62,784
	Provision for income tax				-		-			-
	NET INCOME (LOSS)			$	(765,499)	$	828,283	$		62,784

NOTE 18– COMMITMENTS AND CONTINGENCIES  

There is no pending litigation or proceeding involving any director or officer of the Company for which indemnification is being sought.  

On July 1, 2008, the Company leased office space for a period of three years for a fixed monthly rental of $1,500.  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.

23

JAYHAWK ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011

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

NOTE 19 - SUBSEQUENT EVENTS  

As discussed in Notes 11 and 14, on or about December 22, 2009 the Company entered into a securities purchase agreement with  certain institutional investors (the “Investors”) pursuant to which the Company sold, in three tranches, convertible debentures and warrants (the “2009 Transactions”). For more information regarding the 2009 Transactions, refer to the Company’s Current Report on Form 8-K filed with the SEC on December 14, 2009, December 31, 2009 and April 20, 2010. On or about October 18, 2010, the Company entered into a securities purchase agreement with the Investors pursuant to which the Company sold the Investors convertible debentures and  warrants (the “2010 Transactions”). For more information regarding the 2010 Transaction,  refer to the Company’s Current Report on Form 8-K filed with the SEC on October 19, 2010.

On February 16, 2012, the Company entered into a Modification Agreement with the Purchasers.  Under the terms of the Modification Agreement, certain terms have been modified.  The maturity date of the 2009 Debentures is extended to March 15, 2012.  The conversion price of Debentures issued in the 2009 Transactions and 2010 Transaction is reduced to five cents ($0.05) per share. The  Exercise Price of the Warrants issued in the 2009 Transactions and 2010 Transaction is reduced to five cents ($0.05) per share.

No other terms of the 2009 Transactions or 2010 Transaction have been changed.

On February 16, 2012, the Company issued 379,917 shares of common stock in lieu of paying interest with cash, to holders of  convertible debentures described in Note 11.  The interest totaled $25,643 and was issued at the 5-day variable weighted-average price ("VWAP") of $0.067 per share.

24

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

Results of Operations for the three months ended December 31, 2011 and 2010   

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 December 31, 2011, the Crosby area experienced  improving weather conditions which provided adequate access to four of JayHawk Energy’s five producing wells. By mid-November 2011, the Company was producing at its Burner, Landstrom, Erickson and Schutz wells.  All four wells produced regularly during the quarter just ended, and continue to produce to date of this report.  The Kearney well remains inaccessible due to remnants of the 2011 floods.  

Revenues – For the three months ending December 31, 2011 and 2010, oil revenues reported as JayHawk's net working interest were $169,256 and $79,466 respectively.  The comparative volume of oil and gas delivered and the average prices received during each of the two respective three month periods of 2011 and 2010, are disclosed in the following table:

		Volumes		Average Prices		Gross Revenue
		2011	2010	2011	2010	2011	2010
Oil sales (in barrels)		3,963	3,011	$82.85	$ 62.53	$  328,321	$    188,270
Gas sales (in thousand cubic feet)		1,416	4,915	3.25	3.62	4,609	17,768
Total gross receipts						$  332,930	$    206,038
	Less: working and royalty interests					(147,528)	(117,218)
	Less: severance taxes					(16,146)	(9,354)
Net revenue to JayHawk						$ 169,256	$     79,466

Volumes of oil delivered during the three month period ending December 31, 2011 increased by 952 barrels (+32%) over the same timeframe in 2010.  This was primarily due to increased production and better transportation access resulting from favorable weather and road conditions in North Dakota during November and December 2011 compared to the same months in 2010.   Average prices for oil during the three months ended December 31, 2011, increased $20.32 (32%) per barrel over the prior year.  

Oil Revenues – As commented in Note 2 of the Condensed 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.

For the three month period ending December 31, 2011, JayHawk sold a gross 3,963 barrels (Bbls).  Field prices (after delivery charges) fluctuated from a low of $73.27 to a high of $85.35 during the three month period ending December 31, 2011  This production was sold at average prices of $82.85/Bbl.  During the comparable period ending December 31, 2010 the quarterly sales volumes were 3,011 Bbls.  Average prices received per barrel of crude oil were $62.53 for the three months ending December 31, 2010.

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, 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

25

July 2011, Jayhawk Energy is now 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 our gas production continue to remain low.  During the three months ending December 31, 2011, prices have fluctuated between a low of $2.72 per mcf. and a high of $3.56 per mcf.  

Production and Operating Expenses – Total operating expenses for the three months ended December 31, 2011 and 2010 were $721,028 and $814,605, respectively.  The expenses are segregated as follows:

			Three months ended								Three months ended
			December 31, 2011								December 31, 2009
			Crosby, ND		Girard, KS		G&A		Total		Total
Direct Regional Costs		$	92,248	$	13,096	$	-	$	105,344	$	38,002
Depreciation, depletion and amortization			90,421		76,036		1,118		167,575		187,795
General and administrative			363		-		135,261		135,624		230,714
Other net (income) and expense			1,769		2,468		(288,990)		(284,753)		(439,829)
	Totals	$	184,801	$	91,600	$	(152,611)	$	123,790	$	16,682

Total production expenses for the -2North Dakota oil operations were $92,248 for the three months ended December 31, 2011.  These expenses are 4.4% higher as a percentage of revenue than incurred in the comparative periods ending December 31, 2010, primarly as a result of repairs and maintenance expenses associated with restarting the wells after a prolonger period of non-production.  Other expense increased over the comparable period due to a loss of $102,514 on the sale of equipment no longer utilized in production and sold as surplus to generate cash flow.  All other expenses decreased over the prior year as a result of ongoing cost-cutting initiatives.

Relative to the Company’s Kansas natural gas activities, throughout the three month period ending December 31, 2011, 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.  This accounts for the reduction in production costs reflected between the comparable three month period ending December 31, 2011 and 2010.  

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

General and Administrative Expenses – include the cost of head office administration and the salaries and wages paid senior management and administrative staff.  A comparative analysis of the general and administrative expense for the three month period ending December 31, 2011 and 2010 is provided in the following table:

		Three months ended		Three months ended
		December 31, 2011		December 31, 2010
Compensation and payroll taxes	$	48,506	$	143,595
Legal, professional and consulting fees		10,957		39,815
Audit and public company expense		39,540		14,760
Insurance		12,541		12,041
All other corporate general and administrative		24,080		20,502
	$	135,624	$	230,713

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 $95,089 (41.2%) during the three month period ending December 31, 2011 compared to the prior year. Overall expenses have decreased over the prior year for the comparable quarter ending December 31 as a result of staff attrition and reduction or deferral of management salaries.  Compensation and payroll expense has decreased $95,089, 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 December 31, 2010.

26

Other net (income) expense – for the three month period ending December 31, 2011 and 2010, 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 10 to the Notes to the Financial Statements.

		Three months ended		Three months ended
		December 31, 2011		December 31, 2010
Interest and financing costs	$	(32,232)	$	(96,568)
Loss on initial recording of derivatives		-		(342,187)
Gain (loss ) on extinguishment and conversion of debt		71,383		(158,358)
Gain (loss) on change in fair value of conversion option derivative		196,197		724,104
Gain on change in fair value of warrant derivative		198,480		501,558
Amortization of discount on debentures		(144,814)		(184,847)
Accretion of asset retirement obligation		(4,261)		(3,873)
	$	284,753	$	439,829

The Company incurred interest and financing costs of $32,232 for the three months ended December31, 2011, compared to $96,568.  This reduction was due to a lower debt load and reducing interest-bearing vendor payables over the past twelve months.  

The Company derived significant “Other Income” from change in valuation of conversion option and warrant derivatives whereby the fair value of the options and warrants were less than the fair market value, resulting in non-cash gains.  The total gains associated with the derivatives and conversion thereof was $466,060 for the three months ended December 31, 2011 compared to a gain of $725,117 for the three months ended December 31, 2010.

Cash Flows, Liquidity and Capital Resources  

As of December 31, 2011 current assets totaled $278,911 consisting of cash, $129,165, accounts receivable, $139,015, and prepaid expenses, $10,731.  At the same time the Company's current liabilities were $2,180,737.  This working capital shortage 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 provided by operating activities totaled $76,253 for the three months ending December 31, 2011, compared to $219,597 used by operating activities for the three month period ending December 31, 2010.

Net cash provided by investing activities totaled $ Nil during the three months ending December 31, 2011 as compared use of  $22,770 in the same period ending December 31, 2010.

Net cash provided by financing activities totaled $ Nil during the three months ending December 31, 2011 as compared use of  $407,442 in the same period ending December 31, 2010.

The net change in cash is the sum of cash used in operating activities and provided by investing and financing activities, or a net total of $76,253 which is an increase in the Company's cash balance of $52,912 existing at September 30, 2011, to the cash balance at December 31, 2011 of $129,165.  

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.

27

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures - We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon the evaluation of those controls and procedures performed as of December 31, 2011, 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 December 31, 2011 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.

JayHawk Energy, Inc., is not a party to any material legal proceedings and, to management’s knowledge, no such proceedings are threatened or contemplated. 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

None.

Item 4.  Submission of Matters to Vote of Security Holders

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

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

32.1          Section 1350 Certification of CEO

28

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: October 15, 2012	By:	/s/ Lindsay E. Gorrill
		Lindsay E. Gorrill Principal Executive Officer, President and a Director

29

EX-31

Exhibit 31.1

CERTIFICATION

PURSUANT TO SECTION 302 OF

THE SARBANES-OXLY ACT OF 2002

Rule 13a-14(a)/15d-14(a) Certifications.

I, Lindsay E. Gorrill, certify that:

1.	I have reviewed this quarterly report on Form 10-Q/A of JayHawk Energy, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) of the registrant, and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation and
	(d)	Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and
5.	The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting , to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer‘s internal control over financial reporting.

Date: October 15, 2012

/s/ Lindsay E. Gorrill 

Lindsay E. Gorrill

Chief Executive Officer

 Exhibit 32.1Certification of Chief Executive Officer

Pursuant to Section 302 of Sarbanes-Oxley Act

I, Kelly J. Stopher, certify that:

1.	I have reviewed this annual report on Form 10-Q/A of JayHawk Energy, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4.	The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) of the registrant, and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting.
5.	The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

 Date: October 15, 2012

/s/ KELLY J. STOPHER

Kelly J. Stopher

Chief Financial Officer

EX-32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of JayHawk Energy, Inc. a Colorado corporation (the "Company") on Form 10-Q/A for the period ending December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Lindsay E. Gorrill, Chief Executive Officer of the Company, certifies to the best of his knowledge, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to JayHawk Energy, Inc., and will be retained by JayHawk Energy, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Lindsay Gorrill

Lindsay Gorrill

Chief Executive Officer

October 15, 2012

XML

Deferred Costs, Capitalized, Prepaid, and Other Assets

3 Months Ended

Dec. 31, 2011

Disclosure Text Block Supplement [Abstract]

Other Assets Disclosure [Text Block]

NOTE 7 – OTHER LONG-TERM ASSETS

Other assets consist of various deposits and reclamation bonds as disclosed in the following table:

			December 31, 2011		September 30, 2011
Rental Security Deposit		$	1,500	$	1,500
Bond Deposits			100,000		100,000
	TOTAL	$	101,500	$	101,500

XML

Receivables, Loans, Notes Receivable, and Others

3 Months Ended

Dec. 31, 2011

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 4 - TRADE ACCOUNTS RECEIVABLE

At December 31, 2011, trade accounts receivable represents those amounts the Company is owed for its oil and gas production delivered during the month of December 2011 and amounts due from other working interests for their respective percentages of joint operating costs and drilling costs. Management has determined the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions.  As of December 31, 2011 and September 30, 2011 there is no allowance recognized for doubtful accounts. 

Proceeds for the December 2011 deliveries, valued at  $128,942, were subsequently received in January 2012.  Accounts receivable for December 2011 natural gas deliveries, $2,453 were also received in January 2012.  

Proceeds for the September 2011 deliveries, valued at $70,664, were subsequently received in October 2011.  Amounts receivable for September natural gas deliveries, $571 were also received in October 2011. Specifically, trade accounts receivable are detailed as follows:

			December 31, 2011		September 30, 2011
Due for crude oil		$	128,942	$	70,664
Due for natural gas			2,453		571
Other receivables			7,620		7,620
	TOTAL	$	139,015	$	78,855

XML

CONSOLIDATED BALANCE SHEETS (USD $)	Dec. 31, 2011	Sep. 30, 2011
CURRENT ASSETS
Cash and cash equivalents	$ 129,165	$ 52,912
Trade accounts receivable	(60,160)	78,855
Other current assets	10,731	10,162
TOTAL CURRENT ASSETS	278,911	141,929
PROPERTY AND EQUIPMENT
Unproved gas properties, net of accumulated amortization of $1,519,665 and $1,443,629 respectively	3,846,637	3,922,673
Proved and developed oil and gas properties, net of accumulated DD&A of $839,257 and $748,836 respectively	867,744	958,165
Computers, office equipment, furniture and leasehold improvements, net of depreciation of $37,777 and $36,659 respectively	7,134	8,252
NET PROPERTY AND EQUIPMENT	4,721,515	4,889,090
OTHER LONG-TERM ASSETS	101,500	101,500
TOTAL ASSETS	5,101,926	5,132,519
CURRENT LIABILITIES:
Accounts payable	274,425	489,043
Due to royalty and working interest holders	(53,173)	181,367
Other payables, interest and taxes accrued	5,693	132,058
Conversion option derivative	57,668	286,498
Warrant derivative	101,467	299,947
Convertible debentures	1,164,000	1,279,000
Less: unamortized discount on debentures	(171,811)	(316,625)
TOTAL CURRENT LIABILITIES	2,180,737	2,351,288
LONG-TERM LIABILITIES
Asset retirement obligation	174,681	170,421
TOTAL LONG-TERM LIABILITIES	174,681	170,421
TOTAL LIABILITIES	2,355,418	2,521,709
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 200,000,000 shares authorized, 59,381,895 and 58,236,245 shares issued and outstanding respectively	$ 59,382	$ 58,236
Additional paid-in capital	21,056,550	20,967,464
Accumulated deficit	(18,369,424)	(18,414,890)
TOTAL STOCKHOLDERS' EQUITY	2,746,508	2,610,810
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 5,101,926	$ 5,132,519

XML

Accounting Changes and Error Corrections

3 Months Ended

Dec. 31, 2011

Accounting Changes and Error Corrections [Abstract]

Accounting Changes and Error Corrections [Text Block]

NOTE 17- 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 for the quarter ended December 31, 2010.

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 11).   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.

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 December 31, 2010 statement of operations is as follows:

					Previously reported		Increase (Decrease)		Restated
REVENUE
		Oil sales		$	69,051	$	-	$		69,051
		Natural gas sales			10,415		-			10,415
			TOTAL REVENUE		79,466		-			79,466
OPERATING EXPENSES
		Production costs - oil			35,692		-			35,692
		Production costs - natural gas			2,310		-			2,310
		Depreciation, depletion and amortization			210,053		(22,258)			187,795
		Loss on write-off and sales of leases and equipment			-		-			-
		Impairment of proved properties			-		-			-
		General and administrative			230,714		-			230,714
			TOTAL OPERATING EXPENSES		478,769		(22,258)			456,511
OPERATING LOSS					(399,303)		(22,258)			(377,045)
OTHER INCOME (EXPENSE)
		Interest and financing costs			(43,680)		(52,888)			(96,568)
		Loss on initial recording of derivatives			-		(342,187)			(342,187)
		Gain (loss) on extinguishment and conversion of debt			(95,348)		(63,010)			(158,358)
		Gain (loss) on change in fair value of conversion option derivative			-		724,104			724,104
		Gain (loss) on change in fair value of warrant derivative			-		501,558			501,558
		Amortization of discount on debentures			(174,279)		(10,568)			(184,847)
		Accretion of asset retirement obligation			-		(3,873)			(3,873)
		Other income (expense)			(52,889)		52,889			-
			TOTAL OTHER INCOME (EXPENSE)		(366,196)		806,025			439,829
	INCOME (LOSS) BEFORE INCOME TAX				(765,499)		828,283			62,784
	Provision for income tax				-		-			-
	NET INCOME (LOSS)			$	(765,499)	$	828,283	$		62,784

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Financial Services, Brokers and Dealers

3 Months Ended

Dec. 31, 2011

Brokers and Dealers [Abstract]

Brokers and Dealers Disclosure [Text Block]

NOTE 14 - BROKER AND SHARE PURCHASE WARRANTS

In conjunction with the issuance of the $1,500,000 convertible debentures described in Note 11, 166,000 warrants were issued for services provided in execution of the debentures. As discussed in Note 8, 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 11, 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 December 31, 2011 is presented as follows:

		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, December 31, 2011			221,335		$0.12		4,777,778		$0.12

⁽¹⁾  Provisions allow for a reduction in exercise price based on equity issuances subsequent to warrant issuance.  See Notes 8 and 11.

As discussed in Note 19 – Subsequent Events, the Company entered into a Modification Agreement with holders of debentures discussed in Note 11.  The Exercise Price of the warrants issued in the 2010 transaction is reduced to five cents ($0.05) per share effective February 16, 2012.

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Accounting Policies

3 Months Ended

Dec. 31, 2011

Accounting Policies

Significant Accounting Policies [Text Block]

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the three months ended December 31, 2011, 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 December 31, 2011, 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 $18,369,424 and  net income of $45,466 for the three months ended December 31, 2011, and as of that date the Company's current liabilities exceeded its current assets by $1,901,826.  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.

Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalent, restricted cash, accounts receivable, investments, and accounts payable.  The carrying value of notes payable and convertible debentures approximate fair value based on the contractual terms of those instruments.

Joint Venture Operations

In instances where the Company’s oil and gas activities are conducted jointly with others, the Company’s accounts reflect only its proportionate interest in such activities.

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods.  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.   Actual results may differ from these estimates and assumptions which could have a material effect on the Company's reported financial position and results of operations.

Income or Loss Per Common Share

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

The dilutive effect of convertible and outstanding securities as of December 31, 2011 and December 31, 2010, would be as follows:

		December 31, 2011	December 31, 2010
Stock Options		2,040,000	2,040,000
Convertible debt		9,699,997	9,063,887
Warrants		4,999,113	4,999,113
	Total Possible Dilution	16,739,110	16,103,000

At December 31, 2011 and September 30, 2011, the effect of the Company's outstanding options and common stock equivalents would have been anti-dilutive.

Revenue and Cost Recognition

The Company uses the sales method of accounting for oil and gas revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes the Company may be entitled to, based on the Company's individual interest in the property.  Periodically, imbalances between production and nomination volumes can occur for various reasons.  In cases where imbalances have occurred, a production imbalance receivable or liability will be recorded when determined.  Costs associated with production are expensed in the period in which they are incurred.

Cash Equivalents

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

Trade Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate for doubtful accounts.  Management determines the allowance by regularly evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions.  Trade receivables are written off when deemed uncollectible.  Recoveries of receivables previously written off are recorded as income when received.

Concentrations

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

Property, Plant and Equipment

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

The Company follows the successful effort method of accounting for oil and gas property as promulgated in Accounting Standards Codification (ASC) Topic 932, "Extractive Activities – Oil and Gas".  Under this method of accounting, acquisition costs for proved and unproved properties are capitalized when incurred.  Exploration costs, including geological and geophysical costs, the costs of carrying and retaining unproved properties and exploratory dry hole drilling costs, are expensed.  Development costs, including the costs to drill and equip development wells, and successful exploratory drilling costs to locate proved reserves are capitalized.  Exploratory drilling costs are capitalized when incurred pending the determination of whether a well has found proved reserves.  A determination of whether a well has found proved reserves is made shortly after drilling is completed.  The determination is based on a process that relies on interpretations of available geologic, geophysics and engineering data.  If a well is determined to be successful, the capitalized drilling costs will be reclassified as part of the cost of the well.  If a well is determined to be unsuccessful, the capitalized drilling costs will be charged to expense in the period the determination is made.  If an exploratory well requires a  major capital expenditure before production can begin, the cost of drilling the exploratory well will continue to be carried as an asset pending determination of whether proved reserves have been found only as long as: i) the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made and ii) drilling of the additional exploratory wells is under way or firmly planned for the near future.  If drilling in the area is not under way or firmly planned, or if the well has not found a commercially producible quantity of reserves, the exploratory well is assumed to be impaired and its costs are charged to expense. 

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

The Company calculates depletion, depreciation and amortization (DD&A) of capitalized cost of proved oil properties on a field-by-field basis using the units-of-production method based upon proved reserves. In computing DD&A the Company will take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage.  When applicable, the Company will apply the provisions of ASC Topic 410, "Accounting for Asset Retirement Obligations", ("ASC 410") which provides guidance on accounting for dismantlement and abandonment cost (see Note 10).

Support equipment and other property, plant and equipment related to oil and gas production are depreciated on a straight-line basis over their estimated useful lives which range from 5 to 35 years.  Property, plant and equipment unrelated to oil and gas producing activities is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 25 years.

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

Impairment of Long-Lived Assets

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

Proved properties- The Company evaluates its proved properties for impairment when circumstances or events occur that may impact the fair value of the assets.  The fair value of property is primarily evaluated based upon the present value of expected revenues directly associated with those assets.  An impairment loss would be recognized if the carrying amount of a capitalized asset is not recoverable and exceeds its fair value. 

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

Sales of Producing and Non-producing Property

The Company accounts for the sale of a partial interest in a proved property as normal retirement.   The Company accounts for the sale of a partial interest in an unproved property as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained.   The Company recognizes a gain or loss for all other sales of non-producing properties and includes the gain or loss in the results of operations.

Fair Value Measures

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

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

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

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

Derivative Instruments

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

Asset Retirement Obligation

The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  The carrying value of a property associated with the capitalization of an asset retirement cost is included in proved oil and gas property in the balance sheets.  The future cash outflows for oil and gas properties associated with settling the asset retirement obligations is accrued in the balance sheets.  The asset retirement obligation consists of costs related to the plugging of wells and removal of facilities and equipment on its oil and gas properties (see Note 10). 

Income Tax and Accounting for Uncertainty

Income taxes are determined using the liability method in accordance with ASC Topic 740 "Income Taxes" ("ASC 740").  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

ASC 740 recognizes that the ultimate deductibility of positions taken or expected to be taken on tax returns is often uncertain.  It provides guidance on when tax positions claimed by an entity can be recognized and guidance on the dollar amount at which those positions are recorded.  In order to recognize the benefits associated with a tax position taken the entity must conclude that the ultimate allowability of the deduction is more likely than not.  If the ultimate allowability of the tax position exceeds 50% (more likely than not), the benefit associated with the position is recognized at the largest dollar amount that has more than a 50% likelihood of being realized upon ultimate settlement.  Differences between tax positions taken in a tax return and recognized in accordance with the guidance will generally result in (1) an increase in income taxes currently payable or a reduction in an income tax refund receivable or (2) an increase in a deferred tax liability or a decrease in a deferred tax asset, or both (1) and (2).

Stock Options Granted to Employees and Non-Employees

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

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

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

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

Reclassifications

Certain reclassifications have been made to the December 31, 2010 financial statements in order to conform to the 2011 presentation.  These reclassifications have no effect on net loss, total assets or accumulated deficit as restated except as otherwise described in Note 18 (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 17, financial information included for the three months ended December 31, 2010 has been restated.

New Accounting Pronouncements

The FASB issued an ASU to amend existing oil and gas reserve accounting and disclosure guidance to align its requirements with the SEC's revised rules.  The significant revisions involve revised definitions of oil and gas producing activities, changing the pricing used to estimate reserves at period end to a twelve month arithmetic average of the first day of the month prices and additional disclosure requirements.  In contract to the SEC rule, the FASB does not permit the disclosure of probable and possible reserves in the supplemental oil and gas information in the notes to the financial statements.  The amendments are effective for annual reporting periods ending on or after December 31, 2009. 

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.

Nature of Operations [Text Block]

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. 

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
REVENUE
Oil sales	$ 166,382	$ 69,051
Natural gas sales	2,874	10,415
TOTAL REVENUE	169,256	79,466
Production costs - oil	92,248	35,692
Production costs - natural gas	13,096	2,310
Depreciation, depletion and amortization	167,575	187,795
General and administrative	135,624	230,714
TOTAL OPERATING EXPENSES	408,543	456,511
OPERATING LOSS	(239,287)	(377,045)
Interest and financing costs	(32,233)	(96,568)
Loss on initial recording of derivatives		342,187
Gain (loss) on extinguishment and conversion of debt	71,383	(158,358)
Gain ( on change in fair value of conversion option derivative	196,197	724,104
Gain ( on change in fair value of warrant derivative	198,480	501,558
Amortization of discount on debentures	144,814	184,847
Accretion of asset retirement obligation	4,260	3,873
TOTAL OTHER INCOME (EXPENSE)	284,753	439,829
INCOME BEFORE INCOME TAX	45,466	62,784
NET INCOME	$ 45,466	$ 62,784
Basic and diluted weighted average number of shares outstanding	59,065,401	50,422,875

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Earnings Per Share

3 Months Ended

Dec. 31, 2011

Earnings Per Share

Earnings Per Share [Text Block]

NOTE 12 - COMMON STOCK

Three Months Ended December 31, 2011

Per the terms of the debentures, holders have the option to receive shares issues in lieu of cash for accrued interest through the date of conversion.  The table below details common shares issued for conversion of debentures and accrued interest during the three months ended December 31, 2011:

	Date		Debt Converted	Conversion price per share	Shares Issued		Accrued Interest	Price 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.

XML

Document and Entity Information (USD $)	3 Months Ended
	Dec. 31, 2011	Aug. 31, 2012	Mar. 31, 2011
Document and Entity Information
Entity Registrant Name	JAYHAWK ENERGY, INC.
Document Type	10-Q
Document Period End Date	Dec. 31, 2011
Amendment Flag	false
Entity Central Index Key	0001308710
Current Fiscal Year End Date	--09-30
Entity Common Stock, Shares Outstanding		59,381,895
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	No
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Entity Public Float			$ 8,871,001

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Derivative Instruments and Hedging Activities

3 Months Ended

Dec. 31, 2011

Disclosure Text Block [Abstract]

Derivatives and Fair Value [Text Block]

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, trade accounts receivables, accounts payable and accrued liabilities approximate fair value due to their limited time to maturity or ability to immediately convert them to cash in the normal course. The carrying values of convertible debentures are net of a discount and does not reflect fair value of similar instruments.  The approximate fair value of the convertible debentures based upon the number of shares into which the debentures are convertible is $388,000 using the current market price per share of stock at December 31, 2011. 

The table below sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011 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.

			December 31, 2011		September 30, 2011	Input Hierarchy Level
Assets:
	Cash and cash equivalents	$	129,165	$	52,912	Level 1
Liabilities:
	Conversion option derivative		57,668		286,498	Level 2
	Warrant derivative		101,467		299,947	Level 2

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	3 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 45,466	$ 62,784
Depreciation, depletion and amortization	167,575	187,795
Accretion of asset retirement obligation	4,260	3,873
Amortization of discount on debentures	144,814	184,847
Loss on initial recording of derivative		342,187
Loss (gain) on conversion of debt	(71,383)	158,358
Loss (Gain) on change in fair value of conversion option derivative	(196,197)	(724,104)
Loss (Gain) on change in fair value of warrant derivative	(198,480)	(501,558)
Common stock issued in consideration of charitable contribution	5,000
Common stock issued in consideration of services		9,456
Common stock issued in lieu of interest	5,836	37,500
Stock based compensation	3,146	53,286
Trade accounts receivable	(60,160)	138,194
Other current assets and other long term assets	(569)	846
Accounts payable	274,425	(87,057)
Due to royalty and working interest holders	(53,173)	(72,734)
Other payables, interest and taxes accrued	5,693	(13,270)
Net cash provided (used) by operating activities	76,253	(219,597)
Proved oil and gas additions		(22,770)
Net cash used by investing activities		(22,770)
Payments on short-term notes		(92,558)
Proceeds from convertible debentures		500,000
Net cash provided by financing activities		407,442
Net increase in cash and cash equivalents	76,253	165,075
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	52,912	56,280
CASH AND CASH EQUIVALENTS AT END OF PERIOD	129,165	221,355
Interest paid with common stock	5,836	37,500
Expiration of option to acquire unproved properties		116,235
Common stock issued for conversion of debentures	$ 115,000

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Debt

3 Months Ended

Dec. 31, 2011

Debt Disclosure [Abstract]

Short-term Debt [Text Block]

NOTE 9 - NOTES PAYABLE DUE IN LESS THAN ONE YEAR

On September 1, 2010 the Company entered into a short-term promissory note with a vendor for its balance of accounts payable.  The initial principal balance of $272,373 was due and payable in six (6) equal payments of $46,729 including interest at a rate of 12% per annum.  Through December 31, 2011, the Company has satisfied all financial obligations on this note. 

On March 10, 2011 the Company entered into a short-term promissory note with a vendor for its balance of accounts payable.  The principal balance of $146,905 was due and payable in five (5) equal payments of $29,768 beginning on March 15, 2011 including interest at a rate of 5.25% per annum.  Through December 31, 2011, the Company has satisfied all financial obligations on this note.  

On April 28, 2011 the Company entered into a short-term promissory note with a vendor for its balance of accounts payable.  The principal balance of $107,230 was due and payable in five (5) equal payments of $21,446 beginning on April 28, 2011 including interest at a rate of 5.25% per annum.  Through December 31, 2011, the Company has satisfied all financial obligations on this note.  

Disclosure Text Block Supplement [Abstract]

Debt and Capital Leases Disclosures [Text Block]

NOTE 11 - 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.

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 purchase $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

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, $59,311 and $118,625 of the discount remains to be amortized at December 31, 2011 and  September 30, 2011, respectively.  The discount will continue to be amortized over the remaining life of the underlying convertible debentures.

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 for the three months ended December 31, 2011 and the year ended September 30, 2011, $112,500 and $198,000 of the discount remains to be amortized as of December 31, 2011 and September 30, 2011 respectively.  The discount will continue to be amortized over the remaining life of the underlying convertible debentures.

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 three months ended December 31, 2011 and the year ended September 30, 2011 and 2010, 103,984 and 1,238,751 common shares were issued, respectively, for interest payable under the debentures.  Interest expense of $35,078 and $192,036 has been included in ‘Interest and financing costs’ in the  consolidated statements of operations for the three months ended December 31, 2011 and the year ended September 30, 2011, respectively. Interest accrued is included on the Consolidated Balance Sheets in "Other payables, interest and taxes accrued" of $35,078 and $33,362 at December 31, 2011 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 8.

In all three of these debt issuances, the fair value of the derivative liabilities at the date of issuance exceeded the amount of the debt.  The excess of the fair value of the derivative liabilities issued over the debt amount has been recorded to the statement of operations during the periods  ended December 31, 2011 and 2010, as follows:

		Excess fair value of derivative liabilities over face amount of debt at issuance
Issue Date	Debt Amount	2011	2010
December 14, 2009	$900,000	-	$2,894,580
April 23, 2010	600,000	-	2,020,000
October 20, 2010	500,000	$342,186	-
		$342,186	$4,914,580

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 three months ended December 31, 2011 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. See Note 12.

Giving effect to monthly amortization of the debt discounts and the conversion of debt into shares of common stock,  during the three months ended and year ended December 31, 2011 and September 30, 2011, respectively, $144,814 and $825,257, respectively, of debt discount amortization has been posted to the statement of operations.  The remaining discounts will continue to be amortized to the statement of operations over the remaining life of the underlying convertible debentures.

As of December 31, 2011, 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 $1,279,000 as of December 31, 2011.    Management has reclassified the outstanding balance of all debentures, including the October 2010 debentures to current liabilities as of December 31, 2011.   As discussed in Note 20 - Subsequent Events, the debenture holders have extended the maturity date on the December 2009, April 2010 and October 2010 debentures to March 15, 2012. The Exercise Price of all outstanding warrants is reduced to five cents ($0.05) per share effective February 16, 2012

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Commitment and Contingencies

3 Months Ended

Dec. 31, 2011

Disclosure Text Block Supplement [Abstract]

Commitments Contingencies and Guarantees [Text Block]

NOTE 18– COMMITMENTS AND CONTINGENCIES 

There is no pending litigation or proceeding involving any director or officer of the Company for which indemnification is being sought. 

On July 1, 2008, the Company leased office space for a period of three years for a fixed monthly rental of $1,500.  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 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.

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Extractive Industries

3 Months Ended

Dec. 31, 2011

Oil and Gas Exploration and Production Industries Disclosures [Abstract]

Oil and Gas Exploration and Production Industries Disclosures [Text Block]

NOTE 5 - UNPROVED PROPERTIES AND IMPAIRMENT 

The total of the Company's investment in unproved properties at December 31, 2011 and September 30, 2011 consists of the following capitalized costs, respectively:

					December 31, 2011		September 30, 2011
Name
UNPROVED AND PRODUCING GAS PROPERTIES
Girard, Kansas properties
	Field equipment			$	615,953	$	615,953
	Capitalized drilling costs				662,899		662,899
			Subtotal		1,278,852		1,278,852
	Less: Accumulated DD&A				(469,273)		(458,765)
Net capitalized costs					809,579		820,087
Jayhawk Gas Transport Company
		Field equipment			2,605,871		2,605,871
		Less Accumulated DD&A			(433,893)		(404,865)
Net capitalized costs					2,171,978		2,201,006
UNPROVED AND NON-PRODUCING OIL AND GAS PROPERTIES
Kansas Girard Project					1,403,444		1,403,444
	Less: accumulated amortization				(616,499)		(579,999)
Net investment in Girard Project					786,945		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				$	3,846,637	$	3,922,673

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 6 - PROVED PROPERTIES AND IMPAIRMENT 

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

Name			December 31, 2011		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		(839,257)		(748,836)
Total Proved Oil and Gas Properties		$	867,744	$	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 an impairment exists on other Crosby property. The impairment write-down was recognized at $280,963 for the year ended September 30, 2011.

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Fair Value Measures and Disclosures

3 Months Ended

Dec. 31, 2011

Disclosure Text Block [Abstract]

Derivatives and Fair Value [Text Block]

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, trade accounts receivables, accounts payable and accrued liabilities approximate fair value due to their limited time to maturity or ability to immediately convert them to cash in the normal course. The carrying values of convertible debentures are net of a discount and does not reflect fair value of similar instruments.  The approximate fair value of the convertible debentures based upon the number of shares into which the debentures are convertible is $388,000 using the current market price per share of stock at December 31, 2011. 

The table below sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011 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.

			December 31, 2011		September 30, 2011	Input Hierarchy Level
Assets:
	Cash and cash equivalents	$	129,165	$	52,912	Level 1
Liabilities:
	Conversion option derivative		57,668		286,498	Level 2
	Warrant derivative		101,467		299,947	Level 2

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Compensation Related Costs, Share Based Payments

3 Months Ended

Dec. 31, 2011

Disclosure Text Block Supplement [Abstract]

Shareholders' Equity and Share-based Payments [Text Block]

NOTE 13 - STOCK BASED COMPENSATION

The Company’s board of directors approved a stock option plan on August 11, 2009.   The purpose of the Plan is to provide employees and consultants of the Corporation and its Subsidiaries with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Corporation and its Subsidiaries, to join the interests of employees and consultants with the interests of the shareholders of the Corporation, and to facilitate attracting and retaining employees and consultants of exceptional ability.    The total number of shares available for grant under the terms of the Plan is 4,000,000.  The stock option price is the market price of the share at the date of issuance, but may be changed by the Board of Directors or designee from time to time.  The stock options are non-transferable and expire not more than five (5) years from the date of the granting.

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

During the year ended September 30, 2011, the Company granted 2,790,000 stock options to employees, contractors, board members and consultants exercisable at a price of $0.20 per share which expire September 2015.

At December 31, 2011, the Company had 2,040,000 options issued and outstanding.

The following table reflects the summary of stock options outstanding at December 31, 2011 and changes during the three months ended December 31, 2011:

		Number of shares under options			Weighted Average Exercise Price Per Share			Weighted Average Fair Value			Aggregate Intrinsic Value
Balance outstanding, September 30, 2010			2,790,000	$		0.20	$		558,000	$		279,000
	Forfeited		(750,000)			0.20			(150,000)			-
	Exercised		-			-			-			-
	Granted		-			-			-			-
Balance outstanding, September 30, 2011			2,040,000	$		0.20	$		408,000	$		-
	Forfeited		-
	Exercised		-
	Granted		-
Balance outstanding, December 31, 2011			2,040,000	$		0.20	$		408,000	$		-

The fair value of the stock options granted was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options.  The underlying assumptions used to calculate the fair value are as follows:

Year Ended September 30, 2010
	Dividend yield	-
	Expected volatility	99.3%
	Risk free interest rate	1.43%
	Expected life	5 years

A summary of the status of the Company’s nonvested stock options outstanding at December 31, 2011 is presented as follows:

		Number of options			Weighted Average Grant Date Fair Value Per Share			Weighted Average Grant Date Fair Value
Nonvested, September 30, 2010			1,515,000	$		0.16	$		$238,813
	Granted		-			-			-
	Vested		(605,000)			0.16			(213,144)
	Forfeited		(750,000)			-			-
Nonvested, September 30, 2011			160,000			$0.16			$25,669
	Granted		-			-			-
	Vested		-			-			-
	Forfeited		-			-			-
Nonvested, December 31, 2011			160,000			$0.16			$25,669

As of December 31, 2011, there was $22,023 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan.  That cost is expected to be recognized over a weighted-average period of .85 years.  For the period ended December 31, 2011, $3,146 was expensed to operations.

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Other Liabilities

3 Months Ended

Dec. 31, 2011

Other Liabilities and Financial Instruments Subject to Mandatory Redemption [Abstract]

Other Liabilities Disclosure [Text Block]

NOTE 8 - DERIVATIVE LIABILITIES

As discussed in Note 11, 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 at December 31, 2011, of $0.12 per share or an aggregate of 9,699,997 shares.  Additionally common share purchase warrants were issued, expiring 42 months from the original issue date and permit the holders two exercisable options.  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

For the periods ended December 31, 2011 and 2010, 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 on designated event dates over the past two years:

	December 14, 2009	April 23, 2010	October 20, 2010	Revaluation Ranges
Risk-free interest rate	0.87%	1.10%	0.40%	0.04% to 1.60%
Expected dividend      yield	-	-	-	-
Expected term	2 years	1.64 years	2 years	.21 years to 3 years
Expected volatility	169.0%	196.6%	173.8%	120.1% to 184%
Per unit fair value of conversion option derivative liability	$0.60	$0.65	$0.14	$0.006 to $0.90
Number of conversion units valued	3,000,000	2,000,000	2,777,778	--
Valuation of conversion option derivative on date of issue	$1,800,000	$1,300,000	$388,889	--

Below is detail of the conversion option liability balance for the three months ended December 31, 2011 and for the year ended September 30, 2011.

		December 31, 2011	September 30, 2011
Beginning balance		$                    286,498	$                    848,300
	Initial fair value of conversion option liability	-	388,889
	Revaluation of conversion option liability resulting from conversion of debentures	(215,080)	(119,683)
	Net change in fair value of conversion option liability	(13,750)	(831,008)
Ending balance		$                       7,668	$                   286,498
Conversion option shares outstanding at December 31, 2011 and September 30, 2011 respectively		9,699,997	10,658,333
	Weighted average fair value per unit	$                        0.006	$                         0.03
Ending balance		$                      57,668	$                   286,498

Warrant derivative

For 2011 and 2010, the fair value of warrants 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 on designated event dates over the past two years:

	December 14, 2009	April 23, 2010	October 20, 2010	Revaluation Ranges
Risk-free interest rate	1.70%	1.68%	0.59%	0.25% to 1.70%
Expected dividend      yield	-	--	--
Expected term	3.5 years	3 years	3 years	3 to 3.5 years
Expected volatility	165.4%	166.2%	159.6%	136.6% to 172.8%
Per unit fair value of warrant derivative	$0.63	$0.66	$0.16	$0.06 to $1.44
Number of warrants valued	3,166,000	2,000,000	2,833,113	166,000 to 3,166,000
Valuation of warrant derivative	$2,564,460	$1,320,000	$453,298	--

Below is detail of the warrant derivative balance for the three months ended December 31, 2011 and for the year ended September 30, 2011.

		December 31, 2011	September 30, 2011
Beginning balance		$                   299,947	$                  498 ,180
	Initial fair value of warrant derivative	-	453,298
	Revaluation of warrant derivative resulting from exercise of warrant	-	-
	Net change in fair value of warrant derivative	(198,480)	(651,531)
Ending balance		$                   101,467	$                  299,947
Warrants outstanding at period end		4,999,113	4,999,113
Period end weighted average fair value per unit		$0.02	$0.06
Ending balance		$                   101,467	$                  299,947

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Equity

3 Months Ended

Dec. 31, 2011

Disclosure Text Block Supplement [Abstract]

Shareholders' Equity and Share-based Payments [Text Block]

NOTE 13 - STOCK BASED COMPENSATION

The Company’s board of directors approved a stock option plan on August 11, 2009.   The purpose of the Plan is to provide employees and consultants of the Corporation and its Subsidiaries with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Corporation and its Subsidiaries, to join the interests of employees and consultants with the interests of the shareholders of the Corporation, and to facilitate attracting and retaining employees and consultants of exceptional ability.    The total number of shares available for grant under the terms of the Plan is 4,000,000.  The stock option price is the market price of the share at the date of issuance, but may be changed by the Board of Directors or designee from time to time.  The stock options are non-transferable and expire not more than five (5) years from the date of the granting.

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

During the year ended September 30, 2011, the Company granted 2,790,000 stock options to employees, contractors, board members and consultants exercisable at a price of $0.20 per share which expire September 2015.

At December 31, 2011, the Company had 2,040,000 options issued and outstanding.

The following table reflects the summary of stock options outstanding at December 31, 2011 and changes during the three months ended December 31, 2011:

		Number of shares under options			Weighted Average Exercise Price Per Share			Weighted Average Fair Value			Aggregate Intrinsic Value
Balance outstanding, September 30, 2010			2,790,000	$		0.20	$		558,000	$		279,000
	Forfeited		(750,000)			0.20			(150,000)			-
	Exercised		-			-			-			-
	Granted		-			-			-			-
Balance outstanding, September 30, 2011			2,040,000	$		0.20	$		408,000	$		-
	Forfeited		-
	Exercised		-
	Granted		-
Balance outstanding, December 31, 2011			2,040,000	$		0.20	$		408,000	$		-

The fair value of the stock options granted was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options.  The underlying assumptions used to calculate the fair value are as follows:

Year Ended September 30, 2010
	Dividend yield	-
	Expected volatility	99.3%
	Risk free interest rate	1.43%
	Expected life	5 years

A summary of the status of the Company’s nonvested stock options outstanding at December 31, 2011 is presented as follows:

		Number of options			Weighted Average Grant Date Fair Value Per Share			Weighted Average Grant Date Fair Value
Nonvested, September 30, 2010			1,515,000	$		0.16	$		$238,813
	Granted		-			-			-
	Vested		(605,000)			0.16			(213,144)
	Forfeited		(750,000)			-			-
Nonvested, September 30, 2011			160,000			$0.16			$25,669
	Granted		-			-			-
	Vested		-			-			-
	Forfeited		-			-			-
Nonvested, December 31, 2011			160,000			$0.16			$25,669

As of December 31, 2011, there was $22,023 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan.  That cost is expected to be recognized over a weighted-average period of .85 years.  For the period ended December 31, 2011, $3,146 was expensed to operations.

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Income Taxes

3 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 16 - INCOME TAX

The Company did not recognize an income tax benefit or expense for the 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. 

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Subsequent Events

3 Months Ended

Dec. 31, 2011

Subsequent Events [Abstract]

Subsequent Events [Text Block]

NOTE 19 - SUBSEQUENT EVENTS 

As discussed in Notes 11 and 14, on or about December 22, 2009 the Company entered into a securities purchase agreement with  certain institutional investors (the “Investors”) pursuant to which the Company sold, in three tranches, convertible debentures and warrants (the “2009 Transactions”). For more information regarding the 2009 Transactions, refer to the Company’s Current Report on Form 8-K filed with the SEC on December 14, 2009, December 31, 2009 and April 20, 2010. On or about October 18, 2010, the Company entered into a securities purchase agreement with the Investors pursuant to which the Company sold the Investors convertible debentures and  warrants (the “2010 Transactions”). For more information regarding the 2010 Transaction,  refer to the Company’s Current Report on Form 8-K filed with the SEC on October 19, 2010.

On February 16, 2012, the Company entered into a Modification Agreement with the Purchasers.  Under the terms of the Modification Agreement, certain terms have been modified.  The maturity date of the 2009 Debentures is extended to March 15, 2012.  The conversion price of Debentures issued in the 2009 Transactions and 2010 Transaction is reduced to five cents ($0.05) per share. The  Exercise Price of the Warrants issued in the 2009 Transactions and 2010 Transaction is reduced to five cents ($0.05) per share.

No other terms of the 2009 Transactions or 2010 Transaction have been changed.

On February 16, 2012, the Company issued 379,917 shares of common stock in lieu of paying interest with cash, to holders of  convertible debentures described in Note 11.  The interest totaled $25,643 and was issued at the 5-day variable weighted-average price ("VWAP") of $0.067 per share.

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Organization, Consolidation and Presentation of Financial Statements

3 Months Ended

Dec. 31, 2011

Organization, Consolidation and Presentation of Financial Statements

Nature of Operations [Text Block]

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. 

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Asset Retirement Obligations

3 Months Ended

Dec. 31, 2011

Asset Retirement Obligation Disclosure [Abstract]

Asset Retirement Obligation Disclosure [Text Block]

NOTE 10 - 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 three months ended December 31, 2011, and the year ended September 30, 2011, was computed to be $4,260 and $15,493, respectively.

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

			December 31,2011		September 30, 2011
Beginning balance		$	170,421	$	154,925
Liabilities incurred			-		-
Liabilities settled			-		-
Accretion expense			4,260		15,493
	TOTAL	$	174,681	$	170,421

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Related Party Disclosures

3 Months Ended

Dec. 31, 2011

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

NOTE 15 - 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.