10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2012

[ ] 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 000-52711

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)	(IRS Employer Identification No.)
811 E. Sherman Avenue Coeur d'Alene, Idaho (Address of principal executive office)	83814 (Postal Code)
(208) 667-1328 (Issuer's telephone number)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:

Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issued, as defined in Rule 405 of the Securities Act: Yes[ ] No [ x]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes[ X] No []

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yes [x] No [ ]

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post filed). Yes [X ] No [ ] (Not required)

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of III of this Form 10-K or any amendment to the Form 10-K. [x]

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer [ ]

Accelerated Filer [ ]

Non-Accelerated Filer [ ]

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). Yes [ ] No [x]

The aggregate market value of the Common Stock held by non-affiliates (as affiliates are defined in Rule 12b-2 of the Exchange Act) of the registrant, computed by reference to the average of the high and low sale price on March 31, 2012 was $2,730,119.

As of December 25, 2012 there were 60,759,178 shares of issuer’s common stock outstanding.

JAYHAWK ENERGY, INC.

FORM 10-K

For the Fiscal Year Ended September 30, 2012

TABLE OF CONTENTS


Part I		Page
Item 1 and 2	Desc ription of Business and Properties	3
Item 1A	Risk Factors	5
Item 1B	Unresolved Staff Comments	9
Item 3	Legal Proceedings	13
It em 4	Submission of Matters to a Vote of Security Holders	13

Part II		Page
Item 5	Market for Common Equity and Related Stockholder Matters	14
Item 6	Selected Financial Data	14
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	20
Ite m 8	Financial Statements	21
Item 9	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	47
Item 9A	Controls and Procedures	47
Item 9B	Other Information	49

Part III		Page
Item 10	Directors, Executive Officers and Corporate Governance	49
Item 11	Executive Compensation	51
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	51
Item 13	Certain Relationships and Related Transactions, and Director Independence	52
Item 14	Principal Accounting Fees and Services	52

Part IV		Page
Item 15	Exhibits	53
	Signatures	55

	EXHIBIT 31.1	56
	Certification of Chief Executive Officer
	EXHIBIT 31.2	57
	Certification of Chief Financial Officer
	EXHIBIT 32.1	58
	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	EXHIBIT 32.2	59
	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

PART I

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

Portions of this Annual Report of JayHawk Energy, Inc. on Form 10-K, and the information appearing under "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," generally, and specifically therein under the captions "Liquidity and Capital Resources" contain forward-looking statements and involve uncertainties that could materially affect the expected results of operations, liquidity, cash flows and business prospects. Words such as "estimate," "may," "might," "anticipates," "believes," "expects," "plans," “intends," “objectives” and similar expressions that convey the uncertainty of future events or outcomes generally identify forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only to the date of this report.

ITEMS 1 and 2. DESCRIPTION OF BUSINESS AND PROPERTIES

General

Unless the context otherwise requires, in this report, the term “JayHawk” or “Company”, "we", or "our", refer to JayHawk Energy, Inc., a Colorado Corporation, and its wholly owned subsidiary, JayHawk Gas Transportation Corporation. JayHawk's executive offices are located at 611 E. Sherman Avenue, Coeur d'Alene, Idaho 83814. The Company's telephone number is (208) 667-1328. JayHawk reports its operations using a fiscal year ending September 30 and the operations reported on this Form 10-K, are presented on a consolidated basis.

JayHawk began leasing their current office space, in Coeur d'Alene, Idaho, of approximately 1500 sq. ft. in September 2011 from Marlin Property Management, LLC, a related party (see Note 15 of the Notes to the Consolidated Financial Statements). The monthly rental payment is $2,500. Prior to September 2011, the Company leased office space, located in Post Falls, Id, also from Marlin Property Management, Inc. . The current office space and facilities are sufficient to meet the Company's present needs and it does not anticipate the need to secure any additional space.

The Company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, registration statements and other items with the Securities and Exchange Commission (SEC). JayHawk provides access free of charge to all of these SEC filings, as soon as reasonably practicable after filing, on its internet site located at www.jayhawkenergy.com. In this report on Form 10-K, the language “this fiscal year" or "current fiscal year” refers to the 12 month period ending September 30, 2012.

In addition, the public may read and copy any materials JayHawk files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (www.sec.gov.) that contains reports, proxy and information statements regarding issuers, like JayHawk, that file electronically with the SEC.

Business Development

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

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

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

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

Due to a lack of funding, during the fiscal year ending September 30, 2009, no new additional acreage was acquired and no new development or drilling took place. This lack of funding contributed to management’s decision in August of 2009 to enter into a joint venture agreement with DK True Energy Development (DKTED) for the continued development of its coal-bed methane wells of the Girard properties. DKTED has contributed $250,000 through the date of this report to acquire an interest in the Girard properties. WHL Energy Midcon, LLC acquired DKTED's interest in December 2009. This is more fully discussed in the Management Discussion and Analysis, Item 7 of Part II, and in Note 11 to the Consolidated Financial Statements, of this Form 10-K.

As of September 30, 2012, JayHawk Energy remains an early stage oil and gas company led by an experienced management team focused on exploration and production of oil and natural gas. The Company's immediate business plan is to focus its efforts on further developing the as yet undeveloped acreage in Southeast Kansas and to expand its oil production on its Crosby (f/k/a Candak), North Dakota properties. The Company's main priority will be given to projects with near term cash flow potential, although consideration will be given to projects that may not be as advanced from a technical standpoint but demonstrate the potential for significant upside. Future development activities will be determined by the Company's ability to access sources of sufficient funding.

Oil and Gas Properties

Please refer to Item 2 of this Form 10K for discussion on the Company’s oil and natural gas properties and reserves.

Employees

During the year ending September 30, 2012 JayHawk Energy, Inc., utilized five individuals to manage and operate its business. Administrative and executive functions are carried out by two individuals located in Coeur d' Alene, Idaho. Oil production operations are overseen by the Company’s President and a field superintendent located in the Williston Basin area of North Dakota. The field superintendent in North Dakota is compensated as an independent contractor. Additionally one independent contractor functions as the field superintendent of the Girard and Uniontown properties and is responsible for the gas production operations. Going forward, and for the foreseeable future, the Company plans to outsource its geological, geophysical, drilling and petroleum engineering requirements to independent consultants and contractors.

Competitive Business Conditions

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

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

Patents and Trademarks

JayHawk Energy does not own, either legally or beneficially, any patent or trademark.

Governmental Regulations

The Company's oil and gas operations are subject to various federal, state and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the

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

ITEM 1A. RISK FACTORS RELATED TO THE COMPANY'S BUSINESS

JayHawk is subject to various risks and uncertainties in the course of its business. The following summarizes some, but not all, of the risks and uncertainties that may adversely affect its business, financial condition or results of operations.

Going Concern – As shown in the accompanying consolidated financial statements, the Company has incurred operating losses since inception. As of September 30, 2012, JayHawk Energy has limited financial resources with which to achieve its objectives and obtain profitability and positive cash flows. Achievement of the Company's objectives will be dependent upon its ability to obtain additional financing, to locate profitable oil and gas properties and generate revenue from the current and planned business operations, and control costs. The Company plans to fund future operations by joint venturing, obtaining additional financing from investors, and attaining additional commercial production. However, there is no assurance that JayHawk Energy will be able to achieve these objectives.

Commodity Price Risk: The Company's estimated proved reserves, revenue, operating cash flows, and operating margins are highly dependent on the prices of crude oil and natural gas. A substantial or extended decline in oil or natural gas prices would reduce its operating results and cash flows and could impact the rate of growth and carrying value of the Company's assets. Prices for liquid hydrocarbons and natural gas are very volatile. JayHawk Energy's revenues, operating results and ability to grow in the future are highly dependent on the prices it receives for its oil and natural gas. Many factors beyond the Company's control influence the price it receives for production. These include, but are not limited to, general economic conditions worldwide, political instability in other parts of the world, changes in weather patterns, price and availability of alternative sources of energy, and government regulation.

Technical Risk: The Company's exploration and development operations are subject to many risks which may affect its ability to profitably extract oil and natural gas reserves or achieve targeted returns. In addition, continued growth requires that the Company acquire and successfully develop additional oil and natural gas reserves.

JayHawk Energy's exploration and development activities will depend in part on the evaluation of data obtained through geophysical testing and geological analysis, as well as test drilling activity. The results of such studies and tests are subjective, and no assurances can be given that exploration and development activities based on positive analysis will produce oil or natural gas in commercial quantities or costs. As developmental and exploratory activities are performed, further data required for evaluation of its oil and natural gas interests will become available. The exploration and development activities that will be undertaken by the Company are subject to greater risks than those associated with the acquisition and ownership of producing properties. The drilling of development wells, although generally consisting of drilling to reservoirs believed to be productive, may result in dry holes or a failure to produce oil and natural gas in commercial quantities. Moreover, any drilling of exploratory wells is subject to significant risk of dry holes.

The Company's commercial success depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. Without the continual addition of new reserves, any existing reserves and the production thereof will decline over time as such existing reserves are depleted. A future increase in the Company's reserves will depend not only on its ability to explore and develop any properties the Company may have from time to time, but also on its ability to select and acquire suitable producing properties or prospects. No assurance can be given that JayHawk Energy will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, the Company may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations economically disadvantageous. There is no assurance that commercial quantities of oil and natural gas will be discovered or acquired by the Company.

Catastrophic Risk: The Company's oil and natural gas operations are subject to unforeseen operating hazards which may damage or destroy assets. Although the Company maintains a level of insurance coverage consistent with industry practices against property or casualty losses, unique circumstances to any particular event may make the coverage inadequate. Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including

hazards such as fire, explosion, blowouts, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or in personal injury.

Competitive Risk: The petroleum industry is highly competitive and very capital intensive. If the Company is unable to successfully compete with the large number of oil and natural gas producers in its industry, it may not be able to achieve profitable operations. The Company encounters competition from numerous companies in each of its activities, including acquiring rights to explore for crude oil and natural gas. The Company's competitors include oil and natural gas companies that have substantially greater financial resources, staff and facilities than JayHawk Energy. JayHawk's ability to increase reserves in the future will depend not only on its ability to explore and develop its existing properties, but also on the ability to select and acquire suitable producing properties or prospects for exploratory drilling. Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery. Competition may also be presented by alternate fuel sources.

Regulatory and Environment Risk: The Company is subject to various regulatory requirements, including environmental regulations, and may incur substantial costs to comply and remain in compliance with those requirements. Oil and gas operations are subject to environmental hazards such as oil spills, produced water spills, gas leaks and ruptures and discharges of substances or gases that could expose the Company to substantial liability. The Company's operations are also subject to numerous laws and regulations at the federal, state and local levels, including regulation relating to matters such as the exploration for and the development, production, marketing, pricing, transmission and storage of oil and natural gas, as well as environmental and safety matters. Failure to comply with applicable regulations could result in fines or penalties being owed to third parties or governmental entities, the payment of which could have a material adverse effect on the Company's financial condition or results of operations. The Company's operations are subject to significant laws and regulations, which may adversely affect its ability to conduct business or increase its costs.

Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties.

The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require the Company to incur costs to remedy such discharge. No assurance can be given that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect the Company's financial condition, results of operations or prospects. The Company could incur significant liability for damages, clean-up costs and/or penalties in the event of discharges into the environment, environmental damage caused by the Company or previous owners of the Company's property or non-compliance with environmental laws or regulations. In addition to actions brought by governmental agencies, the Company could face actions brought by private parties or citizens groups. Any of the foregoing could have a material adverse effect on the Company's financial results.

Market Risk: The marketability and price of oil and natural gas that may be acquired or discovered by the Company will be affected by numerous factors beyond JayHawk Energy's control. The Company's ability to market its natural gas may depend upon the ability to acquire space on pipelines that deliver natural gas to commercial markets. The Company may also be affected by deliverability uncertainties related to the proximity of its reserves to pipelines and processing facilities, by operational problems with such pipelines and facilities, and by government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and by many other aspects of the oil and natural gas business.

Financial Risks: JayHawk Energy's business may be harmed if the Company is unable to retain interests in existing leases. All of the Company's properties are held under licenses, working interests in operating agreements and interest in oil and gas mineral leases, interests in oil and gas mineral leases, some of which expire within the next twelve months. If the Company fails to meet the specific requirements of each lease, especially future drilling and production requirements, the lease may be terminated or otherwise expire. The Company cannot be assured that it will be able to meet its obligations under each lease. The termination or expiration of its working interest relating to any lease would harm the Company's business, financial condition and results of operations.

Estimation Risks: Reserve estimates, like all estimates, are subject to numerous uncertainties and may be inaccurate. There are numerous uncertainties inherent in estimating quantities of oil or natural gas reserves and cash flows to be derived from, including many factors beyond the Company's control. The reserve and associated cash flow information set forth herein represents estimates only. In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows where therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties,

classification of such reserves based on risk of recovery and estimates of future net revenues expected wherefrom prepared by different engineers, or by the same engineers at different times, may vary. Actual production, revenues, taxes and development and operating expenditures with respect to the Company's reserves will vary from estimates thereof and such variations could be material.

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

Default Risks: Properties are held in the form of licenses, leases and working interests in operating agreements and leases. If the Company and/or a lease holder fail to meet the specific requirements of the lease, license or operating agreement the specific instrument may terminate or expire. There can be no assurance that any of the obligations required to maintain each license or lease will be met, although the Company exercises commercially reasonable efforts to do so. The termination or expiration of licenses or leases or the working interests relating to a license or lease may have a material adverse effect on the Company's results of operations and business.

Risk of Loss of Key Personnel: The Company's success depends in large measure on certain key personnel, including its President and Chief Executive Officer, and Chief Financial Officer. The loss of the services of such key personnel could have a material adverse effect on the Company. Although the Company is considering acquiring key person insurance, the Company does not currently have such insurance in effect for these key individuals. In addition, the competition for qualified personnel in the oil and natural gas industry is intense and there can be no assurance that the Company will be able to continue to attract and retain all personnel necessary for the development and operation of its business.

Title Deficiencies Risk: The existence of a material title deficiency can render a lease worthless and can result in a large expense to the Company's business. It is the Company's practice in acquiring oil and gas leases or undivided interests in oil and gas leases to forego the expense of retaining lawyers to examine the title to the oil or gas interest to be placed under lease or already placed under lease. Instead, we rely upon the judgment of oil and gas landmen who perform the field work in examining records in the appropriate governmental office before attempting to place under lease a specific oil or gas interest. This is customary practice in the oil and gas industry. However, we do not anticipate that we, or the person or company acting as operator of the wells located on the properties that we currently lease or may lease in the future, will obtain counsel to examine title to the lease until the well is about to be drilled. As a result, we may be unaware of deficiencies in the marketability of the title to the lease. Such deficiencies may render the lease worthless and impede upon the Company's ability to develop the property subject to the lease.

Risk Related to Debentures: The Company currently is indebted to five institutional investors in the form of convertible debentures the repayment of which are secured by liens against the Company’s North Dakota properties. The Company is currently in default of provisions in the debenture agreements as discussed in Note 8 of the consolidated financial statements. Should the debenture holders choose to exercise their rights to foreclose on the North Dakota properties, the Company's cash flow from operations could be reduced significantly to only those revenues derived from the Kansas natural gas operations.

Risk related to disclosure controls: The Company's disclosure controls and procedures and internal control over financial reporting were not effective, which caused the Company's financial reporting to be unreliable and lead to incorrect financial information being disseminated to the public in the past. The Company's management evaluated its disclosure controls and procedures as of September 30, 2012 and concluded that as of that date, the Company's disclosure controls and procedures were not effective. In addition, management evaluated the Company's internal control over financial reporting as of September 30, 2012 and concluded that that there were material weaknesses in the Company's internal control over financial reporting as of that date and that its internal control over financial reporting was not effective as of that date. A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis.

Communication failures between individuals executing transactions and individuals accounting for transactions led to the identification of certain required disclosures to the financial statements. Additionally, due to insufficient staffing, it was not possible to ensure appropriate segregation of duties between incompatible functions, and formalized monitoring procedures have not been established or implemented. The Company has not yet remediated this material weakness and management believes that the Company's disclosure controls and procedures and internal control over financial reporting continue to be ineffective. Until these issues are corrected, the Company's ability to report financial results or other information required to be disclosed on a timely and accurate basis may be adversely affected and the Company's financial reporting may continue to be unreliable, which could result in additional incorrect financial information being disseminated to the public. Investors relying upon this incorrect information may make a misinformed investment decision.

Risks Related to the Company's Common Stock: Shares of the Company's common stock may continue to be subject to price volatility and illiquidity because the shares are thinly traded and may never become eligible for trading on a national securities exchange. While the Company may at some point be able to meet the requirements necessary for its common stock to be listed on a national securities exchange, the Company cannot assure investors or potential investors that it will ever achieve a listing of its common stock. Initial listing is subject to a variety of requirements, including minimum asset values, minimum revenue, minimum trading price and minimum public “float” requirements. There are also continuing eligibility requirements for companies listed on public trading markets. If the Company is unable to satisfy the initial or continuing eligibility requirements of any such market, then its stock may not be listed or could be delisted. This could result in a lower trading price for the Company's common stock and may limit investors ability to sell their shares, any of which could result in losing some or all of their investment.

The Company's common stock is subject to the “penny stock” rules of the Securities and Exchange Commission and the trading market in the Company's securities is limited, which makes transactions in JayHawk Energy's stock cumbersome and may reduce the value of an investment in its stock. The Securities and Exchange Commission (the “SEC”) has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to the Company, as any equity security that (i) has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, or (ii) is not registered on a national securities exchange or listed on an automated quotation system sponsored by a national securities exchange. For any transaction involving a penny stock, unless exempt, Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, requires:


	•	that a broker or dealer approve a person’s account for transactions in penny stocks; and
	•	the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:


	•	obtain financial information and investment experience objectives of the person; and
	•	make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC

relating to the penny stock market, which, in highlight form:


	•	sets forth the basis on which the broker or dealer made the suitability determination; and
	•	attests that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, and about the commissions payable to the broker-dealer and the registered representatives, as well as current quotations for the securities, and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of the Company's common stock and cause a decline in the market value of its stock.

The market valuation of energy companies, such as JayHawk Energy, Inc., frequently fluctuate due to factors unrelated to the past or present operating performance of such companies. The Company's market valuation may fluctuate significantly in response to a number of factors, many of which are beyond its control, including:


	•	changes in securities analysts’ estimates of the Company's financial performance, although there are currently no analysts covering its stock;
	•	fluctuations in stock market prices and volumes, particularly among securities of energy companies;
	•	changes in market valuations of similar companies;
	•	announcements by the Company or its competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;
	•	variations in the Company's quarterly or annual operating results;
	•	fluctuations in oil and natural gas prices; and
	•	additions or departures of key personnel.

Dividends: Investors should not look to dividends as a source of income. In the interest of reinvesting initial profits back into its business, the Company does not intend to pay cash dividends in the foreseeable future. Consequently, any economic return will

initially be derived, if at all, from appreciation in the fair market value of the Company's stock, and not as a result of dividend payments.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

S.E. Kansas - Girard Properties - Adjacent to the Uniontown Project is the Girard Project in Crawford County Kansas which the Company acquired on March 31, 2008. With this transaction JayHawk acquired 34 wells, of which 7 were tied into a pipeline also acquired at this time (more fully described immediately following). This acquisition provided JayHawk infrastructure necessary for future development of existing and acquired leased acreage, and during July and August of 2008, the Company completed drilling and casing an additional 21 gas wells. JayHawk Energy's acreage position in both Bourbon and Crawford counties Kansas was enhanced again with the acquisition from Missouri Gas Partners of certain oil, gas and mineral rights to 11,462 leased acres in June of 2008. As of September 30, 2012, the Company has 21 producing gas wells tied into the pipeline. Since June of 2008 through September of 2012, the Company's gas production and sales has contributed $306,153 in net revenues. At this time, The Company produces only natural gas at its Girard, Kansas well sites. This is more fully discussed in Note 5 to the Consolidated Financial Statements of this Form 10-K.

JayHawk Gas Transportation Company - Associated with the acquisition of the Girard properties in March of 2008, the Company acquired a 16 mile pipeline. In May of 2008, the Company established a 100% owned and controlled subsidiary, "JayHawk Gas Transportation Corporation" to hold and manage the assets associated with the pipeline. This pipeline is tied into a 2 million cubic foot sales pipeline and allows for substantial growth.

S.E. Kansas - Uniontown Properties – Located in S.E. Kansas, these properties consisted of the leased acreage and wells within the leased area drilled by previous operators. 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.

North Dakota - Crosby (formerly Candak) Project – On January 16, 2008, the Company acquired a 65% working interest in five producing oil wells, historically referred to as the Candak properties but currently referred to as the Crosby properties more properly reflecting the pool designation of the properties, located in the Williston Basin area of North Dakota. In addition to the five producing wells, the Company acquired certain oil, gas, and mineral rights in a 15,500-acre land position. The Crosby properties provide production of approximately 50 barrels ("Bbls") of light to medium crude oil daily from the five existing wells. Since their acquisition and through September 30, 2012 these five wells have produced and sold in excess of 82,000 Bbls. and generated net revenues to JayHawk of $3,160,185.

During the year ending September 30, 2010, JayHawk drilled two vertical wells on the Crosby property in order to develop the Mississippian reservoir further within the pool. The wells exhibited marginal production potential after attempts to stimulate flow and are currently shut-in. One of these wells may be converted to water disposal in order to reduce operating expense. JayHawk, in its acquisition of leases during 2010, acquired Bakken rights along with the Mississippian rights in section 28-164N-97W at the Crosby property. Activity in the Bakken has been moving northward from the well developed Bakken fields in Mountrail and McKenzie Counties to the south. Recent drilling by other companies into the Bakken shale formation and the underlying Three Forks shale have yielded promising production results within 10 miles of the Crosby pool. The Company is also looking at strategies to redeploy redundant production equipment on the property in order to streamline the production system and to increase overall efficiency.

Disclosure of Reserves – The Company holds proved oil reserves in North Dakota. For the North Dakota properties, the independent petroleum engineering firm of McDaniel & Associates Consultants, Ltd. (“McDaniel”) of Calgary, Alberta Canada, prepared the estimates of the Company's proved developed and proved undeveloped reserves as of September 30, 2012 and 2011. McDaniel’s Report of Third Party for the Evaluation of Oil Reserves attributed to Jayhawk Energy, Inc’s interests in the Crosby in the United States and related consent for use is filed as an Exhibit with this 10K. A copy of the McDaniel and Associates and related consent for use for specific purpose is attached as Exhibit 99 to the Company’s Amended Annual Report on form 10K/A filed October 18, 2012. McDaniel & Associates, Ltd. is an independent expert engineering, geological, technical and advisory company providing services to the oil and gas industry throughout the world. McDaniel & Associates was established in 1955 and has been providing oil and gas reserve estimates for the past 57 years. McDaniel & Associates maintains a staff of over 60 professionals and technical support personnel with offices in Calgary, Alberta, Canada, and Guildford, England. McDaniel & Associates report is intended to be compliant with SEC Regulations S-X and S-K, for the purpose of disclosure requirements.

The future net cash flows (and related present value) attributable proved and probable reserves were calculated for each well and the properties in total as of these respective dates. Proved developed reserves are defined as estimated quantities of oil, natural gas and natural gas liquids which upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. Proved undeveloped reserves are those reserves which can be expected to be recovered from new wells with existing equipment and operating methods.

The reserve data set forth in the reports and in this Report represents only estimates, and should not be construed as being exact quantities. The reserves may or may not be actually recovered, and if recovered, the actual revenues and costs could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations.

McDaniels & Associates used all assumptions, data, methods and procedures they considered necessary and appropriate under the circumstances to prepare their estimates. The reserves set forth in their reports for the properties are estimated by performance methods or analogy. In general, reserves attributable to producing wells and reservoirs are estimated by performance methods such as decline curve analysis which utilizes extrapolations of historical production data. Reserves attributable to non-producing and undeveloped reserves includes in the reports are estimated by analogy. The estimates of the reserves, future production, and income attributable to properties are based on the reserve definitions set out in Rule 4-10(a) in SEC Regulation S-X.

The McDaniel & Associate report summarize conclusions made by them with respect to the reserve estimates. To estimate economically recoverable crude oil, many factors and assumptions were considered, including the use of reservoir parameters derived from geological, geophysical and engineering data which cannot be measured directly, economic criteria based on current costs and SEC pricing requirements, and forecasts of future production rates. Under applicable SEC regulations, proved reserves must be demonstrated to be economically producible based on the existing economic conditions including the prices and costs at which economic production from a reservoir is determined as of the effective date of the report. With respect to the property interests the Company owns, production and well tests from examines wells, normal direct costs of operating the wells or leases, other costs such as transportation and processing fees, production taxes, recompletion and development costs and product prices are based on SEC regulations, geological maps, well logs, core analyses, and pressure measurements.

Reservoir engineering is a subjective process of estimating underground accumulations of crude oil that cannot be measured in an exact manner. There are numerous uncertainties inherent in estimating crude oil reserves and their estimated values, including many factors beyond the Company’s control. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geologic interpretation and judgment. As a result, estimates of different engineers, including those used by the Company, may vary. In addition estimates of reserves are subject to revision based upon actual production, result of future developments and exploration activities, prevailing crude oil prices, operating costs and other factors. The revisions may be material. Accordingly, reserve estimates are often different from the quantities of crude oil that are ultimately recovered and are highly dependent upon the accuracy of the assumptions upon which they are based. The Company’s estimate net proved reserves, included in the Company’s SEC filings, have not been filed with or included in reports to any other federal agency. See Item 1A of this Report entitled “RISK FACTORS - Estimation Risks: Reserve estimates, like all estimates, are subject to numerous uncertainties and may be inaccurate.”

Federal and state regulations governing protection of the environment may prevent the Company from recovering the estimated reserves disclosed in this section of the Report. For a discussion of the main federal laws and regulations in the United States in place to protect the environment, see the subsection of this Annual Report above entitled “DESCRIPTION OF BUSINESS – Governmental Regulations,” which disclosure is incorporated herein by reference.

A summary of the Company’s net proved oil reserves for the North Dakota, Crosby properties for the years end September 30, 2012 and 2011 are presented below:


		2012	2011
		Oil (Bbls)	Oil (Bbls)
PROVED
Developed – North Dakota		44,100	45,500
Undeveloped – North Dakota		21,600	21,400
	TOTAL PROVED RESERVES	65,700	66,900

The Company has no reserve estimates for synthetic oil, synthetic gas or sales of other non-renewable natural resources that are intended to be upgraded into synthetic oil and gas.

The Kansas properties identified above as the Girard and Uniontown projects have not been evaluated and no independent estimates of proved reserves have yet been made. Consequently, management has determined the producing natural gas properties in Girard, Kansas be classified as unproven for purposes of financial statement disclosure. Additional information about the Company’s proved

oil reserves are presented under Note 19 - Supplemental Oil and Gas Information in the accompanying Consolidated Financial Statements.

Probable Reserves

Estimates of probable reserves are inherently imprecise. When producing an estimate of the amount of oil and gas that is recoverable from a particular reservoir, an estimated quantity of probable reserves is an estimate of those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered. Estimates of probable reserves are also continually subject to revisions based on production history, results of additional exploration and development, price changes and other factors.

When deterministic methods are used, it is likely as not that actual remaining quantities recovered will exceed the sum of the estimated proved plus probable reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable reserves estimates. Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of available data are less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certainty criteria. Probable reserves may be assigned to areas that are structurally higher than the proved areas if these areas are in communication with the proved reservoir. Probable reserves estimates also include potential incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than assumed for proved reserves.

A summary of the Company’s net probable oil reserves for the North Dakota, Crosby properties for the years end September 30, 2012 and 2011 are presented below:

2012

2011

Oil (Bbls)

PROBABLE

21,100

19,000

Controls over Reserve Estimates

Compliance as it relates to reporting the Company’s reserves is the responsibility of Lindsay Gorrill, President and Chief Executive Officer, who has over 20 years experience in resource-based companies. Mr. Gorrill has a strong background in asset evaluation and management.

With respect to the Company’s properties, the control over reserve estimates included retaining McDaniel & Associates Consulting, LTD as our independent and geological auditing firm. Jayhawk provided McDaniel & Associates with information about its oil properties, including production profiles, prices and costs, and McDaniel & Associates reviewed the estimates of the reserves attributable to oil properties. McDaniel & Associates Consulting LTD is an independent expert engineering, geological, technical and advisory company providing services to the oil and gas industry. The engineer responsible for overseeing the reserve study at McDaniel & Associates is a licensed engineer, with professional memberships with the Petroleum Society of Canada, The Association of Professional Engineers, and the Geologists and Geophysicists of Alberta (APEGGA). All of the information on the North Dakota oil reserves in this Report is derived from McDaniel & Associates’ report.

Proved undeveloped reserves

At September 30, 2012, management estimated the Company had proved undeveloped reserves (PUDs) of 21,600 Bbls for its North Dakota properties which accounted for 32.9% of its total estimated North Dakota proved oil reserves. The table following table discloses the Company's PUDs during 2012 and 2011:


	2012	2011
	Oil (Bbls)	Oil (Bbls)
PUDS beginning of year	21,400	21,400
Revisions of previous estimates	200	-
Conversions to proved developed reserves	-	-
Additional PUDs added	-	-
PUDs end of year	21,600	21,400

Production volumes

The following table set forth certain information regarding the production volumes of oil and natural gas for the periods indicated for the Company for the period indicated. The Company's oil wells are located in North Dakota. The Company's natural gas wells are located in Kansas:


	Years Ended September 30,
Oil (North Dakota)	2012	2011	2010
Production volumes:
Oil production (Bbls)	13,398	9,912	19,398
Average daily production (BOED)	36.7	27.16	53.15


Natural Gas (Kansas)
Production volumes:
Natural gas (mcfs)	1,810	15,973	18,749
Average daily production (mcfs)	4.96	43.76	51.37

The oil and gas sales revenue shown in the table below is the Company’s net share of annual revenue in each project for the past three fiscal years:


			Years Ended September 30,
			2012		2011		2010
Oil Revenue (North Dakota)		$	659,617	$	333,275	$	612,607
Gas Revenue (Kansas)			3,612		29,847		72,101
	Total	$	663,229	$	363,122	$	684,708

The table below shows the average sales price per unit and average cost of good sold per unit the Company received for oil and natural gas for the past three fiscal years:


		Years Ended September 30,
Average sales price:		2012		2011		2010
Oil –per barrel (North Dakota)	$	74.37	$	74.18	$	63.13
Gas – per mcf (Kansas)	$	3.01	$	3.85	$	4.13

Average cost of goods sold:
Oil – per barrel (North Dakota)	$	15.61	$	15.63	$	14.86
Gas – per mcf (Kansas)	$	17.10	$	3.66	$	1.49

Drilling and Development Activity

The following table sets forth wells drilled and completed during the periods indicated on the Company's oil and gas properties:


		Year Ended September 30,
		2012		2011		2010
		Gross	Net	Gross	Net	Gross	Net
Development
Oil wells		-	-	2.00	1.92	2.00	1.92
Natural gas wells		-	-	-	-	-	-
Dry wells		-	-	(2.0)	(1.92)	(2.0)	(1.92)
	Total	-	-	-	-	-

Exploration
Oil wells		-	-	-	-	-	-
Natural gas wells		-	-	-	-	-	-
Dry wells		-	-	-	-	-	-
	Total	-	-	-	-	-	-

The following table summarizes the Company's total oil wells by type as of September 30, 2012. A net well represents the Company's percentage ownership of a gross well. The following table does not include wells which were awaiting completion, in the process of completion or awaiting flowback subsequent to fracture stimulation. All oil wells are located in North Dakota; all natural gas wells are located in Kansas.


		Producing Wells		Non-producing wells
		Gross	Net	Gross	Net

Oil wells		5	3.25	2	1.92
Natural gas wells		21	13.65	4	2.60
	Total	26	16.90	6	4.52

Title to Properties

Management believes the Company has satisfactory title to all of its U.S. properties in accordance with standards generally accepted in the oil and gas industry. The properties are subject to customary royalty interests, liens for current taxes and other burdens, which management believes does not materially interest with the use of or affect the value of such properties. Prior to acquiring undeveloped properties, the Company performs a title investigation that is thorough but less vigorous than that conducted prior to drilling, which is consistent with standard practice in the oil and gas industry. Before the Company commences drilling operations, it conducts a thorough title examination and performs curative work with respect to significant defects before proceeding with operations. The Company has performed a thorough title examination with respect to substantially all of its active properties.

Delivery commitments

The company currently has no delivery commitments for product obtained from its wells.

Dry holes

The Company has not experienced any dry holes in fiscal years ending September 30, 2012 or 2011. It experienced two dry holes during its drilling operations in 2010.

ITEM 3. LEGAL PROCEEDINGS.

On March 7, 2012, Gross Capital, Inc. (“Gross”) filed suit against the Company in the United States District Court for the Southern District of Texas, Houston Division (the “Gross Lawsuit”). Gross formerly provided the Company with investor relations and other consulting services. 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. The Company believes the likelihood it will incur a loss in connection with this litigation is reasonably possible rather than probable. At this time it is not possible to predict the potential financial impact to the Company. The Company has not accrued any loss related to this litigation

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report Form 10-K

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

The Company's common stock is quoted on the OTC Bulletin Board under the symbol "JYHW.OB". For the periods indicated, the following table sets forth the high and low bid prices per share of JayHawk’s common stock since inception of trading. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.


		2012				2011
		High		Low		High		Low

1st Quarter End December 31	$	0.09	$	0.03	$	0.33	$	0.10

2nd Quarter End March 31		0.09		0.04		0.21		0.11

3rd Quarter End June 30		0.06		0.03		0.15		0.07

4th Quarter End September 30		0.05		0.02		0.14		0.06

Holders

As of September 30, 2012, there were 91 stockholders of record who owned 60,759,178 shares of common stock. The number of record holders was determined from the records of the Company's transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of the Company's common stock is Corporate Stock Transfer Company at 3200 Cherry Creek Drive South, Suite #340, Denver, Colorado, 80209.

Description of Securities

The authorized capital stock of the Company consists of 200,000,000 of the common stock, at $0.001 par value, and 10,000,000 shares of preferred stock, at $0.001 par value. The shares of preferred stock may be issued in one or more series. The designations, powers, rights, preferences, qualifications, restrictions, and limitations of each series of preferred stock shall be established from time to time by the Board of Directors in accordance with Colorado law.

Dividends

Holders of common and preferred stock are entitled to receive dividends as may be declared by the Board of Directors. The Board of Directors is not restricted from paying any dividends but is not obligated to declare a dividend. No dividends have ever been declared and it is not anticipated that dividends will ever be paid, but will be dependent upon the Company's financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.

ITEM 6. SELECTED FINANCIAL DATA

The Registrant is a “smaller reporting company” as defined Rule 10(f)(1) of Regulation S-K, and as such is not required to present the information required under this Item.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS

The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. All notes referred to in this Management Discussion and Analysis refer to the notes to the Consolidated Financial Statements presented in Item 8. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 7, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-K that does not consist of historical facts, are "forward-looking statements."

Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. The statements involve factors, risks and

uncertainties including those discussed in the “Risk Factors” section contained elsewhere in this report, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements.

Investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements in this report.

Overview

This overview is presented in chronological order as to dates the respective transactions were completed. It should be read in conjunction with the "Notes to the Consolidated Financial Statements" presented in Item 8, specifically Note 12 relative to Common Stock, and Note 5 and Note 6 relative to Asset Impairments.

On June 21, 2007, the Company changed its name from Bella Trading Company, Inc. to JayHawk Energy, Inc. and shifted focus from the retail jewelry industry to the oil and gas business. The Company's new business plan was to acquire oil and gas properties for exploration and development with the intent to bring the projects to feasibility at which time it would either contract out the operations or joint venture the project to qualified interested parties. The Company implemented this plan on July 25, 2007 with the acquisition of certain oil, gas, and mineral leases to approximately 35,000 gross acres located in Bourbon County, Kansas (the “Uniontown project”). The assets were purchased for a total purchase price of $2.2 million.

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

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

On April 18, 2008, JayHawk entered into an agreement to acquire oil and natural gas rights to 1,336 gross acres and 14 completed but non-producing gas wells, in exchange for $300,000 in cash and 50,000 shares of the Company's common stock.

On June 30, 2008, the Company agreed to purchase oil, gas and mineral leases on 11,462 gross acres and 5 completed and cased gas wells, located in Crawford and Bourbon counties in Kansas. In consideration for these assets JayHawk paid $140,000 in cash and was obligated to issue 286,550 shares of its common stock as the leases were assigned at the rate of 25 shares per acre.

On July 22, 2008, the former purchaser of the Company's North Dakota crude oil production, SemCrude, L.P, filed a Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court, District of Delaware. At the time of the SemCrude filing JayHawk Energy, Inc., had not been paid for the crude oil SemCrude had taken from the Company's properties for the months of June and July 2008. As a consequence, the Company had an outstanding receivable exceeding $283,000 and offsetting allowance for doubtful accounts of $119,763 at September 30, 2009. The amount was subsequently paid.

During the 4^th quarter of the year ending September 30, 2009 the Company completed a signed letter agreement with DK True Energy Development Limited ("DKTED”) which allowed DKTED to earn up to an 85% working interest in JayHawk's Coal Bed Methane ("CBM") project in southeast Kansas (the Girard project). This interest could have been earned by DKTED after paying the Company $500,000 and spending a minimum of $1,300,000 over a three year period. DKTED had the option to cap its participation and working interest at 42.5% after paying the Company $250,000 and spending $300,000 on workovers of existing wells during the first year, in what is described as the “Primary Program”. DKTED subsequently assigned its interests in the Girard project to WHL Energy Midcon, LLC. ("WHL"), in December 2009 who provided operational expertise and personnel on the Girard project.

In 2010, after WHL had fulfilled the $250,000 cash payment obligation and spent the $300,000 on workovers of the Girard project, the Company issued WHL an option to earn an additional 42.5 percent (total 85 percent) participation and working interest upon remitting to the Company an additional $250,000 within nine months of the granting of the option. During the year ended September 30, 2011, the option period expired unexercised and, per the terms of the agreement, WHL's total working interest earned was set at 35 percent. As such, the Company has reduced the cost basis of the Girard by $250,000 to offset the elimination of the corresponding investment from WHL that had previously been carried as "Investment by Joint Venture Partner" on JayHawk Energy's balance sheet.

In 2012, the Company acquired WHL's remaining 35% working interest in the Girard project in exchange for equipment with a net book value of $16,595. The Company now controls a 100% working interest in the Girard project.

In September 2009, the Company completed a full analysis of the Crosby North Dakota property in which JayHawk is the operator. At that time, there were five producing Ratcliffe formation oil wells with gross production of approximately 60 barrels of oil produced per day. Considering that large mineral interests held in the area by JayHawk and its joint venture partners, the area was considered a prime opportunity for exploitation of the reserves attributable to the reservoir as determined by management’s analysis of the Crosby pool and other analogue oil pools within the same depositional fairway of the Crosby pool. Many of these analogue pools had been successfully developed by other operators and had returned significant additional production and reserves associated with that drilling exploitation. Corroboration for the development of the pool was also given by the independent engineering assessment performed by McDaniel Associates of Calgary, Alberta, Canada who had been commissioned by JayHawk to perform an independent third party report for the Company’s year-end in both 2012 and 2011.

In March 2010, JayHawk commenced the drilling of the first of two vertical wells on the Crosby property located on the western side of the acreage position. These wells were inferred to be in the thick part of the reservoir and were offsetting some of the better producing wells in the pool. Both wells were ultimately drilled and tested oil in the Ratcliffe target formation and despite early encouraging results, both wells produced oil at marginal rates over a longer production period and were eventually shut in during September of 2010. Both wells are currently shut in pending further remedial action.

While the management and third party engineering assessments were both favorable in terms of the development potential of the Crosby pool, risk factors associated with any drilling of oil and gas resources are common. These risk factors are associated with changing parameters within the reservoir and include, but are not limited to; non-deposition of reservoir, reduced porosity and permeability of reservoir rock when present, structural changes to the reservoir which may preclude the trapping of hydrocarbons, drainage of existing reserves by other wells, mechanical problems while drilling which may prevent production, rising costs due to unforeseen circumstances which may result in wells becoming non-commercial, lower than anticipated production rates due to changes in reservoir quality which were un-anticipated, well bore damage by drilling which may prevent commercial production of hydrocarbons, catastrophic failure during drilling which may prevent the well from reaching its intended target or other unforeseen events which may mitigate the economic success of a drilling operation.

Management’s assessment of the economic viability of these two wells is pending further evaluation to determine whether pressure depletion and/or communication with the water leg in the formation directly below the zone occurred. Therefore, the Company has impaired both wells for the year ending September 30, 2011 pending further evaluation.

The Company is in the process of evaluating existing data logs to determine whether additional geological tests may indicate a reservoir located at a shallower depth than previously anticipated. Management believes the two wells previously drilled may have perforated the reservoir, and, with some rehabilitation efforts, the previously impaired wells may warrant the investment of additional capital to make operational again. The Company has not, at this time, identified any sources of capital that may be available to it for the purposes of conducting the additional geological testing and/or the rehabilitation of the two offline wells.

Should either of the wells be ultimately determined to be non-commercial, the well may be converted to a water disposal well in order to reduce trucking and disposal costs associated with the existing producing wells. The Company would then also consider accepting disposal water from other producers in the area as an alternate revenue source in what had previously been a cost center.

The Company has not entered into commodity swap arrangements or hedging transactions, and although it has no current plans to do so, it may enter into commodity swap and/or hedging transactions in the future in conjunction with oil and gas production. The Company has no off-balance sheet arrangements.

The forecast for the period for which the Company's financial resources will be adequate to support its operations involves risks and uncertainties and actual results could fail as a result of a number of factors. The Company's future financial results continue to depend primarily on (1) the Company's ability to discover commercial quantities of oil and gas; (2) the market price for oil and gas; (3) the ability to continue to source and screen potential projects; and (4) the Company's ability to fully implement its exploration and development program with respect to these and other matters. The Company cannot assure that it will be successful in any of these activities or that the prices of oil and gas prevailing at the time of production will be at a level allowing for profitable production.

Results of Operations

For the years ending September 30, 2012 and 2011 the Company reports gross revenues of $663,229 and $363,122, respectively, from the sales of oil and natural gas. Details of these two revenue components follow:

Oil Revenues: As commented on in Note 2 to the Consolidated Financial Statements for the period ended September 30, 2012, 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 years ended September 30, 2012 and 2011 JayHawk sold a gross 16,665 Bbls and 9,518 Bbls respectively. Gross working interest in the revenues generated from the five North Dakota oil wells were $659,617 and $333,275 respectively. Gross receipts reconciled to JayHawk net working interest, or revenue recognized is reflected in the following table:


		2012	2011	2010

Gross Sales Value		$ 1,239,356	$ 706,012	$ 1,217,310
	Less: Distributable to Outside Interest, Production and Severance Taxes	(579,739)	(372,737)	(604,703)
JayHawk's Gross Revenue		$ 659,617	$ 333,275	$ 612,607

The increase in gross revenues evidenced here is attributable to the Company's ability to access its production fields for much of fiscal year 2012 following inclement weather and associated flooding which resulted in road restrictions during the year ended September 30, 2011. The Company resumed production at all five of its North Dakota wells in July 2012 following significant road repair and rehabilitation to its Kearney well site. For the year ending September 30, 2012 the average price the Company received for a barrel of oil was $74.37. During the comparable period ending September 30, 2011 the average price received per barrel was $74.18.

Gas Revenues: During the first quarter ending December 31, 2009, the Company entered into an agreement whereby initially 42.5 percent of the gas revenues generated from the Girard properties were assigned to a joint venture partner in exchange for $250,000. Net gas revenues accruing to the Company for the year ending September 30, 2011 and 2010 are reported net of the Company's joint venture partner's interest. Under the previous agreement, the joint venture partner was responsible for 100% of the operating expenses and retained a 42.5% percent of the gas revenue generated. During the year ended September 30, 2011, the joint venture partner chose not to exercise their option, which will subsequently cause natural gas revenues to be reported on a gross basis and the previous joint venture partner being recognized as a 35% working interest partner responsible for only their pro-rata share of operating expenses.

Revenues derived from gas sales for the years ending September 30, 2012 and 2011 were $3,612 and $29,847. Average monthly prices received for each thousand cubic feet (mcf) of gas sold during the period end September 30, 2011 have remained volatile, ranging from a high of $5.15, received for the sale of June 2011 production, to a low of $3.08 received for October 2010 production. The average price received for the 12 month period ending September 31, 2012 was $3.01 per mcf. The average price received for the 12 month period ending September 30, 2011 was $3.85 per mcf. The Company suspended production in 2012 with the intent of re-starting operations in Kansas in anticipation of increased natural gas prices at some point in the future.

Exploration Expenses: There were no exploration expenses incurred during the years ending September 30, 2012 or 2011.

Production Expenses: Production expenses are comprised of field labor, maintenance, chemicals, fuel, and salt water disposal, less amounts charged other working interests in the particular wells. These expenses associated with the Company’s North Dakota oil operations increased from $148,750 for the year ending September 30, 2011 to $293,107 for the year ending September 30, 2012. Increase in production expenses are a result of ability to produce and re-sell oil without significant interruption or extended periods of inclement weather, which was the case for the year ended September 30, 2011. The Company incurred additional expense repairing and rehabilitating access roads and machinery damaged during the flooding of 2011. Management does not anticipate significant increases in production expenses in the forthcoming year other than those related to increased production and oil sales.

The Kansas gas operations saw production expenses increase slightly from $28,411 to $30,949 between the same periods. This is a result of maintenance and repair expense coupled with JayHawk bearing responsibility for all costs of operations in Kansas compared to prior years.

Depreciation, depletion, amortization, abandonment and asset impairment expense: The aggregate of these expenses for the years ending September 30, 2012 and 2011 are detailed below.


				2012		2011
Depreciation, depletion and amortization
	Field equipment and drilling costs - North Dakota		$	165,139	$	173,775
	Field equipment and drilling costs - Kansas			215,817		290,735
	Computer, furniture, office equipment and leasehold improvements			4,471		8,108
	Amortization of leases - North Dakota			-		9,384
	Amortization of leases - Kansas			52,489		346,204
	Amortization of asset retirement obligation			36,749
	Depletion - North Dakota			256,203		142,033
Total depreciation, depletion and amortization				730,868		970,239

Impairment and loss on abandonment of properties
	Loss on abandonment of unproved properties - Kansas			-		1,020,479
	Impairment of proved properties - North Dakota			-		280,963
	Impairment of unproved properties - Kansas			3,275,000		-
Total impairment and loss on abandonment of properties				3,275,000		1,301,422

Loss (gain) on write-off and sales of leases and equipment
	Loss (gain) on write-off and sales of leases and equipment - Kansas			-		(15,519)
	Loss on write off and sales of leases and equipment - North Dakota			-		1,317,085
Loss on write-off and sales of leases and equipment				-		1,301,566

		Total Depreciation, depletion, amortization, abandonment and asset impairment expense	$	4,005,868	$	3,573,247

As discussed generally in Note 2, and specifically in Note 5, of "Notes to the Consolidated Financial Statements," JayHawk periodically reviews and assesses its unproved properties to determine if they have been impaired. During the year ended September 30, 2011, management's evaluation of the Uniontown project indicated the capital required to develop the property exceeded the Company's ability to fund the project, and any capital raised would be better served being deployed on other opportunities. Therefore, the remainder of the leases in Uniontown expired without renewal. Consequently, the Company charged off remaining balance of $1,020,479 on the Uniontown project at September 30, 2011.

As discussed in Note 5 of "Notes to the Consolidated Financial Statements," management made a review of its Kansas Girard project. Management's outlook for the U.S. natural gas prices indicated it is unlikely that sufficient U.S. demand for natural gas would materialize in the foreseeable future. Using a historical income approach based upon internal estimates of natural gas prices and future deliveries, management determined that the unproved and developed properties in Girard, Kansas should be impaired to the extent of the salvage value of field equipment and pipeline. The Company also impaired its unproved and undeveloped properties in Girard, Kansas. Thus, the Company recognized impairment loss of $3,275,000 on the Girard project for the year ended September 30, 2012.

General and Administrative Expenses: General and administrative expenses have been decreased 17.6% or $145,854 to $680,419 for the year ending September 2012 from $826,273 for the comparable period ended September 30, 2011. The President and CEO reduced his salary to zero and an administrative assistant position was eliminated from the Company's payroll. The Company incurred $107,107 in consulting fees related to the services provided by Cynergy Advisors who was engaged to facilitate investment banking, potential joint venture agreements and secure additional capital for the Company. As of the date of this report, there has been no proposed transaction or financing executed.


			2012		2011

Compensation and payroll taxes		$	233,113	$	343,673
Salary deferral and stock option expense			12,584		213,144
Legal, professional and consulting fees			180,125		73,490
Audit and public company expense			138,717		87,314
Office and other corporate general and administrative			115,880		108,652
	Total General and Administrative Expenses	$	680,419	$	826,273

Included in General and Administrative Expense is the recognition of a non-cash Stock Option expense in the amount of $12,584 for the year ended September 30, 2012 awarded to certain directors, officers and employees of the Company as part of the 2009 Stock Option Incentive Plan compared to $213,144 recognized in the year ended September 30, 2011.

Audit fees and public company expense increased for the year ended September 30, 2012 by $51,403 as a direct result of restatement of the Company's fiscal year end September 30, 2011 financial statements. Management expects audit fees and public company expense to decrease dramatically in the forthcoming fiscal year.

Other Income and Expense: Detail of the aggregate of this classification is disclosed in the following table:


			2012		2011

Interest and financing costs		$	(128,594)	$	(256,006)
Loss on initial recording of derivatives			-		(342,186)
Loss on extinguishment and conversion of debt			(1,075,114)		(221,000)
Gain on change in fair value of conversion option derivative			908,169		831,008
Gain on change in fair value of warrant derivative			400,961		651,531
Amortization of discount on debentures			(94,075)		(825,257)
Accretion of asset retirement obligation			(17,042)		(15,493)
Other income			4,657		49,569
	Total Other Income (Expense)	$	(1,038)	$	(127,834)

Interest expense decreased $127,412 during the year ended September 30, 2012 compared to the year ended September 30, 2011. When offset by conversions to the debentures throughout the course of the fiscal year, the corresponding debt for the majority of fiscal year 2011 exceeded that of 2012 and, consequently, associated interest expense fell accordingly. Management expects interest expense to remain relatively unchanged in the near future with no plans to incur additional debt at this time. Additionally, interest expense is reported net of interest income, of which there was a minimal amount reported in the current year as a result of no excess cash availability for investment.

The Company will continue to recognize gains (losses) on the fair value of derivative based on quarterly revaluation of the warrant and conversion option derivatives. The extent of these gain (losses) is unpredictable due to the volatility of the Company's share price, the unknown future value of the Company's shares and the length of term still remaining on the warrants and debentures at any particular revaluation event (end of quarter, conversion of debenture, etc.). The change in value will be charged to operations.

Change in fair value of the conversion option derivatives increased as the fair value price of the instruments was below their conversion and exercise price. To that extent, the Company recognized additional gain on fair value of conversion option derivative of $908,169 for the year ended September 30, 2012, an increase of $77,161 over the prior comparable year ended September 30, 2012.

As the modification of terms related to the debentures resulted in extinguishment of debt under ASC 470-50-40-2, the Company charged $1,003,731 to operations. The Company also recognized $71,383 in loss on conversion derivative as a result of $115,000 in debentures converted to the Company's common stock.

Liquidity and Capital Resources: At September 30, 2012 and 2011, the balances of the Company's cash and cash equivalents were $74,496 and $52,912, respectively. The Company's accounts receivable totaled $132,454 and $78,855, respectively. Subsequent to year-end, in October 2012, the Company received $132,454 from the current purchasers of its crude oil and gas production, representing proceeds of September sales, included in accounts receivable at September 30, 2012.

The Company's working capital deficit (current liabilities less current assets) was $2,371,879 at September 30, 2012. At September 30, 2011, the Company's working capital deficit was $2,209,359. The increase in liabilities at September 30, 2012 is attributable to unpredicted costs associated with returning the Company's North Dakota oil wells to productivity. Several non-recurring expenses, including rebuilding the access road to the Company's Kearney well, caused delay in payments to certain working interest partners and royalty holders. Management does not anticipate the recurrence of such expenses in the forthcoming year.

To fully carry out the Company's business plans the Company needs to raise a substantial amount of additional capital, or obtain industry joint venture financing, which we are currently seeking. The Company can give no assurance that it will be able to raise such capital. The Company has limited financial resources until such time that it is able to generate such additional financing or cash flow from operations. The Company's ability to establish profitability and positive cash flow is dependent upon its ability to exploit its mineral holdings, generate revenue from its planned business operations and control exploration cost. Should the Company be unable to raise adequate capital or to meet the other above objectives, it is likely that the Company would have to substantially curtail its business activity, and that the Company's investors would incur substantial losses of their investment.

The accompanying Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying Consolidated Financial Statements JayHawk Energy is an independent oil and gas company with a limited operating history and losses since

inception. These factors, among others, may indicate that the Company will be unable to continue as a going concern for reasonable period of time.

The Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional operating capital, and ultimately, to attain profitability. The Company intend to acquire additional operating capital through equity offerings to fund its business plan. There is no assurance that the Company will be successful in raising additional funds.

Cash Flows: Net cash provided by operations increased primarily due to more cash being received for the Company’s crude oil sales associated with improved ability to deliver oil to market. In the year ending at September 30, 2011, cash used by operating activities exceeded cash provided by operating activities by $527,840. In the year ending at September 30, 2012, cash provided by operating activities exceeded cash used by operating activities by $32,219, primarily as a result of ongoing expense reduction and improved oil sales volume.

During the year ending September 30, 2011, investment activities provided the Company with $185,521 as compared to $10,635 used during the comparable period ending September 30, 2012. The Company acquired a remaining 35% interest in Kansas and renewed several leases in North Dakota during the fiscal year in anticipation of increased exploration activities in the forthcoming year.

The Cash flows provided from financing activities were $Nil and $338,951 for the years ended September 30, 2012 and 2011, respectively.

Commitments: At September 30, 2012 the Company has no commitments to make any capital expenditures. Any potential future capital expenditures will be dependent on concluding adequate and successful financing arrangements.

The Company was obligated under its original office lease agreement, expiring July 1, 2011, to make payments of $1,500 per month. Management was successful in extending this agreement through December 1, 2011 whereby the Company entered into a new lease agreement in Coeur d'Alene, Idaho for $2,500 per month. The term of the lease is four years and contains no escalation clauses.

ITEM 7A. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Registrant has no investments in any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.

ITEM 8. FINANCIAL STATEMENTS.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Consolidated Financial Statements

September 30, 2012 and 2011

JAYHAWK ENERGY, INC. AND SUBSIDIARY

Contents

Page

FINANCIAL STATEMENTS:

Report of Independent Registered Public Accounting Firm

Consolidated balance sheets

Consolidated statements of operations

Consolidated statement of changes in stockholders' equity (deficit)

Consolidated statements of cash flows

Notes to consolidated financial statements

28-46

[f10k093012version13finalf002.gif]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

JayHawk Energy, Inc.

We have audited the accompanying consolidated balance sheets of JayHawk Energy, Inc. (“the Company”) as of September 30, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of JayHawk Energy, Inc. as of September 30, 2012 and 2011, and the results of its consolidated operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred substantial losses, has negative working capital and has an accumulated deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

DeCoria, Maichel & Teague, PS

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Spokane, Washington

December 31, 2012


JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

					September 30, 2012		September 30, 2011
ASSETS
	CURRENT ASSETS
		Cash and cash equivalents		$	74,496	$	52,912
		Trade accounts receivable (NOTE 4)			132,454		78,855
		Other current assets			10,189		10,162
			TOTAL CURRENT ASSETS		217,139		141,929

	PROPERTY AND EQUIPMENT
		Unproved properties, net (NOTE 5)			380,371		3,922,673
		Proved properties, net (NOTE 6)			509,705		958,165
		Computers, office equipment, furniture and leasehold improvements, net			3,781		8,252
			NET PROPERTY AND EQUIPMENT		893,857		4,889,090

	OTHER LONG-TERM ASSETS (NOTE 7)				101,621		101,500

	TOTAL ASSETS			$	1,212,617	$	5,132,519

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
	CURRENT LIABILITIES:
		Accounts payable		$	587,228	$	489,043
		Due to royalty and working interest holders			437,202		181,367
		Other payables, interest and taxes accrued			232,917		132,058
		Conversion option derivative (NOTE 9)			109,414		286,498
		Warrant derivative (NOTE 9)			58,257		299,947
		Convertible debentures (NOTE 8)			1,164,000		1,279,000
			Less: unamortized discount		-		(316,625)
			TOTAL CURRENT LIABILITIES		2,589,018		2,351,288

	LONG-TERM LIABILITIES
		Asset retirement obligation (NOTE 10)			187,463		170,421
			TOTAL LONG-TERM LIABILITIES		187,463		170,421

	TOTAL LIABILITIES				2,776,481		2,521,709

	COMMITMENTS AND CONTINGENCIES (NOTE 18)				-		-

	STOCKHOLDERS' EQUITY (DEFICIT):
		Preferred stock, $0.001 par value; 10,000,000 shares authorized,
			none issued and outstanding		-		-
		Common stock, $0.001 par value; 200,000,000 shares authorized,
			60,759,178 and 58,236,245 shares issued and outstanding
			respectively (NOTE 12)		60,759		58,236
		Additional paid-in capital			21,138,419		20,967,464
		Accumulated deficit			(22,763,042)		(18,414,890)
			TOTAL STOCKHOLDERS' EQUITY (DEFICIT)		(1,563,864)		2,610,810

	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)			$	1,212,617	$	5,132,519

See accompanying notes to consolidated financial statements.


JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

					Year Ended September 30,
					2012		2011
	REVENUE
		Oil sales		$	659,617	$	333,275
		Natural gas sales			3,612		29,847
			TOTAL REVENUE		663,229		363,122

	OPERATING EXPENSES
		Production costs - oil			293,107		148,750
		Production costs – natural gas			30,949		28,411
		Depreciation, depletion and amortization			730,868		970,239
		Loss on abandonment of unproved properties			-		1,020,479
		Loss on write-off and sales of leases and equipment			-		1,301,566
		Impairment of proved and unproved properties			3,275,000		280,963
		General and administrative			680,419		826,273
			TOTAL OPERATING EXPENSES		5,010,343		4,576,681

	OPERATING LOSS				(4,347,114)		(4,213,559)

	OTHER INCOME (EXPENSE)
		Interest and financing costs			(128,594)		(256,006)
		Loss on initial recording of derivatives (NOTE 8)			-		(342,186)
		Loss on extinguishment and conversion of debt			(1,075,114)		(221,000)
		Gain on change in fair value of conversion option derivative			908,169		831,008
		Gain on change in fair value of warrant derivative			400,961		651,531
		Amortization of discount on debentures			(94,075)		(825,257)
		Accretion of asset retirement obligation			(17,042)		(15,493)
		Other income			4,657		49,569
			TOTAL OTHER INCOME (EXPENSE)		(1,038)		(127,834)

	LOSS BEFORE INCOME TAX				(4,348,152)		(4,341,393)

	Provision for income taxes				-		-

	NET LOSS			$	(4,348,152)	$	(4,341,393)

	Basic and diluted loss per share (NOTE 2)			$	(0.07)	$	(0.08)

	Basic and diluted weighted average number of shares outstanding				59,890,346		53,412,704

See accompanying notes to consolidated financial statements.


JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

	Common Shares	Stock Par Value	Additional Paid-In Capital	Retained Earnings (Deficit)	Total

Balance at September 30, 2010	48,980,326	$ 48,980	$ 19,508,456	$ (14,073,497)	$5,483,939
Issuance of common shares for conversion of debentures	4,898,614	4,899	713,101	-	718,000
Issuance of common shares in lieu of cash for interest	1,238,751	1,239	159,631	-	160,870
Issuance of common shares for services	443,554	443	54,807	-	55,250
Private placement offering	2,675,000	2,675	318,325	-	321,000
Stock options	-	-	213,144	-	213,144
Loss for the year ended September 30, 2011	-	-	-	(4,341,393)	(4,341,393)
Balance at September 30, 2011	58,236,245	58,236	20,967,464	(18,414,890)	2,610,810

Issuance of common shares for conversion of debentures	958,333	958	75,270	-	76,228
Issuance of common shares in lieu of cash for interest	1,481,267	1,482	78,184	-	79,666
Issuance of common shares for charitable contribution	83,333	83	4,917	-	5,000
Stock options	-	-	12,584	-	12,584
Loss for the year ended September 30, 2012	-	-	-	(4,348,152)	(4,348,152)
Balance at September 30, 2012	60,759,178	$ 60,759	$ 21,138,419	$ (22,763,042)	$ (1,563,864)

See acco mpanying notes to consolidated financial statements.


JAYHAWK ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
					Year Ended September 30,
					2012		2011
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(4,348,152)	$	(4,341,393)
	Adjustments to reconcile net loss to net cash used by operating activities:
		Depreciation, depletion and amortization			730,868		970,239
		Accretion of asset retirement obligation			17,042		15,493
		Amortization of discount on debentures			94,075		825,257
		Loss on conversion and extinguishment of debt			1,075,114		221,000
		Loss on initial recording of derivative			-		342,186
		Gain on change in fair value of conversion option derivative			(908,169)		(831,008)
		Gain on change in fair value of warrant derivative			(400,961)		(651,531)
		Common stock issued in consideration of charitable contributions and services			5,000		55,250
		Common stock issued in lieu of interest			79,666		160,870
		Loss on write-off and sales of leases and equipment			-		1,301,566
		Impairment of unproved and proved properties			3,275,000		280,963
		Loss on abandonment of unproved properties			-		1,020,479
		Stock based compensation			12,584		213,144
	Changes in assets and liabilities:
		Trade accounts receivable			(53,599)		146,560
		Other current assets and other long term assets			(148)		(50,418)
		Accounts payable			97,205		(206,180)
		Due to royalty and working interest holders			255,835		45,983
		Other payables, interest and taxes accrued			100,859		(46,300)
			Net cash provided (used) by operating activities		32,219		(527,840)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment				-		(22,770)
	Proceeds from sales of equipment				-		220,000
	Unproved oil and gas property additions				(10,635)		(48,445)
	Refund (deposit) on proved property development				-		36,736
		Net cash provided (used) by investing activities			(10,635)		185,521

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from convertible debentures				-		500,000
	Proceeds from private placement of common stock				-		321,000
	Principal payments on notes payable				-		(482,049)
		Net cash provided by financing activities			-		338,951

Net increase (decrease) in cash and cash equivalents					21,584		(3,368)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR					52,912		56,280
CASH AND CASH EQUIVALENTS AT END OF YEAR				$	74,496	$	52,912


Supplemental Cash Flow and Other Disclosures (NOTE 16)

See accompanying notes to consolidated financial statements.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

This summary of significant accounting policies is presented to assist in understanding the financial statements. These consolidated financial statements as of and for the years ended September 30, 2012 and 2011 are prepared using the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America ("US GAAP") and have been consistently applied in the preparation of the Consolidated Financial Statements.

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 September 30, 2012, the Company has limited financial resources with which to achieve the objectives and obtain profitability and positive cash flows. As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $22,763,042 and a net loss of $4,348,152 for the year ended September 30, 2012, and as of that date the Company's current liabilities exceeded its current assets by $2,371,879. 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.

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, 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.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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 September 30, 2012 and 2011, would be as follows:


		2012	2011
Stock Options		2,040,000	2,040,000
Convertible debt		23,279,993	10,658,333
Warrants		4,999,113	4,999,113
	Total Possible Dilution	30,319,106	17,697,446

At September 30, 2012 and 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 instruments purchased with maturity of three months or less when acquired to be cash equivalents.

Trade Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate for doubtful accounts. 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

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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

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

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 include the gain or loss in the results of operations.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

Fair Value Measures

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

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

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

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

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

Derivative Instruments

The Company has financing arrangements that contain freestanding derivative instruments or hybrid instruments that contained embedded derivative features. In accordance with 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 Obligations

The Company recognizes the fair value of a liability for an asset retirement obligations 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

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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 2011 financial statements in order to conform to the 2012 presentation. These reclassifications have no effect on net loss, total assets or accumulated deficit as previously reported.

New Accounting Pronouncements

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

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

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash and cash equivalents, and reclamation bonds approximate fair value due to their limited time to maturity or ability to immediately convert them to cash in the normal course. The carrying values of convertible debentures is net of a discount and does not reflect fair value of similar instruments. The approximate fair value of the convertible debentures based upon the number of shares into which the debentures are convertible is $465,600 using the current market price per share of stock at September 30, 2012.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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 September 30, 2012 and September 30, 2011, respectively, and the fair value calculation input hierarchy that the Company has determined has applied to each asset and liability category.


			2012		2011	Input Hierarchy Level

Assets:
	Cash equivalents	$	74,496	$	52,912	Level 1
Liabilities:
	Conversion option derivative		109,414		286,498	Level 2
	Warrant derivative		58,257		299,947	Level 2

NOTE 4 - TRADE ACCOUNTS RECEIVABLE

At September 30, 2012, trade accounts receivable represents those amounts the Company is owed for its oil and gas production delivered during the month of September 2012 and amounts due from other working interests for their respective percentages of joint operating costs and drilling costs. As of September 30, 2012 and 2011 there is no allowance recognized for bad accounts.

Specifically, trade accounts receivable are detailed as follows:


			2012		2011
Due for crude oil		$	132,454	$	70,664
Due for natural gas			-		571
Other receivables			-		7,620
	TOTAL	$	132,454	$	78,855

NOTE 5 - UNPROVED PROPERTIES AND IMPAIRMENT

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


				2012		2011

UNPROVED AND DEVELOPED PROPERTIES
Kansas Girard Project
	Field equipment - Jayhawk Gas Transport Company		$	2,605,871	$	2,605,871
	Field equipment - Girard			587,091		615,953
	Capitalized drilling costs			662,899		662,899
		Subtotal		3,855,861		3,884,723
	Less impairments			(2,435,637)		-
	Less accumulated DD&A			(1,127,463)		(863,630)

Total unproved and developed properties, net				292,761		3,021,093

UNPROVED AND UNDEVELOPED PROPERTIES
Kansas Girard Project				1,421,199		1,403,444
	Less impairments			(839,363)		-
	Less: accumulated amortization			(581,837)		(579,999)
Girard Project, net				-		823,445

North Dakota Project				87,610		78,135
North Dakota Project, net				87,610		78,135

Total unproved and undeveloped properties				87,610		901,580

TOTAL UNPROVED PROPERTIES			$	380,371	$	3,922,673

Abandonment of Uniontown: 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

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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.

Impairment of Girard Project: In 2012, management made a review of its Kansas Girard project. Management's outlook for the U.S. natural gas prices indicated it is unlikely that sufficient U.S. demand for natural gas would materialize in the foreseeable future. Internal cash flow estimates prepared by management of the Company did not prove significant fair value exists in the properties. Therefore, the undeveloped and unproved Kansas natural gas properties and equipment have had impairment losses recorded, to the extent net book value exceeds estimated salvage value of such equipment. The Company also recognized impairment to its unproved and undeveloped properties in Girard, Kansas. Thus, the Company recognized impairment loss of $3,275,000 on the Girard project for the year ended September 30, 2012.

NOTE 6 - PROVED PROPERTIES AND IMPAIRMENT

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


			September 30,
Name			2012		2011

Crosby, North Dakota Properties
	Proved Reserves	$	2,357,753	$	2,357,753
	Field Equipment		1,200,247		1,200,247
	Capitalized Drilling Costs		416,429		416,429
	Subtotal		3,974,429		3,974,429
	Less: Impairments		(1,092,302)		(1,092,302)
	Less: Accumulated DD&A		(2,372,422)		(1,923,962)
Total Proved Oil and Gas Properties		$	509,705	$	958,165

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

For the year ended September 30, 2012, the Company performed an analysis to determine whether the carrying amounts in its financial statements exceeded the net present value of the reserve estimates for the Crosby, North Dakota property. Management determined that the net value reflected in the financial statements did not exceed the net discounted present value of the reserves estimated by the independent reserve engineer.

Based upon estimates provided by independent reserve engineers, management determined an impairment existed on the Crosby property of $280,963 for the year ending September 30, 2011 for the North Dakota properties.

NOTE 7 – OTHER LONG-TERM ASSETS

Other assets consists of various deposits and reclamation bonds. Detail is disclosed in the following table:


			September 30,
			2012		2011
Rental Security Deposit		$	1,500	$	1,500
Bond Deposits			100,121		100,000
	TOTAL	$	101,621	$	101,500

NOTE 8 - 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 had a two year maturity and were issued with attached common stock purchase warrants. The effective interest rate on the debentures was, and is, 10% per annum. The debentures were secured by all assets of the Company except those specifically excluded in the agreement which include all Kansas properties and related assets.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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 during the year ended September 30, 2011.

The modified conversion price of $0.12 per share was amended on or about January 9, 2012, to $0.05 per share based on provisions in the agreements related to equity issuances of additional convertible shares,

The debentures all contain anti-dilution provisions which call for the debt conversion and warrant exercise prices 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 9.

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 $Nil and $718,000 in principal conversion for the years ended September 30, 2012 and 2011, $Nil and $118,625 of the discount remains to be amortized at September 30, 2012 and 2011, respectively.

Based upon the fair values as of the original agreement dates of the October 2010 debentures, $500,000 was allocated to the common stock purchase warrants and the conversion features resulting in a discount on the debt. Giving effect to the amortization of the discount and the conversion of $115,000 in principal conversion and the debenture currently being in default, the discount was fully amortized during the year ended September 30, 2012.

The 10% interest payable quarterly as per provisions in the debentures may be paid in shares of common stock at the Company's option. For the years ended September 30, 2012 and 2011, 1,481,267 and 1,238,751 common shares were issued, respectively, for interest payable under the debentures. Interest expense of $120,184 and $192,036 has been included in ‘Interest and financing costs’ in the consolidated statements of operations for the years ended September 30, 2012 and 2011, respectively. Interest accrued is included on the Consolidated Balance Sheets in "Other payables, interest and taxes accrued" of $29,823 and $33,362 at September 30, 2012 and 2011, respectively.

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 year ended September 30, 2011, as follows:


		Excess fair value of derivative liabilities over face amount of debt at issuance
Issue Date	Debt Amount	2011

December 14, 2009	$900,000	$	-
April 23, 2010	600,000		-
October 20, 2010	500,000		342,186
		$	342,186

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

During the fiscal years ended September 30, 2012 and 2011, holders of the debt elected to convert $115,000 and $718,000 face amount 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.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

Giving effect to monthly amortization of the debt discounts and the conversion of debt into shares of common stock, during the years ended September 30, 2012 and 2011, $94,075 and $825,257, respectively, of debt discount amortization has been posted to the statement of operations.

As of September 30, 2012, the Company is in default of the terms of the convertible debentures as a result of certain provisions of the agreement. The debenture holders may force foreclosure on the North Dakota properties but have not elected to do so. The December 2009 and April 2010 debentures maturity date of December 14, 2011 has lapsed, causing the default provisions on all debentures including the October 2010 debentures for a total balance of $1,164,000 and $1,279,000 as of September 30, 2012 and September 30, 2011, respectively. Management reclassified the outstanding balance of all debentures to current liabilities as of September 30, 2012 and 2011.

NOTE 9 - DERIVATIVE LIABILITIES

As discussed in Note 8, the Company entered into three separate issuances of convertible debentures, dated December 14, 2009, April 23, 2010 and October 20, 2010, which contained provisions allowing holders of the debentures to convert outstanding debt to shares of the Company's common stock. The debentures contain anti-dilution provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions. Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting. As such, management has valued them at fair value at the date of issuance and bifurcated the option 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 which is $0.05 per share at September 30, 2012, or an aggregate of 23,279,993 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 years ended September 30, 2012 and 2011, the fair value of conversion options was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions and the associated revaluation range of assumptions on designated event dates, including end of quarter revaluations, conversions of debenture and modification of terms, 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 248.3%
Per unit fair value of conversion option derivative liability	$0.60	$0.65	$0.14	$0.005 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	--

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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



		2012	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	731,085	(119,683)
	Net change in fair value of conversion option liability	(908,169)	(831,008)
Ending balance		$ 109,414	$ 286,498

Conversion options outstanding at year-end		23,279,333	10,658,333
	Year end weighted average fair value per unit	$ 0.005	$ 0.03
Ending balance		$ 109,414	$ 286,498

Warrant derivative

For 2012 and 2011, 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 222.1%
Per unit fair value of warrant derivative	$0.63	$0.66	$0.16	$0.01 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 at September 30, 2012 and September 30, 2011.


		2012	2011

Beginning balance		$ 299,947	$ 498,180
	Initial fair value of warrant derivative	-	453,298
	Revaluation of warrant derivative resulting from modification of warrant terms	159,271	-
	Net change in fair value of warrant derivative	(400,961)	(651,531)
Ending balance		$ 58,257	$ 299,947

Warrants outstanding at year end		4,999,113	4,999,113
Year end weighted average fair value per unit		$0.012	$0.06
Ending balance		$ 58,257	$ 299,947

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,

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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 years ended September 30, 2012 and 2011, was computed to be $17,042 and $14,084, respectively.

The following table summarizes the change in the asset retirement obligation since the beginning of the fiscal year ending September 30, 2012 and September 30, 2011, respectively:


			September 30,
			2012		2011
Beginning balance		$	170,421	$	154,928
Liabilities incurred			-		-
Liabilities settled			-		-
Accretion expense			17,042		15,493
	TOTAL	$	187,463	$	170,421

NOTE 11 – INVESTMENT BY JOINT VENTURE PARTNER

During 2008, the Company completed a signed letter agreement with DK True Energy Development Limited ("DKTED”) which allowed DKTED to earn up to an 85% working interest in the Company's Girard project in southeast Kansas. The agreement permitted DKTED to earn an initial participation and working interest of 42.5 percent after paying the Company $250,000 and spending $300,000 on workovers of existing wells during the first year. DKTED subsequently assigned its interest in the Girard project to WHL Energy Midcon, LLC. ("WHL"), in December 2009. At that time, the Company recognized receipt of $250,000 as a long-term liability called "Investment by Joint Venture Partner".

In 2010, after WHL had paid the $250,000 cash payment obligation and spent the $300,000 on workovers, the Company issued WHL an option to earn an additional 42.5 percent (total 85 percent) participation and working interest upon remitting to the Company an additional $250,000 within nine months of the granting of the option. The option period expired unexercised and, per the terms of the agreement, WHL's total working interest earned was set at 35 percent. In accordance with ASC 932-360, the sale of the 35 percent partial interest in an unproved property for the initial payment amount of $250,000 was treated as a recovery of cost of the property.

NOTE 12 - COMMON STOCK

Fiscal Year End September 30, 2012

Per the terms of the convertible debentures (Note 8), holders of the debentures have the option to receive shares of common stock issued in lieu of cash for accrued interest at 10% per annum through the date of conversion. The table below details common shares issued for conversion of debentures and accrued interest during the year ended September 30, 2012:


	Date		Debt Converted	Conversion price per share	Shares Issued		Accrued Interest	Fair Market Value per share	Shares Issued

October 4, 2011		$	-	-	-	$	5,835	$0.07	82,660
October 20, 2011			60,000	$0.12	500,000		607	$0.07	9,141
November 29, 2011			55,000	$0.12	458,333		932	$0.08	12,183
February 16, 2012			-	-	-		25,643	$0.07	469,446
April 16, 2012			-	-	-		20,292	$0.05	400,545
July 11, 2012			-		-		20,292	$0.04	507,292
TOTAL		$	115,000		958,333	$	73,601		1,481,267

On December 8, 2011, the Company issued 83,333 shares of common stock as a charitable contribution. Theses shares were valued at $0.06 per share, representing the fair value at date of issuance.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

Fiscal Year End September 30, 2011

October 1, 2010 - The Company issued 124,999 shares of common stock in lieu of paying interest with cash, to holders of 10% convertible debentures described in Note 12. The interest totaled $37,500 and was converted to shares at a price of $0.30 per common share.

April 13, 2011 - The Company closed on a private placement offering in the amount of $321,000 (the “Offering”). Under the terms of this Offering, the Company issued 2,675,000 shares of its common stock at $0.12 per share. No warrants are associated with this Offering. The Company's Chief Executive Officer, purchased $144,000 or 44.9% of the Offering.

April 13, 2011 - The Company issued 649,564 shares of common stock in lieu of paying interest with cash, to holders of 10% convertible debentures described in Note 12. The interest totaled $77,948 and was converted to shares at a price of $0.12 per common share.

May 6, 2011 - The Company issued 120,422 shares of common stock were issued to a member of the Board of Directors in lieu of cash payment for services provided. The shares were valued at $0.1246 per share; with the fair value of the aggregate issuance approximating the value of the services rendered of $15,000.

June 30, 2011 - The Company issued 323,132 shares of common stock to the Board of Directors in lieu of cash payment for services provided. These shares were valued at $.1246; with the fair value of the aggregate issuance approximating the value of the services provided of $49,710.

July 8, 2011 - The Company issued 404,637 shares of common stock in lieu of paying interest with cash, to holders of 10% convertible debentures described in Note 12. The interest totaled $38,251 and was converted to shares at a price of $0.0945 per common share.

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 year ended September 30, 2011:


	Date		Debt Converted			Accrued Interest		Conversion price per share		Shares Issued

October 20, 2010		$		20,000	$		-		$0.18		111,111
October 21, 2010				36,000			-		$0.18		200,000
October 25, 2010				202,500			-		$0.18		1,125,000
October 27, 2010				27,000			-		$0.18		150,000
November 8, 2010				10,000			-		$0.18		55,556
November 24, 2010				10,000			-		$0.18		55,556
November 30, 2010				10,000			-		$0.18		55,556
December 7, 2010				50,000			1,068		$0.18		283,709
January 10, 2011				25,000			2,722		$0.18		154,012
May 3, 2011				20,000			-		$0.12		166,667
May 12, 2011				50,000			-		$0.12		416,667
May 25, 2011				50,000			764		$0.12		423,033
May 31, 2011				20,000			-		$0.12		166,667
August 5, 2011				60,000			-		$0.12		500,000
August 22, 2011				67,500			1,233		$0.12		572,777
September 22, 2011				60,000			1,383		$0.12		521,854

TOTAL		$		718,000	$		7,170				(1) 4,958,165

(1) Includes 59,551 shares of common stock issued as accrued interest on date of conversion at a 5-day variable weight average per share. 4,898,614 common shares issued strictly for conversion of debentures at stated price per share.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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, 2010, 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 September 30, 2012 and 2011, the Company had 2,040,000 options granted and outstanding. The outstanding options have a weighed average remaining term of 2 years.

The following table reflects the summary of stock options outstanding at September 30, 2012 and changes during the years ended September 30, 2012 and 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, September 30, 2012			2,040,000		$0.20	$		408,000	$		-

A summary of the status of the Company’s nonvested stock options outstanding at September 30, 2012 is presented as follows:


		Number of options			Weighted Average Per Share			Weighted Average Fair Value
Nonvested, September 30, 2010			1,515,000	$		0.16	$		238,313
	Granted		-			-			-
	Vested		(605,000)			0.16			(213,144)
	Forfeited		(750,000)			-
Nonvested, September 30, 2011			160,000	$		0.16	$		25,169
	Granted		-			-			-
	Vested		(80,000)			0.16			(12,585)
	Forfeited		-			-			-
Nonvested, September 30, 2012			80,000	$		0.16	$		12,584

As of September 30, 2012, there was $12,584 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 1.0 years.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

NOTE 14 - BROKER AND SHARE PURCHASE WARRANTS

In conjunction with the issuance of the $1,500,000 convertible debentures described in Note 8, 166,000 warrants were issued for services provided in execution of the debentures. As discussed in Note 9, the share purchase and broker warrants are 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 8, 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 September 30, 2012 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		-				-
	Granted		-				-
Balance outstanding, September 30, 2012			221,335		$0.05 ⁽²⁾		4,777,778		$0.05⁽¹⁾

⁽¹⁾ Provisions allow for a reduction in exercise price based on equity issuances subsequent to warrant issuance. See Notes 8 and 9.

⁽²⁾ Weighted average exercise price.

NOTE 15 - RELATED PARTY TRANSACTIONS

On December 1, 2011, the Company entered into a four year lease with Marlin Property Management, LLC, an entity owned by the spouse of the Company's President, CEO and member of the board of directors, for $2,500 per month for office space at an alternate location in Coeur d'Alene, Idaho, at market rate on terms acceptable to the Company.

NOTE 16 - SUPPLEMENTAL CASH FLOW AND OTHER DISCLOSURES


			Year ended September 30,
			2012		2011
Supplemental disclosures:
	Interest paid in cash	$	51,535	$	155,082

Noncash Financing and Investing Activities:
	Common stock issued for conversion of debentures	$	115,000	$	718,000
	Expiration of option to purchase unproved properties		-		116,233
	Cancelled proved property development		-		72,999
	Equipment exchanged for unproved property interest		16,595		-
	Account payable converted to note payable		-		254,135

NOTE 17- INCOME TAX

The Company did not recognize an income tax benefit or expense for the fiscal years ended September 30, 2012 and 2011.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

The deferred tax assets were calculated based on an expected future combined tax rate of 40% consisting of maximum statutory federal tax rate of 35% and state taxes calculated at the rate of 5%, which is net of the expected federal income tax benefit.

The components of the Company’s net deferred tax assets are as follows:


			2012			2011

Deferred tax assets arising from:
	Non-deductible share based compensation	$		171,000	$		167,000
	Property, plant and equipment			2,261,000			944,000
	Net operating loss carryforward			3,498,000			3,038,000
				5,930,000			4,149,000
	Less valuation allowance			(5,930,000)			(4,149,000)
	Net deferred tax assets	$		-	$		-

As management of the Company cannot determine that it is more likely than not the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to 100% of the net deferred tax asset has been recorded at September 30, 2012 and 2011.

The Company has approximately $8.8 million of federal and state net operating loss carryforwards that expire through 2025 and 2032 that may be used to offset future taxable income.

Based on the net loss for the year ended September 30, 2012 and 2011, of $4,348,152 and $4,341,393, respectively, the income tax benefit shown in the financial statements for the years ended September 30, 2012 and 2011 differs from the statutory rate as follows:


			2012 Amount		Rate			2011 Amount		Rate

Provision (benefit) at federal statutory rate		$		(1,522,000)		35%	$		(1,519,000)	35.0%
Permanent differences-financing instruments				(45,000)		1%			(7,000)	0.1%
Effect of state taxes				(224,000)		5%			(219,000)	5.0%
Increase in valuation allowance				1,791,000		(41%)			1,745,000	(40.1%)
	Total	$		-		-	$		-	-

The Company has concluded that the guidance regarding accounting for uncertainty in income taxes had no significant impact on the results of operations or financial position as of September 30, 2012 or 2011. Therefore, the Company does not have an accrual for uncertain tax positions as of September 30, 2012 or 2011. As a result, tabular reconciliation of beginning and ending balances would not be meaningful. If interest and penalties were to be assessed, the Company would charge interest expense and penalties to other operating expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date. Fiscal years 2009 through 2012 remain subject to examination by state and federal tax authorities.

NOTE 18 – COMMITMENTS AND CONTINGENCIES

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.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

consulting services. 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. The Company believes the likelihood it will incur a loss in connection with this litigation is reasonably possible rather than probable. At this time it is not possible to predict the potential financial impact to the Company. The Company has not accrued any loss related to this litigation.

NOTE 19 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited)

In January 2010, 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 discussed in Note 1. The significant revisions involved revised definitions of oil and gas producing activities, changing the pricing used to estimate reserves the period end to a twelve month arithmetic average of the first day of the month prices and additional disclosure requirements. In contrast 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. Application of the revised rules is prospective and companies are not required to change prior period presentation to conform to the amendments. Application of the amended guidance has only resulted in changes to the prices used to determine proved reserves at December 31, 2009. The new guidelines have expanded the definition of proved undeveloped reserves that can be recorded from an economic producer did not impact or prove undeveloped reserves.

The Company follows the guidelines prescribed in ASC 932 for computing a standardized measure of future cash net cash flows and changes therein relating to estimated proved reserves. Future cash inflows and future production and development costs are determined by applying prices and costs, including transportation, quality and basis differentials to the year-end estimated quantities of oil and gas to be produced in the future. The resulting net cash flows are reduced to present value amounts by applying a ten percent annual discount factor. Future operating costs are determined based on estimates of expenditures to be incurred in producing the proved oil and gas reserves in place at the end of the period using year-end costs and assuming continuation of existing conditions, plus Company overhead incurred. Future development costs are determined based on estimates of capital expenditures to be incurred in developing proved oil and gas reserves.

The assumptions used to compute the standardized measure are those prescribed by the FASB and the SEC. The assumptions do not necessarily reflect the Company's expectations of actual revenues to be derived from these reserves, no their present value. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these reserve quantity estimates are the basis for the valuation process. The Company emphasizes that reserve estimates are inherently imprecise and that estimate of new discoveries and undeveloped locations are more imprecise than estimates of establishing proved producing oil properties. Users of this information should be aware that the process of estimating quantities of “proved” and “proved-developed” oil reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various reservoirs make these estimates generally less precise than other estimates included in the financial statements disclosures.

Proved oil reserve quantities at September 30, 2012 and 2011, and the related future net cash flows are based on the estimates prepared by independent petroleum engineers. The following reserve quantity and future net cash flow information for 2012 and 2011 was prepared by McDaniel & Associates Consultants, Ltd and are consistent with internal estimates. The Company provided McDaniel & Associates with engineering, geological and geophysical data, actual production histories and other information necessary for the reserve determination. The reserve estimates were prepared based on economic and operating conditions existing at September 30, 2012 and 2011.

All of the Company's oil reserves are within the continental United States in the states of North Dakota. Based on the evaluation described in the preceding paragraph, presented below (in barrels) is a summary of changes to the Company's net interest in proved developed and proved undeveloped reserves for the years ending September 30, 2012 and 2011:

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012



		Crude Oil (Net Bbls)
September 30, 2010		79,400
	Revisions of previous estimates	2,700
	Purchase of minerals in place	8,400
	Production	(9,100)
September 30, 2011		81,400
	Revisions of previous estimates	(7,000)
	Purchase of minerals in place	-
	Production	(8,700)
September 30, 2012		65,700

Oil reserves

Based on the evaluation described in the preceding paragraph, presented below (in barrels) is a summary of changes to the Company’s net interest in proved undeveloped and proved developed producing and non-producing reserves for the years ending September 30, 2012 and 2011:


		2012	2011
		Oil (Bbls)	Oil (Bbls)
Proved developed producing		44,100	38,500
Proved developed non-producing		-	7,100
Proved undeveloped reserves		21,600	21,400
	Total proved reserves	65,700	67,000

The reserves in this report have been estimated using deterministic methods. For wells classified as proved developed producing where sufficient production history existed, reserves were based on individual well performance evaluation and production decline curve extrapolation techniques. For undeveloped locations and wells that lacked sufficient production history, reserves were based on analogy to producing wells within the same area exhibiting similar geologic and reservoir characteristics, combined with volumetric methods. The volumetric estimates were based on geologic maps and rock and fluid properties derived from well logs, core data, pressure measurements, and fluid samples. Well spacing was determined from drainage patterns derived from a combination of performance-based recoveries and volumetric estimates for each area or field. Proved undeveloped locations were limited to areas of uniformly high quality reservoir properties, between existing commercial producers.

Capitalized Costs Relating to Oil and Gas Producing Activities

Evaluated and unevaluated capitalized costs related to the Company's oil and natural gas producing activities are summarized as follow in $ thousands:


				Year Ended September 30,
				2012		2011
Unproved properties			$	1,509	$	1,482
Proved properties				2,358		2,358
Wells and equipment				5,472		5,501
		Total capitalized costs	$	9,339	$	9,341
Less: Allowance for depreciation, depletion, amortization and lease impairment				(8,449)		(4,460)
	TOTAL		$	890	$	4,881

The Company will continue to evaluate its unevaluated properties; however, the timing of the ultimate evaluation and disposition of the properties has not been determined.

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

Costs Incurred in Oil and Gas Producing Activities (in $ thousands)

Costs incurred in oil and natural gas property acquisitions, exploration and development are summarized as follows, in $ thousands:


			Year Ended September 30,
			2012		2011
Property acquisitions
	Unproved properties	$	10	$	47
	Proved properties (includes wells, equipment and related facilities acquired with proved reserves)				-
Exploration			-		-
Production and development capital expenditures			-		-
	TOTAL	$	10	$	47

Standardized Measure of Discounted Future Net Cash Flow

The following Standardized Measure of Discounted Future Net Cash Flow information has been developed utilizing ASC 932, Extractive Activities – Oil and Gas (ASC 932) procedures and based on estimated oil reserve and production volumes. It can be used for some comparisons, but should not be the only method used to evaluate the Company or the Company performance. Further, the information in the following table may not represent realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the Company’s current value.

The Company believes that the following factors should be taken into account when reviewing the following information:

future costs and selling prices will probably differ from those required to be used in these calculations;

due to future market conditions and governmental regulations, actual rates of production in future years may vary significantly from the rate of production assumed in the calculations;

a 10% discount rate may not be reasonable as a measure of the relative risk in realizing future net oil reserves; and

future net revenues may be subject to different rates of income taxation.

The Standardized Measure of discounted future net cash flows relating to the Company's ownership interests in proved developed oil reserves for the years ended December 31, 2012 and 2011 are as follows:


			2012		2011
Future cash flows		$	3,288,000	$	3,079,000
Future oil and natural gas operation expenses			(1,343,000)		(830,000
Future abandonment costs			(147,000)		(128,000)
Future severance tax			(164,000)		(154,000)
Future income tax expense			-		-
Future net cash flows			1,634,000		1,967,000
Less: 10% annual discount for estimating timing of cash flow			(151,000)		(512,000)
	Standardized measure of discounted future net cash flow	$	1,483,000	$	1,455,000

Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil Reserves

The following is a summary of the changes in Standardized Measure of discounted future net cash flows for the Company’s proved oil reserves during each of the years in the two year period ended September 30, 2012:


			2012		2011
Standardized measure of discounted future net cash flows at beginning of year		$	1,455,000	$	1,540,200
Net changes in prices and production costs			(386,902)		259,496
Sales of oil produced, net of production costs			366,510		184,525
Revisions of previous quantity estimates			31,350		85,509
Development costs incurred			-		20,100
Change in income taxes			-		-
Accretion of discount			17,042		15,493
	Standardized measure of discounted future net cash flows at year end	$	1,483,000	$	1,455,000

JAYHAWK ENERGY, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

Results of Operations for Oil and Gas Producing Activities

The results of operations shown below exclude non-oil and gas producing activities, corporate overhead items, interest expense and other incomes expense, gains and losses. Therefore, these results are on a different basis than results of operations reported upon in the consolidated statement of operations.

All operations were conducted in the United States. The Company produces crude oil in North Dakota and natural gas in southeast Kansas. The Company produces no natural gas in North Dakota and no oil in Kansas at this time. Because of limited funding, exploration activities were not conducted in the years ended September 30, 2012 and 2011.


			2012		2011
Operating revenue		$	663,229	$	363,122
Costs and expenses
	Exploration expenses		-		-
	Production expenses		324,056		177,161
	Depreciation, depletion and amortization		726,397		962,131
	Loss on abandonment of unproved properties		-		1,020,479
	Loss (gain) on write off and sales of leases and equipment		-		1,301,566
	Impairment of proved and unproved properties		3,275,000		280,963
	General and administrative expenses		20,570		6,681
Total costs and expenses			4,346,023		3,748,981

Loss from Operations			(3,682,794)		(3,385,859)
					-
	Other income (expense)		-		(15,493)
Net results for operations		$	(3,682,794)	$	(3,401,352)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The Company was notified on October 31, 2011 that the audit practice of BehlerMick PS, the Company's independent registered public accounting firm ("BehlerMick"), was no longer practicing public accounting and ceased operations. As of November 1, 2011 BehlerMick resigned as the independent registered public accounting firm of the Company and upon recommendation of the Audit Committee of the Company's Board of Directors, the Company accepted BehlerMick's resignation on November 4, 2011.

BehlerMick performed audits of the Company's financial statements for the years ended September 30, 2010, and September 30, 2009. BehlerMick's reports did not did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except that such report on JayHawk Energy's consolidated financial statements contained an explanatory paragraph with respect to uncertainty as to the Company’s ability to continue as a going concern.

During the two years ended September 30, 2010, and September 30, 2009, there were no disagreements with BehlerMick on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to BehlerMick's satisfaction would have caused them to make reference to the subject matter of the disagreement in connection with their report. For the year ended September 30, 2010, and through November 4, 2011, there were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K.

On November 11, 2011, and with the approval of the Company's Board of Directors, the Company engaged DeCoria Maichel and Teague, P.S. ("DMT") as the Company's independent registered public accounting firm.

During the year ended September 30, 2010, and through November 11, 2011 (the date DMT was appointed), the Company did not consult DMT with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s Consolidated Financial Statements, or any other matters or reportable events as defined in Item 304(a)(2)(i) and (ii) of Regulation S-K.

Management has determined that certain errors were contained in the Company's financial statements for the quarters within the year ended September 30, 2011 and the year ended September 30, 2010. Disclosures are provided in Note 19 to the Company's financial statements, and management does not intend on filing quarterly financial statements amendments.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

In connection with the preparation of this annual report on Form 10-K, an evaluation was carried out by JayHawk’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of September 30, 2012. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Based on that evaluation, JayHawk’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective in recording, processing, summarizing, and reporting information required to be disclosed, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of JayHawk Energy, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process, under the supervision of the Chief Executive Officer and the Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with United States generally accepted accounting principles (GAAP). Internal control over financial reporting includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management identified a material weakness in internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified is described below.

As a result of the material weakness in internal control over financial reporting described above, the Company’s management has concluded that, as of September 30, 2012, the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework issued by COSO.

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. The Company was not required to have, nor has it, engaged its independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the year ended September 30, 2012, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.

DIRECTORS AND EXECUTIVE OFFICERS


Name	Age	Position
Lindsay E. Gorrill	50	Chief Executive Officer, President and Director
Kelly J. Stopher	49	Chief Financial Officer
Matthew J. Wayrynen	50	Chairman of the Board and of Compensation Committee
Jeffrey W. Bright	47	Director, Chairman of Nominating Committee
Tyrone Docherty	51	Director, Chairman of Audit Committee

Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Directors are compensated at the rates of $8,000 per year. The Chairmen of the Audit Committee is compensated an additional $4,000 per year. Each other committee chairman is compensated an additional $2,000 per year. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Biographical resumes of each officer and director are set forth below.

Lindsay E. Gorrill - CEO, President and Director

Mr. Lindsay Gorrill is a C.A. and has university degrees in Finance and Marketing. Mr. Gorrill has a background in acquisitions, company building, financial markets and world exposure. Mr. Gorrill has served as Chief Executive Officer, Chief Financial Officer and as a member of the Company's Board of Directors since July 2007. Mr. Gorrill has also, in the past, served as the Company's Chief Financial Officer and also President (an office he currently holds as well). He has also served as President and Treasurer of Star Gold Corp., a company quoted on the OTC Bulletin Board, from February 2008 until April 2012. Mr. Gorrill had, in the past, served as Star Gold’s Treasurer. Mr. Gorrill currently serves as the Chairman of the Board of Directors for Star Gold Corp. Mr. Gorrill has also served as a member of the board of directors of Yaterra Ventures Corp, a company quoted on the OTC Bulletin Board since August 2008. He has served as President, Chief Operating Officer and as a member of the board of directors of Berkley Resources Inc., a company listed on the TSX Venture Exchange, since July 2004. Additionally, since April 2009, Mr. Gorrill has served as President, Chief Executive Officer and Chief Financial Officer of Canada Fluorspar Inc., a company listed on the TSX Venture Exchange. He has also been a member of the board of directors of Deer Horn Metals, Inc., a TSX Venture Exchange listed company since September 2009.

Kelly J. Stopher - CFO

Mr. Kelly Stopher was appointed Chief Financial Officer of the Company on September 28, 2010. Mr. Stopher’s has developed strategies to implement financial management systems, internal control policies and procedures, and financial reporting and modeling for small-cap companies From March, 20010 through September, 2010, Mr. Stopher worked for Allied Security. Mr. Stopher worked as business relationship manager for Wells Fargo Bank, Spokane, WA, from April 2006 through August 2009. From September 2004 through January 2006, he acted as CFO for Weldon Barber, Spokane, WA. From October 2003 through September 2004, he was a sales associate for Kiemle & Hagood Company, in Spokane, WA. And from January 2001 through March 2003 he worked as an account executive for Aston Business Solutions in Boise, ID specializing in enterprise accounting software systems. Prior that Mr. Stopher worked as CFO for Lee Read Jewelers in Boise, ID and spent 5 years in public accounting with Langlow Tolles & Company in Tacoma, WA. Mr. Stopher also serves as Chief Financial Officer for Star Gold Corp., a company quoted on the OTC Bulletin Board, and was appointed to that position in October 2010. Mr. Stopher holds a bachelors degree from Washington State University in Business Administration - Accounting.

Matthew J. Wayrynen - Chairman

Mr. Wayrynen was appointed to the Board of Directors on April 30, 2008. Mr. Wayrynen is a citizen of Canada. He also serves as a director of Deer Horn Metals, Inc. (since 2009), as a Director of Discovery Ventures Inc. (since August 2012) as a director of Avino Silver & Gold Mines, Ltd. (since 2004), as a director and President of American Uranium Corporation (since 2010) and as a director, President and CEO of Berkley Resources, Inc. (since 2003). Mr. Wayrynen is an original co-founder and former President and Chief Executive Officer of TrichoScience Innovations Inc., which was acquired by Replicel Life Sciences Inc. Mr. Wayrynen also serves as Director, President and CEO of WestKam Gold Corp. Prior to these positions Mr. Wayrynen was a broker with Golden Capital Securities, located in Vancouver, British Columbia. Mr. Wayrynen is not an officer or director of any other U.S. reporting company.

Tyrone Docherty - Director

Mr. Docherty was appointed to the Board of Directors on July 10, 2008. Mr. Docherty is a citizen of Canada and is presently the CEO and a director of Deer Horn Metals, Inc. Prior to this position he was president and CEO of Quinto Mining Corporation from June 1997 to June 2008. Mr. Docherty is not an officer or director of any other U.S. reporting company.

Jeffrey W. Bright - Director

Mr. Bright was appointed to the Board of Directors on April 30, 2008. Mr. Bright is a citizen of Canada. Mr. Bright has worked as an attorney since 2003, currently employed with Miller Thomson LLP of Calgary, Alberta, Canada. Mr. Bright was previously legal counsel for Agrium Inc., located in Calgary Alberta, Canada. He is a member of the Association of International Petroleum Negotiators, and the Canadian and American Bar Associations. Mr. Bright is not an officer or director of any other U.S. reporting entity.

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

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of the Company's Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they filed.

The Company have been provided with copies of all forms (3, 4 and 5) filed by officers, directors, or ten percent shareholders within three days of such filings. Based on the review of such forms that the Company received, or written representations from reporting persons that no Forms 5s were required for such persons, the Company believe that, during all prior fiscal periods, all Section 16(a) filing requirements have been satisfied on a timely basis for members of the Board of Directors and Executive Officers.

Code of Ethics

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

Corporate Governance

Audit Committee

On June 30, 2008 JayHawk established an audit committee of its Board of Directors, appointed Mr. Don Siemens as its Chairman, and adopted a "Code of Ethics" to promote honest and ethical conduct, proper disclosure of financial information and compliance with applicable laws, rules and regulations by all of the Company's employees and members of the board of directors. Mr. Tyrone Docherty has served as Chairman of the Audit Committee since June 15, 2009. Jeff W. Bright also serves on the Audit Committee.

Compensation Committee

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

Nominating Committee

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

Reserves Committee

Lindsay Gorrill has served as the Chairman of the Reserves Committee since April 29, 2011. Jeff W. Bright also serves on the Reserves Committee.

Compensation Committee Interlocks and Insider Participation

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

None of the Company's directors or executive officers serves as a member of the board of directors or compensation committee of any other entity that has one or more of its executive officers serving as a member of JayHawk Energy Inc.'s board of directors.

Director Compensation

The table below sets forth, for the last fiscal year, the compensation earned by the Company's non-employee directors:


Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total
						-
Matthew Wayrynen	11,250	-	-	-	-	-
Tyrone Docherty	5,750	-	-	-	-	-
Jeffrey Bright	4,500	-	-	-	-	-

ITEM 11. EXECUTIVE COMPENSATION

Each individual's total compensation consisted of cash paid as salary and recognition of options vested during the year ended September 30, 2011. The following amounts were paid to the respective individuals.


Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	Non-equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total

Lindsay Gorrill, President/CEO	2012	27,500	-	-	-	-	-	-	$27,500
Kelly Stopher, CFO	2012	108,000	-	-	12,584	-	-	-	$120,584

The amounts in the Option Awards column reflect the dollar amount recognized and expensed for financial statement reporting purposes for the years ended September 30, 2012, in accordance with ASC Topic 718 of awards of stock options and thus do not represent aggregate fair value of grants. The Company used the Black-Scholes option price calculation to value the options granted in 2010 and using the following assumptions: risk-free rate of 0.06% and 5.35%; volatility of 0.99; actual term and exercise price of options granted. See Note 13 - Stock Based Compensation in the Notes to the Consolidated Financial Statements for additional details on option issuances.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information regarding beneficial ownership of the Company's common stock as of September 30, 2012:

· by each person who is known by us to beneficially own more than 5% of the Company's common stock;

· by each of the Company's officers and directors; and

· by all of the Company's officers and directors as a group.


NAME AND ADDRESS OF OWNER		TITLE OF CLASS	NUMBER OF SHARES OWNED (1)	Percentage of Class (2)

Lindsay Gorrill, President/CEO		Common Stock		8.35%
	611 E. Sherman, Coeur d'Alene, ID 83814	Common Stock	5,076,112	8.35%
Kelly Stopher, CFO		Common Stock	1,000	0.00%
	611 E. Sherman, Coeur d'Alene, ID 83814	Common Stock	1,000	0.00%
Matthew Wayrynen		Common Stock	166,583	0.27%
	570 Granville , Suite 900, Vancouver, BC V6C 3P1	Common Stock	166,583	0.27%
Tyrone Docherty		Common Stock	48,169	0.08%
	4672 Kensington Place, Delta, BC V4K 4W5	Common Stock	48,169	0.08%
Jeff Bright		Common Stock	40,141	0.07%
	111 Edenstone View NW, Calgary AB T3A 3Z2	Common Stock	40,141	0.07%
All Officers and Directors		Common Stock	5,332,005	8.77%

⁽¹⁾ Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of September 30, 2011 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.

⁽²⁾ Percentage based on 60,759,178 shares of common stock outstanding as of September 30, 2012

Outstanding Equity awards at fiscal year ended September 30, 2012


Name, Title	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Equity Incentive Plan Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date

Lindsay Gorrill, President/CEO	1,100,000	-	-	$0.20	9/2/2015
Kelly Stopher, CFO	160,000	80,000	-	$0.20	9/28/2015

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As discussed in Note 12 - Common Stock in the Notes to the Consolidated Financial Statements, on April 13, 2011, the Company closed on a private placement offering in the amount of $321,000 (the “Offering”). Under the terms of this Offering, the Company issued 2,675,000 shares of its common stock at $0.12 per share. No warrants are associated with this Offering. The Company's Chief Executive Officer, purchased $144,000 or 44.9% of the Offering.

As discussed in Note 15 - Related Party Transactions in the Notes to the Consolidated Financial Statements, 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 CEO. On December 1, 2011, the Company subsequently entered into a four year lease with Marlin Property Management for $2,500 for office space at an alternate location in Coeur d'Alene, Idaho, at market rate on terms acceptable to the Company

The Company has no policy regarding entering into transactions with affiliated parties.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The aggregate fees billed by the Company's auditors, for professional services rendered for the audit of the Company's annual financial statements for the years ended September 30, 2012 and 2011, and for the reviews of the financial statements included in the Company's Quarterly Reports on Form 10-Q during the fiscal years were $135,639 and $62,081, respectively.

All Other Fees

No other fees have been billed in the last two years for products and services provided by the principal accountant other than the services reported pursuant to the above portions of this Item 14.

The Company's board of directors acts as the audit committee and had no “pre-approval policies and procedures” in effect for the auditors’ engagement for the audit years 2012 and 2011.

PART IV

ITEM 15. EXHIBITS.


Exhibit No.		Description

3.1	Articles of Incorporation, filed as an exhibit to the registration statement on Form SB-2 filed with the Securities and Exchange Commission (the "Commission") on December 7, 2004, and incorporated herein by reference.

3.2	Certificate of Amendment to Articles of Incorporation, filed as an exhibit to the 8-K filed with the Commission on June 25, 2007, and incorporated herein by reference.

3.3	Bylaws, filed as an exhibit to the registration statement on Form SB-2 filed with the Commission on December 7, 2004, and incorporated herein by reference.

10.1	Promissory Note of April 12, 2007 with Berrigan Portfolio, Inc., filed as an exhibit to the 8-K filed with the Commission on April 17, 2007, and incorporated herein by reference.

10.2	Asset Purchase and Sale agreement of July 25, 2007 with Armstrong Investments, Inc., filed as an exhibit to the 8-K filed with the Commission on July 26, 2007, and incorporated herein by reference.

10.3	Form of Warrant Agreement of July 25, 2007 with Armstrong Investments, Inc. and Berrigan Portfolio, Inc., filed as an exhibit to the 8-K filed with the Commission on July 26, 2007, and incorporated herein by reference.

14.1	Code of Ethics

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

99.1	2009 Stock Incentive Plan for Employees, Contractors, Consultants, Advisors and Board Members

99.2	2013 Report of Third Party for the Evaluation of Oil Reserves attributed to Jayhawk Energy, Inc.

99.3	2013 Reserve Report

101.INS*	XBRL Instance

101.SCH*	XBRL Taxonomy Extension Schema

101.CAL*	XBRL Taxonomy Extension Calculation

101.DEF*	XBRL Taxonomy Extension Definition

101.LAB*	XBRL Taxonomy Extension Label

101.PRE*	XBRL Taxonomy Extension Presentation

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

SIGNATURES

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

JAYHAWK ENERGY, INC.


Date: January 7, 2013	By: /s/ LINDSAY E. GORRILL
	Lindsay E. Gorrill
	Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Name	Position	Date

By: /s/ LINDSAY E. GORRILL Lindsay E. Gorrill	Chief Executive Officer and President	January 7, 2013

By: /s/ KELLY J. STOPHER Kelly J. Stopher	Chief Financial Officer	January 7, 2013